The Culture Of This Franchise System Must Change
For hundreds of years, social scientists have debated the nature versus nurture conundrum. Are we a product of our DNA and the genes we inherited from our ancestors, or are we the product of the environment that raised us, including the influence of our family, teachers and friends? Or both?
As lawyers, we are taught from the first day of law school that the relationship between two parties is governed by their written agreement. Indeed, the full array of state and federal laws that govern franchising are centered on what is or is not in the franchise agreement. In addition, nearly every franchise agreement, including the 7-Eleven Individual Store Franchise Agreement, has a so-called “integration clause” which states essentially that the Franchise Agreement contains the “entire, full and complete agreement between us and you concerning the Store.”
Yet, having represented independent franchisee associations, franchise advisory councils, and individual franchisees for three decades, I have come to believe that the culture of a franchise system is at least as important as the written agreement. It is that culture which defines the quality of the day-to-day relationship between a franchisor and its franchisees. So as we anticipate the secret behind the scenes creation of the 2019 Franchise Agreement, franchisees must also consider that no matter what that contract provides, this system will not be positioned to meet the seemingly endless stream of internal and external challenges that it faces, unless and until the culture of the system changes—and changes radically.
Here is how one commentator, writing on the website of the International Franchise Association, a franchisor-oriented trade organization, described the need for a positive culture in a franchise system:
“Beliefs, values, ethics and purpose must all be aligned for a perfect match between the franchise system and franchisees. In fact, the culture of the entire organization is made up of this matched combination. It is truly a combined responsibility. The franchise company must create the culture that provides a fair place to conduct business and communicate business matters. Additionally, the franchise organization should nurture it through all avenues and means possible. It’s not enough to say, “We have a culture.” It is a must to live it.” (See www.franchise.org/steps-to-improve-the-franchisor-franchisee-relationship. April 2007.)
What is the culture of the 7-Eleven franchise system? If asked to provide a franchise culture mission statement of this company, which likely does not exist on paper but is nevertheless readily apparent to all franchisees and their representatives, I would say that it would be marked by lack of transparency; secrecy; passive aggressive behavior; hidden agendas; treatment of franchisees as de facto store managers and not independent contractors; heavy handed store level supervision and oversight; franchise system governance through LONs and default notices; and generally keeping franchisees at arms-length to the maximum extent possible.
Just look at the results of the franchisee survey published by the National Coalition in 2016:
- 75 percent of respondents stated that SEI does not trust its franchisees.
- Only 37 percent are proud to be an SEI franchisee.
- Only 26 percent would franchise all over again, if given the choice.
- Only 16 percent would recommend an SEI franchise to family or friends.
- Only 9 percent believe that SEI treats them as independent contractors.
More importantly, having been advised that SEI created its own survey of franchisees, the National Coalition proposed that prior to publishing the results of its survey, that the survey results conducted by it and by SEI be informally exchanged and then discussed in a nonpublic setting. This would give the company and the National Coalition the opportunity to have a meaningful dialogue about the issues and concerns that, as demonstrated by the survey, are at the forefront in the franchise community. The offer was declined.
More recently, we asked SEI to stop demanding that franchisees be forced to sign a new franchise agreement with a graduated gross profit split when the master lease expires, but instead to await the outcome of the litigation that is now pending in New York that would determine whether or not this process violates the rights of franchisees. We saw this as a reasonable and balanced proposal that would save legal fees for all concerned, and allow a court to resolve the dispute. The offer was declined.
The recent full-court press regarding chicken sandwiches is yet another example. The pressure being put on franchisees has been relentless, and has included daily comparisons of the number of chicken sandwiches sold by a franchisee against his or her peers in the market. There have even been suggestions on how franchisees should change their staffing levels in order to be able to sell more chicken sandwiches. However, as every franchisee understands, the issue is profit, not volume. To suggest that the system can sell its way out of the minimum wage challenge is pure fantasy.
We know that Franchise Consulting Group concluded an extensive study of this franchise system at the request and at the expense of SEI. This study involved interviews of dozens of SEI executives and franchisees. They extensively analyzed every aspect of the business. (For more information about this consulting the company, see http://franchiseconsulting.com.) The report was delivered to SEI on March 16, 2016 and a presentation to senior executives was made the following week. Despite repeated requests, we have not been shown this report, or any part of it. However, we have good reason to believe that this report contains extensive criticisms of the culture of this franchise company, indicating that the culture is a barrier to advancing the brand, meeting competition and expanding market share.
In fact, I am disclosing here and now, for the first time, that your General Counsel was interviewed as part of the consulting group project. I was asked a very simple question: what do you think is the number one issue facing franchisees in the system? I could have mentioned the 2019 franchise contract; shrinking gross profit; the regressive nature of the graduated gross profit split that is being forced on franchisees when the master lease expires; heavy reliance upon low-margin fresh foods and promotions; the needless secrecy shrouding the supply chain contracts; insufficient gasoline commissions; the open checkbook for the purchase of gasoline assets while all too many franchised locations are in need of remodeling; forcing on franchisees the elevated cost of maintaining equipment that is beyond its useful life; a gasoline pricing policy that sacrifices the interests of franchisees in favor of gasoline profit for SEI; increasing control over day-to-day operations; and the utter lack of meaningful response to the challenge presented by increasing minimum wage rates across the country.
Instead, I opined that the number one challenge is the closed, contentious and at times dismissive attitude that SEI displays towards its franchisees. I explained that there is a lot of talk and a lot of discussion through the National Coalition, the NBLC and the Roundtable. But too much of this talk, on matters other than those which are strictly operational, is designed to create the illusion of meaningful collaboration, and to kick the can down the road and run out the clock. I explained to Franchise Consulting Group that until this franchise company starts to think of its franchisees as stakeholders, partners and collaborators, the internal and external challenges will continue to mount unaddressed.
In addition, the lack of meaningful dialogue regarding the 2019 contract, unfortunately consistent with the disappointing and counterproductive culture of this company, is causing great consternation and concern in the franchise community, at a level which indicates that some are unwilling to simply wait for the shoe to drop.
I recently participated in a seminar presented at the International Franchise Association Legal Symposium in Washington, D.C. The title of the seminar was “Franchisee Associations, Friend or Foe?” To my audience, I stated that the answer to this question is very simple: it’s up to every Franchisor. If you want your franchisees to be your ally and your friend, then create a culture that treats them like your ally and your friend.
SEI has exactly the same choice.