NCASEF Asks FTC for Crucial Changes to Franchise Rule
The Federal Trade Commission (FTC) Franchise Rule defines acts or practices that are unfair or deceptive within the franchise industry in the United States. The Franchise Rule was created in 1978 and is designed to ensure that people looking to invest in a franchised business have enough information to make an informed decision while preventing fraud and misrepresentation by sellers of a franchised business. The Franchise Rule requires that franchisors disclose certain information annually in a document known as an FDD (franchise disclosure document). The Commission is considering making changes to the Rule. It held a virtual public workshop in November of 2020 and solicited comments and concerns related to the rule and to franchising in general.
NCASEF submitted extensive comments on behalf of our members in the hopes that the FTC will take a broader look at the unfair and unbalanced relationship SEI has fostered with its franchisees. These comments, which detail numerous instances of misleading disclosures, undisclosed risks, built-in conflicts of interest and opportunistic behavior by SEI, can be found at https://beta.regulations.gov/comment/FTC-2020-0064-0103.
We are hopeful that the FTC will start regulating the relationships between franchisees and franchisors and help correct the imbalance of power which only grows year after year in the 7-Eleven system.
A comment submitted to the FTC by three United States Senators and one U.S. Representative, in calling for fair contract terms, captured the inadequacies of the FTC Rule perfectly:
Most franchise agreements are very one-sided in favor of the franchise or leaving franchise owners facing loss of assets, failed businesses in bankruptcy. The FTC’s approach to only requires voluntary disclosure of financial representation data and its lack of enforcement has failed to protect franchise owners.
“Once you have signed the Franchise Agreement and you’re in the system, it seems everything changes,” said Jaspreet Dhillon, NCASEF Treasurer. “Once you own a 7-Eleven franchise, you should be able to get more detailed information about every aspect of your business and, with SEI, you don’t get it. When we have concerns about changes that materially affect our livelihoods, SEI ignores us and treats us like glorified store managers.”
In other systems, the franchisor operates under an open-door policy where franchisees and their independent associations can have a meaningful dialogue about substantive issues, marked by transparency and mutual respect. That is not how SEI works with the democratically elected leaders of the franchise community. It makes us wonder whether the company is at all interested in hearing from us or working amicably to find solutions to problems that plague us.
We pointed out to the FTC that our declining merchandise gross profit margin is another area of deep concern, not just for us but also for people who are considering buying a 7-Eleven store. Throughout the pandemic, in-store sales volume has decreased and because we split gross profits – instead of paying a traditional royalty to our franchisor – the gross margin is what creates franchisee profitability. But, someone who is considering buying a 7-Eleven store does not get a clear picture from the FDD of how declining store-level gross margin will truly impact the profit he will earn from his business. Nor does the FDD clearly spell out how new programs such as 7NOW impact profitability.
“You only have to look at gasoline profits to get a clear picture of the imbalance in the system,” said Michael Jorgensen, NCASEF Executive Vice-Chairman. “Franchisees make only one-and-a-half cents on each gallon of gas sold, while we bear a number of significant expenses related to the gasoline operation. For the six months ended June 30, 2020, SEI’s retail fuel margin was 68% higher (21.07¢ cents versus 35.51¢) than it had been for the same period the prior year. How is that fair? With the $21 billion purchase of Speedway, SEI has made it clear it is doubling down on gasoline. We understand that SEI is in the business to make money, but so are we. We don’t support the unfair split in profits.”
Today, SEI is selling more franchises and there are a growing number of stores available, which means more franchisees will be entering this system. That is why we can’t ignore the inequity in our franchise system. Although no major changes to the Franchise Rule have been made since 2007, we are hopeful the FTC will see and understand our plight and act accordingly to make the relationship more fair, balanced and equitable.