The 7-Eleven Supply Chain

By Eric Karp, General Counsel To NCASEF

The 7-Eleven Supply chain is both enormous and complex.

According to reports published by the parent company of 7-Eleven, Inc., average daily sales in the United States were $5,657 per day or $2,064,805 per year in 2024. At the end of that year, there were 12,960 locations in the system, which means that total sales were approximately $26.8 billion. System wide gross margin in 2024 was 33.2 percent, meaning that system wide cost of goods sold that year was 66.8 percent. That, in turn, means that the total purchases by all 7-Eleven stores in the United States was about $17.9 billion. Franchisees accounted for approximately 40 percent of those purchases or about $7.2 billion.

This arithmetic exercise proves only that the supply chain is very large and capable of harnessing purchasing power to drive costs as low as possible.

But what does the franchise agreement say about the supply chain and the obligations of each of the parties on that subject?

The franchisees are subject to relatively straightforward requirements found in section 15(g) in the franchise agreement. These include the obligation to buy products, goods and services only from Bona Fide Suppliers. In addition, the franchisees must purchase 85 percent of their products from Recommended Vendors and separately 85 percent of their cigarettes from Recommended Vendors. There is a procedure set out in the franchise agreement to convert a Bona Fide Supplier to a Recommended Vendor, but SEI retains sole discretion to determine whether a Bona Fide Supplier meets its requirements to become a Recommended Vendor.

The franchisor is obligated to make a commercially reasonable effort to obtain the lowest cost for products and services on a Market Basket Basis identifying all available discounts allowances and other opportunities for price adjustments. It is universally known in franchising that vendors often offer franchisors inducements to become approved vendors in a franchise system.

This franchise agreement contains unusual provisions stating that if SEI decides to accept an allowance from a vendor, it must first ask the vendor to lower its price instead of providing the allowance to the franchisor. If the vendor refuses to lower the cost of the product, then SEI must follow the steps below:

1. If the vendor offers cooperative advertising allowances and refuses to lower the cost of its products and services in lieu of providing that allowance, then SEI may accept the cooperative advertising allowance.
2. If there are other allowances available from the vendor and it declines to lower the cost of its products and services in lieu of providing such allowance, then SEI must request that the vendor provide such allowance as cooperative advertising.
3. If the vendor declines to provide the allowance as cooperative advertising, then SEI may accept and use the allowance as designated by the vendor.
4. SEI must request written confirmation from the vendor that it will not lower the cost of its products and services in lieu of providing any available allowances.

Under paragraph 15(k) and Exhibit J. the oversight of these provisions is delegated to the Franchisee Selection Committee, which has the power to retain an independent third party to conduct a review of SEI’s compliance with these provisions.

Outside the highly confidential Franchisee Selection Committee process, there is no public available window into the payments or allowances that SEI may receive from vendors. They are not separately accounted for in the financial statements which accompany its Franchise Disclosure Documents or in the securities filings of its parent company. The Summary of Significant Accounting Policies which accompanied the 2024 Audited Financial Statements say that all such allowances are recorded as a reduction to merchandise cost of goods sold. The note explaining that policy is set out in the Appendix.

Because your franchise agreement is unusual in that it has many defined terms that are found in an exhibit to the franchise agreement rather than in the agreement itself, I’m including in the exhibit the definitions of the capitalized terms in this article.

I hope you find this article informative.

Appendix

Audited Financial Statements of 7-Eleven, Inc.

 Summary of Significant Accounting Policies

(n) Allowances and Credits from Vendors – The Company receives various types of allowances and credits from vendors that primarily include cigarette and tobacco buy-downs, display allowances, and scanback and billback allowances. These allowances are recorded in the period in which they are earned as a reduction to merchandise cost of goods sold. Additionally, the Company receives vendor cooperative advertising allowances, which are offset against advertising expense in OSG&A as incurred. The Company also receives fuel branding and volume-based incentives related to our fuel supply contracts. Volume-based incentives are recognized in the period in which the underlying fuel sales occur, whereas unearned fuel branding incentives are deferred and amortized as earned over the term of the respective agreement. Both types of fuel incentives are reflected as a reduction to fuel cost of goods sold.

Selected Definitions from Exhibit E to Franchise Agreement

“Bona Fide Suppliers” means persons or entities regularly conducting the business of supplying or distributing merchandise, supplies or services to retail businesses and performing all of the functions normally associated with such activities; provided that, unless you obtain our prior written consent, neither you, your Affiliate, nor any other 7-Eleven franchisee may be a Bona Fide Supplier.

“Market Basket Basis” means a vendor’s standard product mix that meets our Stores’ purchase needs (excluding Proprietary Products) and is sold under terms that include a balanced comparison of payment terms and methods, in-store services, product mix, service area, frequency of delivery and delivery windows.

“Recommended Vendor(s)” are those Bona Fide Suppliers described in Paragraph 15(h) and which are listed on the 7-Eleven Intranet. The list of Recommended Vendors may be changed from time to time.