A Decrease In Gross Profit On Merchandise Outweighed By Growth In Gross Profit On Fuel

By Eric H. Karp, Esq., General Counsel To NCASEF

This assurance to investors in Seven & i Holdings Co., Ltd., the publicly held parent company of 7-Eleven, Inc., appears as a small print footnote within the 23-page report entitled “Brief Summary for the Second Quarter of FY 2022 (Year Ending February 28, 2023).” The assurance was necessary because systemwide gross profit on merchandise for the six months ended June 30, 2022 was 33.3 percent, or 1.1 percent less than the same period in 2021. Systemwide merchandise sales for the first six months of 2022 were $13.2 billion. That amounts to a loss of gross profit margin of just under $145 million systemwide.

Same store merchandise sales increased for the first six months of 2022 by 4.9 percent, a sharp reduction from the 7.6 percent increase in 2021.

Every franchisee in the system is directly affected by merchandise gross profit, but franchised stores with gasoline do not share in that gross profit, and elevated profit on fuel may be  counterproductive to merchandise sales. SEI’s retail fuel margins measured as cents per gallon rose from 33.06 cents for the first six months of 2021 to 39.75 cents in the first half of 2022. This is in part why the number of gallons sold increased by 44 percent, but fuel sales more than doubled. As SEI’s parent company stated to investors: “Volume headwinds have not translated into lower profits.”

In the end, for the first six months of 2022, SEI earned operating income of $1.35 billion, an 85 percent increase from the year before. And in its separate report issued on October 6, 2022, “Presentation for the Group Management Strategy”, Seven & i reported that the synergies associated with the Speedway acquisition are substantially ahead of plan and projected to reach $450 million for the current fiscal year.

But among the four separate reports that its parent company issued for the first half of fiscal year 2022, comprising a total of 100 pages packed with financial disclosures, not one word measured franchisee financial performance in general, or franchisee merchandise sales, gross profit, net profit, or enterprise value in particular. Franchisees invest in a brand with the goal of achieving steadily increasing profits and building equity and value in the business that can be harvested or passed along to the next generation.

The question presented is what is the overall strategy of the company and the extent to which the tactics employed in pursuit of that strategy involves elevating franchisee financial performance.

About 2,500 years ago, Chinese military strategist, Sun Tzu, wrote “The Art of War.” In it, he said: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” Tactics and strategy should always complement each other and are two sides of the same coin (Emil SAYEGH, Law Journal Newsletter, August 2021).

A series of clues about company strategy can be found in a presentation “7-Eleven, Inc. Initiatives for Further Growth” issued on October 6, 2022, which describes four separate plans for the future, including (1) expanding exclusive merchandise assortments, (2) digital technology utilization, (3) restaurant business, and (4) delivery service. Let’s take a look at how these tactics might affect the lives and livelihoods of you and your fellow franchisees.

1. Merchandise Assortment

The presentation states that the year-over-year increases in fresh food and proprietary beverages sales were 14.5 percent and 12.7 percent, respectively, compared to the overall existing store sales increase of 4.9 percent. The implication is that, but for the increase in fresh food and proprietary beverages sales, the overall existing store sales increase would have been materially less. SEI is projecting that fresh food sales will grow to 25 percent in 2025. But if gross margin does not at least keep pace with sales increases, how does that elevate financial performance?

In its Group Management Strategy Presentation, the parent company noted that in order to react to the environmental dynamics of the fuel business, it expects to put effort into expanding fresh food and the restaurant business (see below). The translation is that although electric vehicle penetration remains low, it will grow steadily and that over time the massive profit from fuel will need to be replaced to some extent.

Selling fresh food involves materially more labor than selling processed food, but there is no analysis of this fact in these presentations. And SEI’s parent company does not disclose data on gross margin by merchandise category for SEI, but it does disclose that data for Seven-Eleven Japan: gross margin for fast food and daily food for the first half of 2022 were 37.2 percent and 34.4 percent, respectively, compared to gross margin for processed food of 39.8 percent. And of particular note is that the overall merchandise gross margin for the SEJ stores was 31.9 percent, compared to SEI stores at 33.3 percent. Does this mean that emphasizing a category with lower gross margin (not to mention higher labor costs) will cause the overall gross margin of the U.S. stores to drift downward?

The Group Management Strategy Presentation states that proprietary products—which now number more than 900—will yield higher gross margin, but few details are provided. The projection is that private brand products will generate $2.1 billion in sales in 2025, or double such sales in 2020.

2. Digital Technology Utilization

Seven & i discloses that 7Rewards and Speedy Rewards have approximately 80 million members combined, 1/3 of whom have used one of those apps within the last 90 days. For franchisees who are signatories to the so-called 2019 or later form of franchise agreement, the participation in all loyalty programs is required and the failure to do so is an event of default for which the agreement can be terminated. Section 17(a) of the franchise agreement specifically states that the cost of redeeming all points earned by customers, no matter at what store they were earned, rests with the franchisee, without any right to reimbursement or offset. And the franchise agreement states that the design and economics of these programs are at SEI’s sole discretion. While such loyalty programs are certainly ubiquitous at restaurants and convenience stores across the nation, responding to customer demands and preferences, any positive impact on franchisee gross margin or net profit is neither clear nor assured.

The Expanded 7Now Program Amendment appears at page F-114 of the FDD. Among its most salient provisions are those which allow SEI to determine (a) at which store any order will be directed for fulfillment, (b) when, on what basis and in what amount refunds will be granted to customers, (c) specifications for proprietary bags and packaging, the cost of which must be borne by the franchisee, (d) standards for determining whether a franchisee is fulfilling the orders in a “prompt and timely manner,” (e) the price is charged to customers for all orders, and (f) the designation of payment processor companies, which may charge higher fees than in store sales.

3. Restaurant Business

According to the presentation, SEI had a total of 488 Laredo Taco locations and 38 Raise the Roost locations as of June 30, 2022. The disclosure states that these apparently co-branded locations experienced significant increases in sales and gross profit. The disclosures include neither any detailed information regarding the financial metrics associated with the operation of these brands nor the extent to which they may differ from the convenience store model. There is no indication that franchisees are currently or will in the future be offered the opportunity to include these brands in their locations or whether they will even have a say as to whether or not that occurs. The 2022 Franchise Disclosure Document does not mention either of these brands as part of the franchise offering.

4. Delivery Service

Seven & i informs its investors that more than 50 percent of the nation’s population now live in areas within two miles of a 7-Eleven or Speedway store, that approximately 6,000 stores will be participating in delivery by the end of the fiscal year and that that sector of the business has experienced a sales growth rate of more than 47 percent. Delivery sales totaled $112 million in the second quarter of 2022.

The 2019 and later franchise agreements purport to give SEI broad discretion to design and require franchisees to participate in either third party delivery services or delivery provided by the franchisee directly. Section 17(b) of the franchise agreement states that the franchisee is responsible for the cost of these delivery programs, which could include the need to employ additional personnel and acquire and insure multiple motor vehicles. It also states that the franchisee’s delivery area is not exclusive. Section 17(c) states that the cost of maintaining computer-related equipment to facilitate pick up and delivery from the store may be charged to the franchisee. The form of Delivery Services Amendment included at page F-112 of the 2022 FDD states that the third-party delivery cost is treated as cost of goods sold and thus shared under the gross profit split. This changes the provisions of the franchise agreement which state that SEI can allocate delivery cost at its discretion.


At least some of this strategy and the tactics of both SEI and its parent company are revealed in a careful review of its extensive presentation to investors. As we have stated in previous columns, SEI has become much more of a gasoline company and a company owned location enterprise than in the past. All the more reasons for franchisees to be fully informed and to ask good questions when presented with the opportunity.