The Risks Of Quick Expansion
Once upon a time a 7-Eleven franchisee could make a very decent living from one store. These days, however, certain policy changes—like sharing the credit card fees, the change in the gasoline commission, a 20 percent franchise fee to renew our contract—have chipped away at our income. When SEI became determined to grow, they realized they could achieve quicker expansion by evolving the system into a multiple-unit franchise. This would also allow existing franchisees to earn more money and low volume stores to stay open, so the company streamlined the process of becoming a multiple storeowner.
While this is certainly good news, many franchisees fear SEI’s rush to put up new stores may soon start to impact more and more of our existing stores. If you look at SEI’s long-term strategy, the company wants to concentrate the market so they can roll out Business Transformation and create a more efficient distribution system. In this light it makes sense to have more stores in a densely populated location.
On the other hand, when you put up all these new stores in one area it will eventually affect the stores already there, even if the new stores are offered to some of the existing franchisees. If there are five stores in an area doing quite well, then suddenly there are eight, franchisees believe each store is going to do a bit less business. In this sense, franchisees feel they would have to own several more stores in order to generate the same amount of income they used to before the encroachment.
Franchisee leaders have expressed our encroachment concerns to SEI numerous times during National Business Leadership Council meetings, but the company keeps coming back to us with studies they’ve conducted and data showing that when they put stores close together, it creates more sales for everyone because there’s more awareness. Their data may indicate as much, but what we’re seeing when stores open too close to one another is underperforming stores and sales decreases.
There needs to be balance in SEI’s expansion plans. On the one hand, multiple-store ownership gives franchisees more opportunity to grow their incomes and become more successful. But at the same time, if we don’t conduct due diligence and proper analysis to ensure that the additional store will have a minimum impact on the existing store base, and that it’s a good location and it can be viable on its own, we are really not achieving the growth objective. We are actually just bringing the system down. We’ll have a newly opened store that is not performing well, or if we opened another store that’s impacting three existing stores, then we have unhappy franchisees.
In general, rapid expansion and growth is a good idea. When you have more stores out there, there is indeed more awareness—more people see it and there is more consistent market penetration. In addition, franchisees have the opportunity to acquire additional stores. At the same time, we should not forget what happened to Starbucks. When they put a coffee shop on every corner, they cannibalized sales and ended up closing over 600 stores. Expansion requires a good balance. I know there’s no crystal ball to tell us whether one location will do well or not, but we should not keep opening stores at the expense of our existing base, even if the new stores are going to veteran franchisees. In our zeal to expand, we may overlook some signals that might tell us that we should slow down. We need controlled growth with good analysis. That’s the key.