Change Is The Only Constant

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

The Greek philosopher Heraclitus is credited with the idea that the only constant in life is change. More recently and closer to home, Benjamin Franklin is quoted as saying, “When you’re finished changing, you’re finished.” And change has been a major theme in the 7-Eleven franchise system, especially over the last 10 years.

 7-Eleven had less than 8,000 stores in the United States and 82 percent of them were operated by franchisees in 2014. More than 11 percent of its revenue was derived from its share of the gross profit split with franchisees. The company’s net income was approximately $335 million. Gross margin derived from gasoline sales was approximately $833 million and gasoline gross profit was 6.3 percent. SEI was primarily a franchised convenience store company.

Fast forward to 2023, we find a system transformed. By the end of last year, there were more than 12,500 stores in the United States, but only 55 percent of them were franchised. Nearly 63 percent of all locations have gasoline and 75 percent of the company’s revenue is derived from fuel and about 5 percent from its gross profit split with franchised stores. Gross profit from gasoline was approximately 11.9 percent. In 2023, SEI gasoline operations generated more than $5.3 billion in gross margin. SEI operating income in 2023 was $2.9 billion. Currently, SEI is primarily a company owned gasoline retailer.

In addition, between 2014 and 2023 franchisees experienced the rollout of the so-called new franchise agreement, which transferred many expenses and responsibilities from SEI to its franchisees.

I outline these changes because of the Strategy Committee Recommendations report from the outside (non-management) Directors of Seven & I Holdings Co., Ltd., the parent company of SEI. The report was issued on April 10, 2024. The committee spent many months developing this plan and their work included extensive conversations with significant many shareholders.

In its announcement of the recommendations, the company stated that the committee had provided input to management in advance of the final recommendations, some of which had already been implemented. The company went on to say that We will create a timeline for actioning those items that are being announced today and have started working towards implementation.

From these conversations emerged the common theme that the company needs to accelerate growth in order to realize its global potential, indicating that the current price of its publicly held shares is not a reflection of that potential.

Four primary recommendations to the overall Board emerged:

1. Growth Through Acquisitions. The committee’s top line recommendation is to Accelerate growth and improve profitability and capital efficiency in the North American CVS market with large growth potential. They indicate that there is an opportunity to capitalize on a fragmented convenience store market with a more assertive and flexible approach to financing. The company’s response referred to a more agile and flexible financial discipline, (target Net Debt/EBITDA range of 1.8-2.5). They report to shareholders that the North American CVS business will continue to be a key driver in growth of the overall company. The committee compliments SEI for its ability to integrate acquired assets, and accelerate their sales and profitability, most recently with Speedway. The committee does not specify any particular targets for acquisition, nor does it indicate whether they would be operated under the 7-Eleven banner or whether they would be franchised.
2. Eventual Transition from Gasoline. Once again, the committee voiced its concern over the eventual transition away from gasoline for personal transportation, although both the form of that transition and the time frame remains unclear. But they urge management to develop an explicit plan to address this transition and its potential impact on customer traffic, sales and profit. The importance of such a plan is obvious, given the heavy reliance of the company on gasoline as a source of revenue and profit. The company’s response to the recommendations did not mention this item.
3. Food Production Capability. The committee’s view is that the 7-Eleven system can differentiate itself from competitors by expanding the variety and quality of its food offerings. The Japanese store revenue share for fresh food and hot food is 42 percent, nearly 2 ½ times that of the United States stores. It urges the Board to make investments in food production capability, in-store and through commissaries, in order to accelerate this opportunity. The company’s response also did not include this item.
4. Unified Leadership. The committee recommends that the superstore division of the parent company be spun out into a separate public company, so that the resources can be concentrated on the convenience store segment, which is now 82 percent of its business. The company’s response on this point stated: the company is considering an IPO of the SST business targeting to list as soon as reasonably practicable as one workable option... They also want to create a globally integrated convenience store management structure, including Japan and North America, under a unified leadership. This appears to be an effort to increase the pace of the transition of North American stores to a product mix closer to that of the Japanese stores. Left unsaid in the report is how this integrated management structure would be created, who would lead it, and where it would be based.

One indicator of the company’s embrace of these recommendations was the announcement on April 18, 2024 that Stephen Hayes Dacus, the Chair of the Strategy Committee will be appointed Chairman of the Board of the company upon approval of the Board following the shareholders meeting on May 28, 2024. In order to understand developments that occurred in the past and may happen in the future directly affecting 7-Eleven stores in the United States, we continue to closely monitor, evaluate and report on developments and information from the parent company of your franchisor, as well as its marketplace competitors and publicly held peers.

Neither space nor time permits speculation on how these changes could affect franchisees in the United States. But I can assure you that I will be discussing these and other pressing matters at my presentation at the NCASEF Convention and Trade Show at the Gaylord Palms Resort and Convention Center in Kissimmee, FL July 17-19, 2024. I hope to see each of you there.