Change Is The Only Constant
By Eric H. Karp, ESQ., General Counsel To NCASEF
The famous Greek philosopher, Heraclitus, who died nearly 2,500 years ago, is quoted as saying that change is the only constant in life. The internal paradox in this statement, using terms that are seemingly opposites, illustrates that change is an inevitable part of our personal and business lives. But it’s important not only to recognize these changes, but also to consider their impact both short term and long term.
Changes in the 7-Eleven system just over the last three years are very significant and have implications for the profitability and value of every franchisee in the system.
One of the overall trends is that the system has become much more oriented towards company-owned stores and gasoline sales. The drivers of this change have been the successive acquisitions of the Sunoco and Speedway chains in 2018 and 2021, respectively, at a combined cost of more than $24 billion.
For example, at the end of 2019 franchise stores represented 76 percent of the system, but by the end of 2021 that percentage had fallen to 56 percent. However, the number of stores in the United States with gasoline rose from 46 percent to 62 percent. See https://www.7andi.com/en/ir/file/library/kh/pdf/2022_0407khe.pdf.
The result is that the share of SEI’s revenue from its portion of the gross profit split has fallen from about 9.5 percent in 2019 to 5.7 percent in 2021. The main driver of this change is the spike in company store revenue, primarily derived from the Speedway transaction.
The bottom line is that SEI is increasingly dependent on company-owned stores and less reliant on the revenue and profit it derives from franchised stores.
At the same time, SEI’s gross revenue from the sale of gasoline, both retail and wholesale, nearly doubled from 2019 to 2021, from $18.3 billion to $34.6 billion. For perspective, SEI’s gross revenue from gasoline in 2011 was about $9 billion. Similarly, the number of gallons sold also nearly doubled from 2019 to 2021.
Not incidentally, SEI’s retail cents per gallon gross margin rose from 24.09¢ in 2019 to 34.85¢ in 2020 to 35.77¢ in 2021. That gross margin, as a percentage of revenue, rose from 9.1 percent in 2019 to 11.5 percent in 2021.
The bottom line is that SEI is on its way to doubling its gasoline business, is elevating its profit on that line of business and is increasingly dependent on the gasoline business to generate net income.
The data also seems to show that SEI is more than willing to close unprofitable stores and stores which require too much capital investment to bring them up to current standards, and even more willing to purchase new stores, especially if they have gasoline stations. By the end of 2022, SEI is projecting that during the previous four-year period, it will have closed nearly 1,200 stores, or about one store every six days.
The parent company of SEI is increasingly dependent on the convenience store business in general and its North American convenience store business, in particular. The Medium-Term Management Plan issued by Seven & i on July 1, 2021called for a concentration of management resources on the U.S. and Japan convenience store business as a pillar of future growth, with specific goals for SEI of 15,000 stores, fresh food constituting 20 percent of revenue, 6,500 stores on 7NOW, and SEI eventually accounting for 50 percent of the cash flow of the worldwide convenience store business. In its most recent public filing, Seven & i projects that North America will soon account for nearly 60 percent of its revenue and 41 percent of its operating income.
The North American operations continue to outperform 7-Eleven Japan. For 2021, SEI showed year-over-year increase in net income of 71.4 percent, while SEJ posted a reduction of 2.5 percent for its fiscal year ended February 28, 2022. Moreover, SEI stores posted a 7.4 percent increase in same store sales, while SEJ posted an increase of only 7/10 of 1 percent. On top of that, the merchandise gross profit of SEJ stores was 31.7 percent, compared to the U.S. stores at 34.2 percent on a blended basis. Finally, EBITDA for SEI exceeded that of SEJ, based in part on the incremental revenue and operating profit of the Speedway stores acquired on May 14, 2021.
These and other related developments may well be reflected in the very recent public announcement by the parent company that it’s revamping its board of directors to include more directors who are not part of management and are not Japanese. The announcement was carried in Convenience Store News on April 7, 2022. See https://www.csnews.com/7-eleven-parent-revamp-board-directors-amid-activist-investor-pressure. The changes including having a majority of its board made up of outside directors, adding two women and three non-Japanese members, and reducing the number of inside directors.
The one thing that hasn’t changed materially is that U.S. stores continue to sell substantially less fast food and daily food then SEJ stores. For example, in 2021 those two categories represented about 16.5 percent of sales in the U.S., but amounted to more than 42 percent of sales for SEJ stores in FY 2022. There is some indication that there will be a push to at least narrow those differences in the future.
The bottom line is that SEI is consistently outperforming SEJ and thus the parent company’s focus on North American operations will continue to grow as its dependence on North American operations for cash flow and profit increases.
As all franchisees are aware, the National Coalition is earnestly seeking a reset of the relationship between the organization and the franchisor. It hopes to establish a more collaborative relationship based upon transparency and mutual respect, leading to material and measurable gains for franchisees. As your leaders pursue these goals, they are aware and they want you to be aware, of the shifting environment in which we are all operating. Only on a fully informed basis can these goals of the National Coalition be realized.