Update On The Minimum Wage
Minimum wage, one of the hottest issues among the franchisee community, is causing franchisees to have fear and skepticism about the future. Folks are concerned how this is going to impact the franchise business model. In some areas, the minimum wage is going to the $15 range over the next five years, a good 40 to 50 percent hike from where we are now. Franchisees are highly concerned about our payroll, and we are trying to do something about it.
We have been discussing the minimum wage issue with SEI since last February when SEI executives first attended the NCASEF board meeting and covered this as part of their presentation. Since that time SEI has created the Minimum Wage Committee of the National Business Leadership Council (NBLC), which has been hard at work trying to come up with solutions.
The first issue for the NBLC committee was to gather data and find out how much elasticity we have on our retail pricing. A survey was performed and SEI decided the best immediate course of action was to increase SRPs for the impacted stores three to four weeks leading up to the day before the minimum wage hike goes into affect. We focused on the hot bed areas impacted the most—Seattle, San Francisco, Chicago, Berkley and some smaller areas. The plan was to increase SRPs through custom retails in small batches raised over time. The problem is that custom retails take a lot more time, and 50 percent of the profit goes to SEI. We have made a huge request to SEI to compensate franchisees, especially low-volume storeowners, to deal with this problem.
At the NBLC meeting in Dallas on October 6, SEI expanded the team to cover the different functions that can help develop solutions in the areas where the minimum wage was increased. The department heads of Marketing, Merchandising, and Planning were included, and three additional zone leaders were added (five total).
SEI’s plan is to develop a marketing plan for each area to increase gross profits to the stores, focusing on the stores currently being impacted. Seattle, where there are about 30 stores that have the ultra high minimum wage increase, is ground zero. On February 15 of this year, minimum wage rose to $9.32. In January 2016 it will increase to $13, and then go to $15 in 2017. This is a $5.68 increase from 2015 to 2017.
To help Seattle franchisees SEI has looked at remodeling opportunities, helping with the coffee launch, and supporting the hot foods program from the marketing perspective, by sampling free of cost. SEI is making an effort to support the stores and we appreciate it, but the fact remains that the franchisees are pulling in all of this additional GP, and we need SEI to reinvest their 50 percent of that additional GP back into the stores to offset the additional payroll expense.
This is a huge request for us, because a big part of the fresh foods category is write-offs. If SEI will be responsible for the PS17 write-offs, franchisees will have more incentive to really get behind the program with ordering, refreshing the hot foods and sandwich cases, and customer service. When you take away the fear of write-offs, the hesitation goes away so the franchisee can order aggressively, and when you order aggressively, you tend to focus on and build the category. Franchisees on the committee have requested that we try this as a test in these hotbed areas and see what the results are. This is a huge opportunity for SEI to step in, take a chance, and really help franchisees.
In the Seattle market, when you look at the increase in compensation and the merchandise gross profit, it is true that the gross profit so far has gone up due to the SRP and CRP activity. The initial increase in the minimum wage did not translate equally into the compensation of payroll because some of our employees are already above the minimum wage level. The next hike in minimum wage is really going to impact us because franchisees can’t raise SRPs indefinitely. There is only so much elasticity in our retails. At some point we start impacting traffic counts, which we have worked really hard to bring up over the last few years.
The bottom line is that payroll is the biggest expense for franchisees, and the fact of the matter is that three out of four Americans support minimum wage increases. To keep the 7-Eleven system viable and profitable for franchisees, it’s important that these fears are addressed by changes to the system.
In our conversations with SEI management, they do understand the gravity of this issue. Zone leaders are engaging the FOA leadership. They have created a team of FCs to go in and analyze stores and look for opportunities in retails, merchandising and SRP and CRP at the store level. For the stores getting the support it helps to impact their gross profit. We appreciate the attention, but the question is, is that enough?
It appears we have survived the first wave, but we have exhausted most of the tools in our bag. The problem with that is if the competition around you is not moving up, T counts suffer. Reinvesting with small remodels, SRPs, CRPs, and hot foods and coffee promotions is great, but in areas like Seattle franchisees need more of a creative financial solution to get through the next wave of increases.