Irresistible Force Meets Immovable Object

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

When you are aligned with your franchisees, you can rule the world.
Franchisees are our primary customers.
No one has more skin in the game.
The metric that matters most to our owners is restaurant level profitability. Franchisees depend on those profits for their income.

These are the thoughts of Cheryl Bachelder, who served as the CEO of the parent company of Popeye’s Louisiana Kitchen from 2007 to 2015. When she joined the company, guest visits, restaurant sales and profitability had been negative for years and the company’s stock price had dropped from $34 in 2002 to $13. The brand was stagnant and the relationship between the company and its franchisees was difficult and contentious. By 2015, the number of franchisees had grown by 33 percent, franchisor revenue was up 68 percent, franchisor net income was up 83 percent, shareholder equity up by 332 percent, and the price of the company’s stock rose by 400 percent.

Commenting on these impressive statistics, Ms. Bachelder stated: “The Popeye’s turnaround has become a case study in what happens when leaders think about serving others—in this case, our franchisees. The test of our leadership is simple: are the people entrusted to our care better off?”

Full disclosure: as General Counsel to the Popeye’s Independent Franchisee Association for many years, I was privileged to witness these events firsthand. Ms. Bachelder later published a book entitled Dare to Serve and was the subject of a prominent Harvard Business Review article, which can be found at The CEO of Popeyes on Treating Franchisees as the Most Important Customers (br.org/2016/10/the-ceo-of-popeyes-on-treating-franchisees-as-the-most-important-customers).

The irresistible force mentioned in the title is the understandable and perfectly reasonable goal and desire of every franchisee to maximize the sales, profitability and the value of their investment in their franchised location. The seemingly immovable object is the fact that the franchisor is also under economic stress based on reductions in its own profitability, and the underperformance of the stock of its parent company.

The reason I bring Popeye’s turnaround to your attention is because the 7-Eleven system is experiencing significant challenges which are very reminiscent of the state of the Popeye’s system in 2007. I illuminate these challenges to this space not to criticize anyone and for no reason other than to demonstrate the gravity of the current situation.

For example, I cite the following statistics, all of which are taken from publicly available sources, and which I am sure come to no surprise to any franchisee in the system:

• Same store sales were down 4.4 percent in July 2024 and 2.7 percent in August, marking the 12th month in a row that same store sales have declined year over year; same store sales had been positive on an annualized basis for each of the years 2014 through 2023;
• In 2024 same store sales at 7-Eleven have consistently underperformed those at Circle K and Caseys;
• Over the last 3½ years, transaction counts have declined faster than spending per customer; year over year transaction count increases fell from 2.3 percent in 2021 to 5.6 percent in the first half of 2024, while average increase in spending per customer fell from 4.9 percent in 2021 to 1.5 percent in the first half of 2024;
• Blended gross margin—for both corporate and franchise stores—was 32.1 percent for the first half of 2024, the lowest recorded first quarter gross profit since that information was first disclosed in 2009; Gross margin as reported by Circle K for the same period was 34.1 percent;
• For the three months ended May 31, 2024, operating income for the overseas component (SEI and certain affiliates) of the parent company’s financial statements was only 21.3 percent of the operating income for the same period the year before;
• The total return on the company’s publicly held shares have seriously lagged applicable stock indices as well as those of their principal competitors, Circle K and Casey’s; and
• Fuel sales and average gallons fell by 11.7 percent and 2.7 percent, respectively in August, compared to declines of 3.7 percent and 4.7 percent, respectively, in July.

This data makes clear that both the franchisor and the franchisee community are under economic pressure and are underperforming their expectations. This is a result of a variety of factors, including those that are internal and external to the system.

These circumstances, as I have repeatedly opined in the past, have made the parent company of 7-Eleven an inviting takeover target. This generated the attempt by ValueAct, which acquired just under 5 percent of the company in the open market, to spin off the convenience store segment of the parent company of SEI into a separate entity in an attempt to increase shareholder value. This proposal was defeated at a meeting of shareholders.

More recently, the parent company of Circle K has made an unsolicited and non-binding offer to purchase the entire company for an amount roughly equal to its current market value. SEI’s parent company has pushed back, characterizing the offer as opportunistic and not reflective of its intrinsic value, which it expects to realize based on the initiatives underway. Circle K then responded on September 8, 2024, stating that their proposal has clear and strategic benefits for both companies, including their customers, employees, franchisees and shareholders. The mention of franchisees by Circle K is in stark contrast to the approach of ValueAct, which seemed to be acting as if the franchisees did not exist.

Circle K has not made clear what benefits would accrue to 7-Eleven franchisees if the purchase was consummated. But we do know from its publicly available franchise disclosure document, that Circle K franchisees pay a royalty of 3 percent of gross sales and advertising contributions aggregating 1.75 percent of gross sales up to $1.5 million of sales per year. Simple math demonstrates that SEI’s share of the gross profit split alone is substantially higher.

As of this writing there is no way to know or assess the likelihood of a transaction involving the parent company of Circle K. But our concern is that the circumstances that led to the unsolicited offer will not soon dissipate.