An Open Letter To New Chairman Joe Galea
Congratulations on your election as chairman of the National Coalition—or should I say, you have my sympathies.
Having served as general counsel for the Coalition for six years, I know all too well the many challenges that you will be facing as the point person for the Coalition, and particularly the difficult interaction with SEI that comes with your job. As a longtime franchisee, and as a former executive vice chairman, you also know the difficult, and likely frustrating, tasks that you are taking on. The path for you will undoubtedly be rocky and rarely downhill, but all who know you are confident that you are up to the job.
Far be it for me to give you any unsolicited advice, but I will do it anyway. Joe, the biggest challenge for you—and one that cannot wait too long to be resolved—is the issue of encroachment. No one disagrees that the growth of the 7-Eleven brand certainly benefits SEI, and can also benefit franchisees, but only if the growth is responsible, logical and takes into consideration the welfare of franchisees. All too often new stores are built or acquired irresponsibly, illogically, and without any concern for a nearby store to generate a decent income for its owner. This has to stop!
The agreement, as you know, expressly permits SEI to build a store anywhere it wants, even adjacent to an existing store. Since it will be hard for you to argue that SEI is violating the store agreement, your job will be to convince SEI that unrestricted encroachment all too often results in a depressed bottom line which hurts not only the affected franchisee, but also depresses the value of the store—which also effects the value of the 7-Eleven trademark. One possible solution is discussing some sort of formula to compensate franchisees for lost income until business returns to at least its state prior to the encroachment. What do you think?
Joe, here is another biggie. You will remember that the 2006 version of the store agreement introduced the tiered 7-Eleven charge (commonly called “The Split”), which radically departed from the 50-50 split that the 2004 agreement provided to most franchisees. The tiers were tied to the changing gross profit of a store, but failed to take into consideration increases in the cost of living which, in turn, increased gross profit, but without a concurrent increase in the amount of products sold. As the cost of living increases, the 7-Eleven charge grows and, guess what, the franchisee makes less money. This challenge can only intensify in strength as time goes by. Once again, you and your executive board must use your powers of persuasion to convince SEI that while SEI deserves to make a profit for its shareholders, franchisees deserve to make a living for his or her family. A fair split benefits everyone.
Depressed already? How about the ever-increasing franchisee fees? If fees weren’t high enough already, starting with the 2012 version of the store agreement, SEI decided that rather than using the time honored formula for determining franchise fees based on gross profit or market averages, stores would henceforth be sold for whatever SEI thought it could get based on a number of factors (sales, age of location, and many other factors). Not only that—as to new stores, corporate stores, or acquired stores, SEI could hold auctions to franchise a store to the highest bidder.
Okay, I agree that anyone can and should be able to sell anything (including a franchise) for whatever the market will bear. That is the American business model. But shouldn’t some consideration be given to franchisees who will experience the goodwill values of their stores decrease because of higher franchise fees? After all, it was and remains the time, effort, and money of only 7-Eleven franchisees that increased the value of stores and created potential franchisees willing to pay these huge fees. Isn’t it reasonable to demand that current franchisees somehow share in this windfall to SEI? Here’s my suggestion: when a store is sold for goodwill, the seller should receive a part of the franchise fee being charged to the purchaser. Such a program would be similar to the Long Term Tenure Rebate Amendment that SEI awarded to franchisees in 1991 and would make up for at least some of the lost goodwill money. Don’t you agree that such a solution would be fair?
Let’s not forget the remote access DVR dispute that you inherited. Joe, in my view, it is imperative that you do whatever is necessary to ensure that the purpose of the surveillance system in the stores remains that of protection for franchisees, and not for spying on franchisees and their employees by SEI. How demoralizing and humiliating it is to understand that SEI has so little trust and confidence in its franchisees that is feels the need to peek over their shoulders 24 hours a day—and without the knowledge or consent of the franchisee. In this case, however, I firmly believe that you have the provisions of the store agreement on your side. Check out paragraph two of every version of the store agreement. It states clearly that the franchisee is an independent contractor responsible for the day-to-day operations of the store and his or her employees. Franchisees need to be trusted to carry out those responsibilities without the prying eyes of SEI. It is unfortunate that litigation may become necessary to enforce these rights, but Joe, I advise you to keep SEI’s feet to the fire on this one.
So, I would think that you can solve the above challenges in the first six months of your tenure as Chairman. But there will be no time to rest on your laurels. There is still much to be done. Start with the ridiculous penny and a half commission per gallon of gas. Something has to be done to help gas stores who, if lucky, break even selling gasoline while SEI reaps huge profits. It is simply not fair and equitable and I know that you and your team can get SEI to increase the commissions to a reasonable sum.
Taking care of the gas situation will probably take you another month or two. Then I suggest that you start paying attention to the job of reducing the 85 percent recommended vendor requirement to perhaps 65 percent or 70 percent. By getting such a reduction, franchisees will be able to purchase more products from non-recommended vendors at a lower cost and also be able to purchase inventory specifically suited to the needs and wishes of their customer base. That should take you another month, which gives you plenty of time to deal with the recent and excessive issuance of unnecessary and improper LONs and breaches and, after that, you can work on the ever-increasing costs and ever-decreasing gross profit of 7-Eleven stores.
Joe, if you take on and resolve the above challenges in the first year of your term, you will have earned a well-deserved rest during the second year. Good luck.