What Can Trends Tell Us About The Future Of The 7-Eleven Brand And System?
By Eric H. Karp, Esq., General Counsel To NCASEF
Over the last several years we have noticed some pronounced trends in the nature and profile of the 7-Eleven system. A trend is nothing more than the general direction in which something is developing or changing. We follow and analyze these trends because we hope and expect that they will give us some clue about the future.
In the investment world, trend analysis is grounded in the fact that what has happened in the past gives us an idea of what may happen next. For example, if a stock has been increasing, will it continue to increase? The ultimate question is whether or not an existing trend will continue, will be reversed, or changed in some fashion.
Sir Isaac Newton was the first to define the universal laws of motion in the 17th century. His general thesis was that an object in motion stays in motion with the same speed and in the same direction, unless acted upon by some other force. This principle, when applied to the business world, would lead to the general conclusion that trends will tend to continue absent some intervention.
Our analysis of publicly available documents discloses the following 16 trends:
- Franchised Store Closures—477 franchise stores closed in 2021, more than double the number of stores that closed the year before.
- Franchisee to Franchisee Transfers—Franchisee to franchisee transfers, when one franchisee sells his or her store to another franchisee, increased from 200 in 2019, to 232 in 2020, to 283 in 2021, an increase of more than 40 percent in just two years.
- Franchise Store Turnover Rates—We define franchisee turnovers as the sum of all transfers, terminations, non-renewals, repurchases by the franchisor, and locations that ceased operations. The turnover rate in 2019 was just under 6 percent. The next year it rose to just under 7 percent and in 2021 exceeded 9 percent. This means that nearly one in 10 franchised locations changed hands in some form or fashion in 2021. For perspective, the turnover rate in 2011 was 2/10 of 1 percent.
- The Number and Percentage of Stores with Gasoline—At the end of 2017, there were approximately 3,300 stores with gasoline. After the Sunoco acquisition in 2018, the percentage of stores with gasoline stood at just under 46 percent. With the acquisition of the Speedway stores in 2021, the number of stores in the United Sates with gas rose to more than 62 percent at the end of that year, bringing the total number of stores with gasoline to approximately 8,100.
- SEI Retail Cents Per Gallon (CPG) on Gas—Prior to the pandemic, SEI retail cents per gallon on gasoline rose from approximately 20 cents in 2015 to approximately 24 cents in 2019. It rose sharply in 2020 to 34.85 cents, 35.7 cents in 2021 and 40.8 cents in the first quarter of 2022. From 2015 to early 2022, that amounts to a 106 percent increase. SEI’s parent company explained to its investors that 2020 and 2021 were marked by very elevated CPG levels, as the trend was toward trying to secure profits.
- SEI Gross Margin Dollars From Gasoline—The acquisitions noted above solidified SEI’s position as a gasoline company. SEI’s gross margin dollars from its gasoline business rose from $535 million in 2011 to $3.9 billion in 2021, an 8-fold increase.
- SEI Total Revenue—SEI’s total revenue in 2021 was $46.6 billion, triple its revenue in 2015, which was recorded at approximately $15 billion.
- SEI Net Income—SEI earned total net income in 2021 of nearly $1.3 billion, more than double its earnings in 2017 and 600 percent of its earnings in 2012.
- Number of Franchised Stores—The number of franchise stores rose steadily from 2010 to 7,474 in 2020, an increase over that period of time at nearly 50 percent. The number of franchised stores declined in both 2021 and in the first quarter of 2022, resulting in a net decline over that 15-month period of 42 stores.
- Stores Sold to Franchisees—The number of stores sold to franchisees declined from 485 in 2016 to 315 in 2021, a drop of 35 percent.
- Percentage of Franchised Stores—Due to some of the trends noted above, the percentage of the stores in the system that are franchised, including those operating under the Sunoco and Speedway brands, was approximately 71 percent at the end of 2021. In 2017, that total stood at 89 percent.
- Percentage of SEI Revenue Derived from Franchisees—Due in part to the decline in the number and percentage of franchised stores and the increase in the number of company-owned stores resulting from the Sunoco and Speedway transactions, the percentage of total revenue derived by SEI from franchisee gross margin splits declined from 13.5 percent in 2015, to 9.5 percent in 2019 to just 5.7 percent in 2021.
- Blended Merchandise Gross Margin—As noted in earlier articles, SEI no longer separately reports average merchandise gross margin for its franchised stores. Blended gross margin of both franchised and company-owned stores stood at 36 percent in 2007 and has been largely on a downward trend since then, resulting in blended gross margins of 34.1 percent in 2020 and 34.2 percent in 2021. Blended gross margin for the first quarter of 2022 declined further to 33.1 percent, the lowest first quarter gross margin since at least 2016.
- Same Store Merchandise Sales—Same store sales growth was approximately 9 percent for the fourth quarter of 2021, but declined to 5.7 percent in the first quarter of 2022 and declined further in April (4.7 percent), May (4.6 percent), June (3.2 percent) and July (3.1 percent).
- Gasoline Sales Growth—Store gasoline sales increase was 42 percent in the second quarter of 2021 reflecting the impact of the Speedway acquisition. It then declined from approximately 26 percent in the fourth quarter of 2021, to 18.4 percent in the first quarter of 2022, and then further declined in April (14.2 percent) and May (7.6 percent).
- SEI Parent Company Stock Performance—For the five-year period ending July 31, 2022, the total return on the stock of SEI’s parent company was just 9.7 percent, less than half the increase in the consumer product index over the same period. By comparison it’s publicly held competitors, Casey’s General Stores and the parent company of Circle K, generated a total return of 98 percent and 95 percent respectively, exceeding the S&P 500 index return of 82 percent.
Not being privy to the internal deliberations of your franchisor or its parent company, or its long-term strategic outlook and planning, our next best alternative is to carefully monitor all publicly available filings in order to keep the franchisee community as informed as possible. We are not in a position to predict whether the trends outlined above will continue, but concerning as they are, every franchisee should take notice and draw whatever conclusions they deem appropriate.