Taking Responsibility: Seven-Eleven Japan

ERIC H. KARP, ESQ., GENERAL COUNSEL TO NCASEF

On July 1 of this year, Seven-Eleven Japan (SEJ) released a new feature on its 7Pay app that allowed the customer to scan a barcode with their phone and pay for their purchase with a credit card or debit card linked to their 7Pay account. Within 24 hours, one customer noticed a charge on a credit card that hadn’t been made by that customer. It turned out that the app had an important flaw that allowed hackers with a minimal amount of personal identifying information to break into the account. The hackers then found a way to automate the attack, resulting in access to the accounts of more than 900 individuals and unauthorized charges of approximately $500,000.

SEJ promptly suspended the barcode feature, stopped registering new users, posted a warning to customers on its website, and promised to compensate users whose accounts have been hacked. Later, the company was told by the Japan Ministry of Economy, Trade and Industry that it needed to bolster its security and that it had failed to follow security guidelines. The Japan Financial Services Agency ordered SEJ to report on all cases of unauthorized access to its app.

Recently, the parent company of SEJ issued an extraordinary press release acknowledging its shortcomings. The announcement stated that its authentication system, and its fraud detection and prevention measures, were “not perfect” and that strict policy and security standards had not been thoroughly implemented. In other words, it took responsibility for its actions. It committed itself to a series of recurrence prevention measures, including redevelopment and implementation of security policy and guidelines, expansion of personnel with expertise in security and internal training, and cultivation of awareness that security is indispensable as one of the services provided to customers.

In addition to that, in recognition of the “serious inconvenience caused to the relevant persons,” the president and the vice president of the parent company each agreed to return 30 percent of their monthly compensation for a period of three months. The executive officer and general manager of System Headquarters of SEJ agreed to a 10 percent reduction of monthly compensation for three months. Finally, the president of Seven Pay Co., Ltd. retired from the company.

Separately, SEJ has been under scrutiny with respect to its 24/7 operation policy, which has become increasingly problematic for Japan franchisees given labor shortages that have existed in that country for some time. This is one of the reasons that a delegation of National Coalition executive officers visited Japan in September to meet with franchisees and members of the press to support their fellow franchisees and to explore the ways in which their interests and their experiences are similar. That commonality is also the reason that the National Coalition has reached out to the Japan Fair Trade Commission regarding its announcement that it would begin a survey of franchising in that country. The National Coalition has made similar outreach to the Australian Joint Parliamentary Commission and its successor, the Australian Department of Employment, Skills and Small and Family Business, which is now studying the possibility of additional measures regarding franchises in that country.

More recently, SEJ made a second announcement acknowledging what it characterizes as a “harsh environment surrounding store operations intensified through factors such as staff shortages and rising personnel expenses.” As a 7-Eleven franchisee in the United States, do you not have the same issues and concerns?

The announcement further stated that the company was planning to carry out measures towards “sustainable growth for franchisees, such as enhancing the owner help system and other systems, continuously implementing labor-saving investments, and strengthening communication by sending out surveys for franchisees.” On top of that, SEJ announced new incentives for franchisees affected by these developments. These include: for higher volume stores, a 2 percent reduction in predetermined charge for stores with 24-hour operations, a special discount of 1 percent on 7-Eleven charges, a monthly reduction amount of 35,000 Yen. For stores that do not operate 24 hours a day, there will be a special discount of 1 percent on 7-Eleven charges, a monthly reduction amount of 15,000 Yen.

The same announcement indicated that SEJ is to close 1,000 convenience stores during the second half of its current fiscal year, reduce the number of employees in the other units of the parent company by 3,000, as well as close five of its department stores and 33 general merchandise shops. The company expects these measures to cost a total of $93 million, but the stock market reacted positively, lifting the stock by 1.4 percent.

You can certainly argue that the measures taken by the parent company in response to the security breach and the financial distress of franchisees do not go far enough or are not adequate. But what is remarkable about both of these instances is the acknowledgment by the company that it has fallen short and needs to do better. And that the profitability of its franchisees is of deep concern, as it well should be.

Which leads us back here to the United States. While SEI and its franchisees might certainly disagree on the cause, nobody can dispute the fact that the current relationship between this company and its franchisees is at a very low point. The National Coalition has repeatedly, urgently, and in good faith extended the hand of cooperation in an effort to get the parties to transparently collaborate, communicate, bargain, and negotiate, and to treat each other with respect. Yet, the company implausibly insists that it bears no responsibility for the state of the relationship. Contrast that with the conduct of SEJ as described above.

In a recent Dispatch, the National Coalition produced cold, hard facts:

  • Eighteen percent of 7-Eleven stores in the U.S. are currently available for franchising.
  • Since April 2018, the number of available stores has increased more than 57 percent, from 999 to 1,578.
  • Since April 2018, stores currently owned by a franchisee and put up for sale (known as goodwill stores) have increased more than 95 percent in California; 39 percent in New York; 314 percent in Illinois; 84 percent in Virginia, and 60 percent in Washington State.
  • Completed sales of franchised stores more than quadrupled from 2013 to 2018.
  • Turnover of franchised stores due to terminations, non-renewals and abandonments doubled from 150 in 2013 to 314 in 2018.

The gross margin for franchisees has been slipping, yet 7-Eleven has started taking a bigger portion of the declining gross revenues. According to public filings by its parent company, the blended gross margin of company stores and franchise stores in the United States fell from 36 percent in 2007 to 34.2% percent in 2018. Fully 6/10 of 1 percent of that drop has occurred in just the last three years. Yet, the 2019 franchise agreement calls for a much steeper gross profit split, with a marginal rate as high as 59 percent in favor of the company. And SEI’s increasing reliance on fresh food, hot food, private label items, and third party delivery are creating more profit uncertainty on the part of franchisees. At the same time, SEI’s net profit rose from $246.6 million in 2001 to $669.4 million in 2018, an increase of more than 170 percent over seven years. From the perspective of franchisees, their financial results and those of the company are headed in opposite directions.

The repeated ask for a reset of the relationship can now be expressed in different terms, using the example of SEI’s parent and sister entities. While SEI has been producing record profits, which no doubt pleases its parent company, little attention has been devoted to the long-term effects of the unfortunate state of the relationship between the company and its franchisees, and the existential challenges to store level profitability.

Why should the U.S. management team not follow the approach of SEJ and acknowledge that it has allowed its relationship with the franchise community to fall to unenviable levels, and start treating its franchisees like independent business owners, stakeholders in the brand, hard-working entrepreneurs, and not like store managers?

Take responsibility. There is no time like the present.