The Gasoline Perplexity


One of two shocks to hit the 7-Eleven franchise system in 2009 was the announcement by 7-Eleven, Inc. (SEI) of the termination of the four-decades-old policy of sharing 25 percent (later 24 percent) of the gross profit from gasoline sales with the franchisee. A few years earlier, SEI had changed the gasoline amendment for new franchisees to a decreasing gross profit split—the more a store generated in gasoline gross profits, the less the franchisee earned. The company’s goal now seemed to be to line its pockets at the expense of the remaining tenured franchisees.

SEI touted escalating operating, maintenance and environmental expenses as the rationale for this drastic change. The end result was that franchisees previously sharing in the gross profit of gasoline sales would now receive 1.5 cents per gallon, irrespective of SEI’s earnings. SEI reported a breakeven cents per gallon gross profit of 13 cents, and said it earns only 3 cents per gallon net profit. Today, franchisees are concerned the increasing daily environmental requirements cost them more than the income they make from gasoline. As it stands, franchisees earn more from Redbox or Vcom/ATM than from gasoline, with no investment in labor.

With the cessation of gasoline gross profit sharing with franchisees, it seems SEI has attempted to cloak its cost per gallon and its earnings per gallon. One factor that has clouded the true cost of gasoline is SEI’s purchase of Tower Energy, the previous gasoline broker. With little effort this could increase gasoline profits at the upstream subsidiary while depressing profits downstream at the gasoline site.

Likewise, gasoline site maintenance has been miniscule for the past several years, resulting in the deterioration of 7-Eleven’s curb appeal, which has also reflected negatively on store image. Gasoline pads have not been cleaned, gasoline canopies have not been painted or have not had new decals applied, gasoline price signs are in disrepair, gasoline dispensers are rusting, and the displays are clouded.

One of the most frustrating policies franchisees have had to endure has been the incongruent pricing downloaded to the stores. Gone are the days when franchisees could discuss the gas pricing strategy to maximize sales and gross profits for both SEI and the storeowner. Recently, franchisees have witnessed 20-cent price differences between stores. Budget “targets” now dictate the pricing strategy. When a store has reached its “target,” the pricing strategy shifts to increasing the gasoline price—without regard to competitor pricing—to seemingly gouge our customers. With the gasoline price sign the most prominent sign at a 7-Eleven store, this only reinforces the consumer’s perception of exorbitant pricing at 7-Eleven, which results in decreased customer transactions in the store. It is interesting that SEI has never truly researched the relationship and impact gasoline has on in-store customer transactions and sales.

Additionally, neighboring 7-Eleven stores often have distinctly different gas pricing. SEI has attempted to explain this based on the volume of gallons pumped. Obviously, a store with six or eight dispensers will pump significantly more gasoline than a store with two dispensers. However, even with two dispensers there are stores that have pumped over 100,000 gallons a month!

Gasoline margins for stores are set according to a five-bucket formula developed by SEI. First, an income target is determined for a store. Based on the volume of gallons pumped at a site the price strategy is implemented. The greater the volume, the lower the gross profit per gallon expected. Conversely, the lower the volume, the higher the gross profit per gallon in order to meet the target gross profit earnings.

Unfortunately, this seems to create a self-fulfilling outcome: the fewer gallons pumped, the higher the retail, resulting in the fewer gallons pumped. Consequently, stores have reported a downward spiral in gallons pumped. Stores previously pumping 150,000 gallons a month are now pumping 60,000 gallons a month. The inevitable destiny is the removal of the gasoline equipment. The frustration mounts when a corporate-owned 7-Eleven store has a more competitive gasoline price than neighboring franchised stores. In fact, franchisees have seen the retail gas price increase at a corporate store after it was franchised.

7-Eleven storeowners are always looking for ways to maximize their incomes. SEI needs to do a better job of helping its franchisee partners accomplish this by meeting its obligations. The gas stores need to be more inviting, with clean gasoline pads, attractive equipment, freshly painted dogbones and islands, and gasoline prices that reflect the value offerings inside the store. SEI also needs to ensure that the proper supplies for gasoline sites it is contractually obligated to provide can be ordered, and that franchisees know how to order these supplies. Furthermore, SEI needs to conduct its own price surveys using the latest available technology instead of relying on the antiquated method of franchisees or their employees driving around to view the competition’s prices—a practice that, by the way, exposes both the franchisee and SEI to potential liabilities.

Franchisees remain concerned that the 1.5 cents per gallon for gasoline commission grows more inadequate every day. Inflation gnaws away at the miniscule remuneration paid, and the increasing environmental requirements and liabilities passed by SEI to franchisees greatly outweigh the remaining commission. One has to wonder, where will it end?