March 1, 2023
By Joe Rossi, NCASEF Executive Vice Chair
In our fast-paced and competitive industry, it is vital to seek support and resources to maintain a thriving enterprise. As a 7-Eleven franchisee, joining your local Franchise Owners Association (FOA) can provide numerous benefits that will contribute to the growth and success of your store. I cannot emphasize enough the importance of being part of such an organization.
One of the primary benefits is access to a wealth of educational resources. As an FOA member, you become part of, not only a local, but a national network that connects you with valuable information from both the National Coalition and SEI. You will also have access to vendor resources and new items before even SEI becomes aware of them, which make FOA-member stores the first to carry the latest innovations from our vendor partners. This knowledge offers a clear roadmap for conducting your business and addressing systemic issues that may arise. The educational opportunities provided by your local FOA ensure that you are equipped with the latest insights and best practices to help you navigate our ever-evolving 7-Eleven business.
Another advantage is the sense of camaraderie and support within the community. Local FOAs function as a fraternity, where members can rely on one another for guidance and assistance. This network of fellow franchise owners cultivates a collaborative environment that encourages mutual growth and success. By leveraging the collective knowledge and experience of your peers, you can overcome obstacles and develop innovative solutions to your individual challenges. After all, there is a power in numbers that allows us to get things done.
The relationship between the FOA and local municipalities is another significant benefit. Being part of a unified group gives you a stronger voice when dealing with ordinances and other regulatory matters. This collective strength ensures that your concerns are heard and addressed, enabling you to focus on running your store more efficiently and profitably.
Furthermore, FOA events such as trade shows, charity golf outings, and holiday parties provide exceptional networking opportunities. These gatherings allow you to connect with other franchisees and our vendor partners to share ideas and experiences, and establish lasting business relationships. The friendships formed through these events contribute to the overall sense of belonging and solidarity within the 7-Eleven franchisee community.
If you are a 7-Eleven franchisee and have not yet joined your local FOA, I highly recommend looking into it. The easiest way to find your local FOA is by visiting the National Coalition website. The process of joining is straightforward—just scan the QR code included with this article that takes you to 7-Help and follow the instructions outlined in the sidebar. The benefits gained from being an FOA member far outweigh the initial investment of time and effort. As a member, you will not only gain access to crucial resources and support, but you will also become a part of a community that cares about your success as much as their own.
March 1, 2023
By Eric H. Karp, Esq., General Counsel To NCASEF
In this message, I pay homage to the late and great Boston Globe sports columnist and editor Ernie Roberts, the progenitor of “Thoughts While Shaving.” As a teenager, I very much looked forward to his columns on the left-hand side of the first page of the sports section, because they contained relatively short stories about a variety of different subjects related to the Boston sports scene, at a time when the perennial NBA Champion Boston Celtics made the news, while our other sports teams languished.
So it is with 7-Eleven and it’s publicly held parent company, Seven & i. The past several weeks have seen news and public disclosures on a variety of fronts which have the potential to affect U.S. franchisees on both a long-term and short-term basis.
Merchandise Gross Profit
Merchandise gross profit for SEI stores for calendar year 2022 was 34 percent, down from 34.2 percent the year before. In fact, this is the lowest merchandise gross profit reported since at least 2006, the first year that this statistic was disclosed. Merchandise gross profit was 36 percent in 2007 and last exceeded 35 percent in 2012.
These numbers are blended, which is to say that they include both company owned and franchised stores. SEI last published merchandise gross profit for franchised stores in 2018, following a nearly 1 percent decline in franchisee merchandise gross margin from 2012 to 2018. Previous public disclosures by SEI’s parent company suggested that the merchandise gross profit in the acquired Speedway stores was lower, which may have been reducing the systemwide average. But there has been more than enough time for the company to adjust and take advantage of the opportunity.
SEI often and correctly points out that sharing gross profit aligns the interests of franchisees and the franchisor. But declining gross profit, together with the increase of SEI’s share of that net profit as reflected in the so-called 2019 form of franchise agreement, should be of concern because it undermines the gains reflected in same-store sales increases.
Retail CPG
SEI’s parent correctly summarized the financial results of SEI for 2022 as follows:
- “A decrease in gross profit on merchandise was outweighed by growth in gross profit on fuel, leading to a year-on-year increase in the overall gross profit margin factor.”
- “Strong growth in operating income through increased fuel GP led by historical CPG and accelerated fresh food and PB sales.”
That “historical CPG” is illustrated by the following, which demonstrates that fuel margin has more than doubled since 2015. And as every franchisee knows, unlike merchandise gross profit, franchisees do not share in this bounty, but rather receive a fixed commission of 1.5 cents per gallon. For perspective, in 2015 and 2016, franchisees received approximately 7.5 percent of the retail gross margin; by 2022, that percentage was more than cut in half to 3.5 percent.
SEI’s total gross profit from the fuel segment of its business increased by more than $1.8 billion in 2022, or 46 percent over the previous year. The extent to which SEI is at least as much a gasoline retailer as it is a merchandise retailer is shown by the fact that in 2022, more than 78 percent of its revenue came from the sale of gasoline and just 4 percent from franchisees.
Electric Vehicles
Given the heavy reliance of SEI on gasoline revenue and profit, illustrated most prominently by its acquisition of the Sunoco and Speedway chains, we are concerned about the long-term prospects for gasoline powered automobiles.
According to InsideEVs.com:
- “Out of 1.24 million new light vehicles registered in January 2023, some 87,708, or 7.1 percent were all-electric. That’s a 74 percent increase year-over-year and a noticeable change, compared to a 4.3 percent share in January 2022. The 7.1 percent share is also a step change from 5.6 percent in the 12 months of 2022.”
- “It’s clear that the battery electric vehicle (BEV) segment is booming, partially through organic growth and partially through the Inflation Reduction Act of 2022 (IRA), which brought back the $7,500 federal tax credit eligibility for Tesla and General Motors.”
- “Another reason why the market surged is price cuts introduced by some of the manufacturers (Tesla was one of them).”
Fortune Business Insights projects that the sale of electric vehicles will experience more than a 25 percent compound annual growth rate through 2028, at which point sales will reach more than $138 billion. Bloomberg reports on projections that EVs will account for 50 percent of all new vehicle sales by 2030. And the federal government has recently proposed new measures to change the way mileage standards are computed for electric vehicles as a way of spurring sales and incentivizing manufacturers to produce lower cost electric vehicles.
ValueAct
This activist investor firm continues to put pressure on the management of the parent company of SEI. It holds a 4.4 percent stake and has been pressuring for change. In the run up to the annual shareholders meeting scheduled for May 25, ValueAct is pushing for a spinoff of the convenience store business into a standalone publicly held company or a sale of the entire company. It is also seeking to replace four board members. ValueAct has recruited two other institutional investors to its cause, Artisan Partners and Dalton Investments.
“A rational and experienced board of directors would understand their fiduciary duty and spin off the Seven Eleven business to existing shareholders,” said James Rosenwald, chief investment officer of Dalton Investments. “The market would likely value the new spin off at more than the entire company today.”
As I have noted before, these investors are not quarrelling with the financial performance of the convenience store business. Rather, they believe that the other segments of the conglomerate are dragging down the value of the company and hence its stock price, which has perennially underperformed its peers and the market as a whole. I bring these matters to your attention because these investors hold large stakes and are very persistent. And any major change in the corporate structure of the parent company could have important consequences for every franchisee in the United States.
Conclusion
With apologies to Ernie Roberts, these four matters may seem disparate and unconnected, but they are all closely interrelated because each one of them has the potential to materially impact the profitability and value of every franchised location in the country. It is for this reason that the National Coalition strives to be fully informed by monitoring all publicly available information and keeping its franchisee constituents in the know.
January 1, 2023
By Sukhi Sandhu, NCASEF Chairman
After a two-year hiatus due to the pandemic, the 7-Eleven Experience came back bigger and better than ever before! Held at the MGM Grand in Las Vegas, the event showcased the best of what 7-Eleven has to offer. It was amazing to see everyone—all the stakeholders and partners—coming together for two days to network, share new ideas, see great new products from exhibiting vendors, and to check out the latest innovations being rolled out by our franchisor.
The size and scale of the event were amazing, almost outgrowing the venue where it was held. Attendees included not only 7-Eleven franchisees and their guests, but folks from 7-Eleven Canada, Speedway, Stripes, Laredo Taco Company, 7Now, our vendor community, and of course, SEI. In all, there were over 13,400 attendees, with the largest franchisee attendance at over 5,400—including their guests. I heard that franchisee registration for this 7EE was at over 90 percent, which is truly impressive. The brand is growing, and it was great to see so many franchisees, corporate operators, and vendors expressing their excitement for being part of this large-scale event.
Attending the 7-Eleven Experience event this year allowed me to speak with hundreds of franchisees, vendor supply partners, and 7-Eleven staff. It provided an excellent opportunity to hear the challenges faced by franchisees and listen to their concerns. Several had even mentioned to me that this was their first time attending the 7EE and it exceeded their expectations. The networking opportunities were incredible, and it was exhilarating to see how franchisees could take advantage of the deals offered by vendors to maximize their profit margins.
The 7EE kicked off with a general session featuring a keynote speech by SEI President and CEO Joe DePinto, held at the MGM Grand Garden Arena, which was filled to capacity. It had the vibe of a rock concert rather than a corporate gathering, and that vibe carried throughout the two-day event.
The trade show was sprawled across three separate, large areas of the MGM Grand Conference Center and was packed wall-to-wall with exhibiting vendors. It served as a great opportunity for vendors to showcase their products and offer deals that would maximize gross profits for franchisees. In fact, I was informed that pre-book orders at this 7EE set a new record, which I’m sure made vendors very happy.
The Learning Center was a great platform to discover all the innovation and simplification being developed by SEI to make our business model better. Areas within the Learning Center included Vault, Retailer Initiative, Marketing, Private Brand, Digital, 7Collection, Rewards, and much more. One of the highlights of the event was the announcement of the self-checkout system rollout, which is set to be launched later this year. It was evident that this new system would significantly reduce operating expenses and improve the speed of service.
The Accounting booth in the Store Support Expo section was a highlight of the event, and it was there to address any concerns or queries from franchisees. The Store Support Expo section was also well-attended, with many SEI departments having their own booths so franchisees could meet and speak directly with department heads and representatives.
Sprinkled throughout the 7EE were appearances by high-caliber celebrities—like baseball legend Roger Clemens, NBA star Dwyane Wade, Dallas Cowboys quarterback Dak Prescott, former 7-Eleven-sponsored Indy Car driver Tony Kanaan, Las Vegas Raiders running back Josh Jacobs, and Washington Commanders defensive end Chase Young, to name a few—who signed autographs and took photos with attendees. There was also a blow-out party at the famed Hakkasan Nightclub, and the final gala night, held at the MGM Grand Garden Arena, was tremendous fun.
It feels good to be part of a brand that is getting bigger and stronger, and it was great to hear that SEI’s commitment for 2023 is to be better and face the challenges with all stakeholders while focusing on the overall brand, including the franchise model.
On the while, the 7EE was an enriching experience. It was great to get together with so many people and stakeholders, and to witness the growth and success of the 7-Eleven brand. The record attendance of franchisees was impressive, and it serves as a wonderful example of how working together and having good communication can result in positive outcomes.
NCASEF plans to carry on this spirit of cooperation and camaraderie at our 47th Annual Convention and Trade Show, to be held at Caesars Palace in Las Vegas from July 30 to August 2. Please mark your calendars and make plans to join us. Our Convention Committee is hard at work putting together an event filled with networking, social, and business-building opportunities that will satisfy all 7-Eleven partners. We’re encouraging vendors to bring exclusive convention-only deals, and we’re inviting SEI to send representatives and set up booths at our trade show to engage with franchisees. More details will be coming soon. I look forward to seeing you all there.
January 1, 2023
By Joe Rossi, NCASEF Executive Vice Chair
The success of any business relies on a healthy relationship between its stakeholders. This is especially important in the case of our business today. A strong and healthy relationship between SEI, franchisees, and our vendor partners results in better communication, greater efficiency, increased sales, and a better customer experience. Here’s why.
A healthy relationship between all stakeholders is essential for the company’s growth and success. Franchisees and vendor partners are crucial components of 7-Eleven’s supply chain, and our performance directly affects the company’s success. By establishing a healthy relationship, all parties can work together to achieve common goals, maximize profits, increase efficiency, and productivity. When there is open communication and collaboration between the three parties, there is a better understanding of each other’s needs and expectations. This understanding leads to the creation of more effective strategies and the implementation of streamlined processes that benefit all stakeholders.
By fostering an environment of trust and collaboration, all parties can bring new ideas and technologies, creative solutions, and new products to the table, which allows the brand to stay competitive and ahead of the curve in the rapidly changing retail industry. Franchisees can provide better customer service, vendors can provide higher quality products, and SEI can ensure that 7-Eleven stores are meeting the needs of customers. This allows us to level up and keep the brand competitive and profitable.
The company benefits from successful stores that provide a high level of customer service and maintain the brand’s reputation. Franchisees benefit from ongoing support from SEI, as well as high-quality products and services from vendor partners. Vendor partners benefit from a steady stream of business from 7-Eleven stores, as well as the opportunity to collaborate with SEI to develop new products and marketing strategies.
As outlined, a healthy and productive relationship between all 7-Eleven stakeholders is essential for the success of the brand. It can lead to better communication, improved efficiency and profitability, better quality products and services, and a more collaborative and supportive environment. As such, all parties should make every effort to develop and maintain strong relationships that are built on trust, respect, and mutual understanding.
January 1, 2023
By Eric H. Karp, Esq., General Counsel To NCASEF
I have recently received a number of questions about whether 7-Eleven franchisees are subject to non-competition covenants in their franchise agreements. These questions appear to be generated for two separate and unrelated reasons. First, the non-competition provisions of the franchise agreement changed materially with the so-called 2019 franchise agreement. Second, the United States Federal Trade Commission has recently proposed a rule which would ban non-competition agreements in the employer/employee relationship. But it has also asked for comments on whether that rule should be extended to protect franchisees by restricting or even eliminating non-competition agreements.
Franchisees who are not signatories to the 2019 franchise agreement are subject to a post-term non-compete in section 5(d)(2) of their franchise agreement. This post-term non-competition obligation applies in the event of expiration, termination, or transfer. It prohibits the franchisee from owning, operating, or having a financial interest in a Competitive Business at the site of the store or any other 7-Eleven store within two years of it last being operated as a 7-Eleven store. Note that this provision does not involve a competitive radius and is limited to the actual site of your store or any other store. This means that following the termination or expiration of your franchise agreement, you could operate an independent convenience store across the street from your former franchise location. This form of franchise agreement non-competition provision is substantially less onerous than the typical franchise agreement in other franchise systems.
The 2019 form of franchise agreement entirely eliminated the post-term non-competition provisions, one of the few changes that favored the franchisee. Item 3 of the current form of Franchise Disclosure Document reflects at least two cases where SEI sued former franchisees for violation of the post-term non-competition covenant. But these cases all involved franchisees who are signatories to pre-2019 franchise agreements.
The FTC proposal with respect to non-competition covenants contains the following observations by the Commission:
Many franchise agreements may contain non-compete clauses. By restricting a franchisee’s ability to start a new business, franchisor/franchisee non-compete clauses could potentially stifle new business formation and innovation, reduce the earnings of franchisees, and have other negative effects on competitive conditions similar to non-compete clauses between employers and workers. Franchisor/franchisee non-compete clauses could also potentially be exploitative and coercive in some cases, such as where there is an imbalance of bargaining power between the parties. While the relationship between franchisors and franchisees may, in some cases, be more analogous to a business-to-business relationship, many franchisees lack bargaining power in the context of their relationship with franchisors and may be susceptible to exploitation and coercion through the use of non-compete clauses. For these reasons, the Commission seeks comment on whether the Rule should cover franchisor/franchisee non-compete clauses and why.
While the current 7-Eleven franchise agreement does not have a typical post-term non-competition provision, it does have a number of in-term non-competition provisions.
- Section 5(d)(1) of the franchise agreement prevents the franchisee from owning, operating, or having a financial interest in a Competitive Business which is or is intended to be located within 1/2 mile of any 7-Eleven convenience store.
- Section 15(g)(1) of the franchise agreement prohibits the franchisee from offering or selling any products which directly compete with any Proprietary Products that SEI designates as exclusive. This is material to the franchisee because the company has reported a steady increase in the number of products designated as proprietary (936 such products as of September 2022) and its stated intention to continue to build that channel in the future.
- Paragraph 12 of the Expanded NOW Program Agreement prohibits the franchisees from using any Delivery Providers other than those designated by SEI and prohibits the franchisee from engaging in any other delivery program or services at the store.
Finally, the 7-Eleven franchise agreement has no similar or reciprocal restrictions on SEI and its ability to compete with the franchisee in any channel of distribution. The franchisee has no protected, restricted or exclusive territory.
One of my roles as General Counsel is to keep franchisees fully informed of their rights and obligations under their franchise agreements. My hope is that this article contributes to the fulfillment of that goal. If you or any franchisee you know has any questions about restrictions on competition in his or her franchise agreement, please do not hesitate to contact us.
November 1, 2022
By Sukhi Sandhu, NCASEF Chairman
When I, along with the other newly elected NCASEF officers, began serving our terms in January of 2022 we set a goal of developing open communication with SEI so we could work together to improve the 7-Eleven business for all stakeholders. Another focus of our administration was to change the culture of our National Coalition to emphasize more collaboration among Board members, and to build stronger relationships with our vendors and supplier partners.
Overall, I believe we are in a better place today than we were on January 1, 2022. On the organization side, we provided a platform via our quarterly meetings for all three stakeholders—FOA leaders, vendors, and SEI management—to share strategies for the 7-Eleven business. SEI now has several of their top people attend our Board meetings to discuss issues, provide updates, answer questions, and take suggestions from Board members.
We also improved our Affiliate Membership Program and turned our focus to working with vendors to grow sales and improve the overall business. Through our Affiliate Member meetings—which we have increased to three per year instead of twice a year—franchisees and vendors get to discuss and work on solutions for things such as supply chain issues, and the meetings provide a platform for introducing new items.
We brought back the charity golf tournament, which besides raising funds for our charity of choice—Children’s Miracle Network Hospitals—also provides a venue for vendors and franchisees to network and socialize. Additionally, we implemented structured NCASEF committees and aligned them with SEI departments to highlight and address systematic issues. The committee members then provide feedback to SEI upper management for solutions. These committee members, in turn, bring that information and updates to the NCASEF Board members.
One of the outcomes of all this—especially our open communication and dialogue with SEI—is the progress made in resolving the AR Gap issue, which has resulted in millions of dollars not being pushed to franchised stores and millions of dollars of AR Gap credits issued to stores. SEI Executive Vice President and Chief Merchandising Officer Jack Stout announced at our last Board meeting that he is devoting all of his attention to tackling and resolving the AR Gap issue once and for all, and has a full-time team dedicated to the task. Another positive outcome is the continuation of the 7Now delivery fee subsidy, which SEI had temporarily suspended but reinstated after NCASEF leadership met several times with corporate to emphasize the importance of the subsidy until the program really takes off and becomes successful.
Something we also worked on and secured was SEI giving a store operational credit of $200 for the last five months of 2022, with an additional $1,500 for the month of November and another $1,500 for the month of December.
More recently, we negotiated a policy change with SEI to reduce the gross profit split (GGPS) charge by 100 basis points for traditional franchised stores, effective January 2023. For franchisees with multiple stores, every traditional store will receive a GGPS reduction of 150 basis points. These changes will remain in effect until further notice and for no less than one year.
Furthermore, we worked with SEI to implement a Gross Income Support (GIS) program for lower volume stores. It was at $200,000 in the beginning of 2022, but I am proud to announce that we negotiated with SEI to increase it to $280,000. This will hopefully provide more stability for lower volume stores and give them enough breathing room to improve and grow their sales. This will kick in with the April 2023 accounting period.
We have also worked with SEI to discount the franchise fee to make it more appealing for franchisees to franchise stores. This can help to increase goodwill because it will allow the potential buyer to invest the saved funds from the franchise fee more towards the goodwill amount.
We will continue to have ongoing conversations with SEI on enhancing our franchise business model and to improve systematic issues such as IT, store safety, fuel profitability, 24/7 hours, etc. I want to assure you all that your NCASEF leadership is fully committed to giving 110 percent to address issues, identify opportunities, and increase the bottom lines of all stakeholders.
I believe that the hard work and dedication of our team is what has brought us to where we are today, and I am confident that we will continue to be successful in the future. Our focus remains on increasing sales and gross profit dollars, driving down costs, and addressing systematic issues. Together, we can continue to make progress and improve the 7-Eleven brand.
I am honored to be a part of this team and I am grateful for all the support we have received in 2022. Let’s make 2023 an even better year!
November 1, 2022
By Joe Rossi, NCASEF Executive Vice Chair
Many franchisees have been facing a significant labor shortage in recent years. This has had a major impact on our business, making it difficult for us to keep our stores running smoothly and
efficiently.
One of the main challenges we have encountered as a result of this labor shortage is the difficulty in finding and retaining good employees. With the unemployment rate being low, it has become increasingly difficult to find qualified and reliable workers who are willing to take on the responsibilities of working in a retail environment. Additionally, many of our current employees are being poached by other companies offering higher wages or better benefits, making it difficult to retain a stable workforce. Many workers are even choosing to work for companies like Uber, Lyft, and DoorDash, which offer more flexible schedules and higher pay.
Another issue we are encountering as a result of the labor shortage is the increase in labor costs. Since we now have to pay higher wages to attract and retain employees, our overall labor costs have gone up. This has had a significant impact on our bottom lines and has made it more difficult for many of us to turn a profit.
In addition to the difficulties in finding and retaining employees, the labor shortage has also made it more challenging to keep our stores fully stocked and organized. With a shortage of employees, it has been difficult for many of us to keep up with the demands of our customers, making it harder to provide them with the products and services they want and need.
Despite these challenges, we need to find ways to overcome this dilemma so we can keep our stores running as effectively as possible. Our franchisor has helped us try to find suitable employees by implementing the Hire Right job aid. Many of us are having a lot of difficulty finding employees to work the third shift hours, so allowing those stores to close for several hours overnight would also be helpful. Presently, SEI is permitting stores to close overnight on a case-by-case basis, but a more blanket approach might be called for.
C-stores in Japan are also facing this labor problem, and they’re experimenting with contact-free self-checkout stations. The self-checkout stations are already being utilized by other c-store chains in the U.S., so maybe it’s time this technology is adapted by 7-Eleven. Perhaps there are other tasks in our store that we could automate to help reduce the number of workers we require. A growing number of retailers are offering more flexible scheduling options, but that only seems plausible with bigger stores with larger staff.
The labor shortage has had a significant impact on our stores, particularly by driving up our labor costs and reducing the level of service we can provide, so we need to develop strategies to overcome this problem before other factors like inflation and crime make the situation worse. We need to ensure that our stores can continue to thrive in the face of this challenge.
September 1, 2022
By Sukhi Sandhu, NCASEF Chairman
There are many challenges that franchisees and the system are currently facing. Among them are the AR Gap, store safety, delivery issues, and rising operational expenses that include labor costs, inflation, and rising credit card swipe fees, and others. However, NCASEF is diligently working with SEI to address these issues and put them behind us so we can move forward to increase sales and profitability for franchisees and all 7-Eleven stakeholders.
The AR Gap has been a major pain point for franchisees. The cause of the AR Gap is not anyone’s fault in particular; it’s more a byproduct of COVID, which has disrupted not only our personal lives, but the operations, logistics, and staffing of our vendors and franchisor. Nevertheless, we have expressed our concerns about the AR Gap and other accounting issues—like the backlog of MASC cases—to SEI, and we’re working with them on permanent solutions. For their part, SEI has allocated additional resources into accounting and is working with the wholesalers, including CoreMark and McLane, to address these cases.
We have also been meeting with our wholesalers to improve the delivery process and fill rates so we have products available on our store shelves for our customers. We’ve been developing and improving a long-term solution for the AR Gap by way of store check-in simplification (SCIS). We’ve been working with SEI, their Logistics team and our wholesale partners to fine tune the SCIS process and make it efficient and accurate so we don’t have to face AR Gaps and our entire delivery and fill rate process is improved.
The profitability around 7NOW has been another challenge. SEI had temporarily suspended its policy of subsidizing the program’s delivery fees, but we had numerous meetings and discussions with our franchisor, and we mutually agreed that franchisee profitability is critical to the success of the program. We all realize that 7Now is a very important program for the brand, but franchisees need to know that it will also be profitable for them so they will invest time and effort into the program to maximize its potential. SEI agreed with this and decided to continue subsidizing the delivery fee, which will be retroactive from the time it was suspended on July 1.
Another topic that we’re engaging with SEI on is store safety. We have requested to form a cross-functional, multi-departmental committee with our franchisor that will look at every obstacle store safety generates, even the challenges that it provides, such as logistics. There is work being done with the Asset Protection department to test crime prevention products and other solutions. There’s even an ongoing test where some stores are allowed to close from midnight to five in the morning to see if that reduces the number of incidents occurring in the stores.
Pass through windows are being tested, which would allow franchisees to serve customers after hours without letting them into the store. It’s being piloted in 10 stores in Northern California and Dallas, Texas, and will be installed in 126 stores by Q1 2023. Then there is the Live View Technology program, which involves deploying cameras to monitor fuel theft, loitering, homeless people, vandalism, theft, robbery, and employee and customer safety. Unfortunately, there is no simple solution to crime because it is more of a societal issue than a 7-Eleven issue, but we are looking into ways to ensure our stores, staff, customers, and franchisees are safe.
We are also working with SEI to form a committee to address our insurance premium increases and the fact that insurance companies are not renewing or offering new Business Owners Policies (BOP) because of the heighten crime plaguing convenience stores. As you know, BOPs protect you from liability claims and lawsuits; safeguards your building, equipment, and inventory; and cover you financially if your business unexpectedly shuts down from a covered loss. This isn’t just happening to 7-Eleven stores, but to other convenience retailers, as well. This new committee will look for solutions to both premium increases and BOP renewal problems.
Labor is another hot issue we’re tackling, the shortage and the rising cost. Presently, labor is the number one expense for franchisees—it accounts for as much as 70 percent of our total expenses and has increased 25 percent in the last three years. Although store sales are up, franchisee labor expenses are outpacing any financial gains we’re making from sales. It’s already tough for us to keep up with the market prevailing wages but come January several states are going to implement more minimum wage hikes. This is one of the many reasons we’re working with SEI to increase overall franchisee profitability.
In terms of finding workers for our stores, we’re looking at reasonably priced third-party staff recruitment companies to help us find eligible employees. We’re also supporting several legislative measures on the federal level that will help widen the labor pool, such as one that gives retirees relief from Social Security penalties for returning to the workforce, and another that would lift the top and bottom age limits for eligibility for the Earned Income Tax Credit, which affects lower income workers. We’re also supporting federal programs that will bring in more foreign workers via the H2C visa program and Ukrainian workers program.
Rising credit card swipe fees is becoming a very big problem, so we’ve partnered with SEI’s Government Affairs team to visit our representatives in Washington, D.C. recently and ask them to support two bi-partisan bills that will lower swipe fees by bringing competition to the credit card processing market. The House bill, the Credit Card Competition Act, would require banks to allow credit card transactions to be processed over at least two unaffiliated card payment networks. The Senate version of the bill would also require that credit cards to be processed over at least two unaffiliated networks—Visa or Mastercard plus a network such as NYCE, Star or Shazam. We plan to keep the pressure on our elected officials to make sure these bills are passed so we can get some relief from credit card fees.
The pin pad issue, which was making life difficult at the store level, is being addressed. After expressing concerns over the faulty devices, SEI committed to ordering brand new pin pads for our stores. The Item Master issue also appears to be behind us. SEI’s IT department feels like they have a handle on the situation, but if any stores continue to have problems with Item Master they are encouraged to bring it to the IT department’s attention for resolution.
Your NCASEF leadership is committed to resolving all issues so we can focus on increasing sales and profits. Whether it’s store safety, credit card swipe fees, or increased operational expenses, we’re working to address all of them. And the key to successfully resolving all of these issues is open and honest communication—not only between NCASEF, SEI and vendors, but also amongst franchisees. That’s why I and the other NCASEF officers travel across the country to attend as many local FOA events as possible—to meet and talk and listen to franchisees so we can bring your system issues to SEI’s attention and help resolve them.
Before I sign off, I would like to acknowledge and thank everyone who united to help out after Hurricane Ian tore through Florida in late September. Great kudos to everyone working together, from franchisees and local FOA leadership, to SEI’s Facility Maintenance and Operations and suppliers and vendors. It was truly inspiring to see how the 7-Eleven family came together to not only help the stores impacted by the storm, but to support the communities and first responders, as well.
September 1, 2022
By Joe Rossi, NCASEF Executive Vice Chair
The 30 plus years that I’ve spent at the corner of North Dearborn and Maple in Chicago as a 7-Eleven franchisee have been some of the greatest of my life. Since I first opened the doors of my store, I’ve been able to support my community through thick and thin. But now, I’m finding it more difficult to keep my lights on and serve Chicagoans due to increased credit card swipe fees.
This issue has been a long time coming. On every purchase, credit card companies will impose a processing fee, or what most Americans know as a “swipe fee.” Unfortunately, the credit card processing market is unfairly stacked against small businesses, as just two companies—Visa and Mastercard—are able to monopolize the rules.
Back when I first opened up shop at the corner of North Dearborn and Maple in 1988—which is now referred to as “Honorary Joseph Rossi Way”—20 percent of my customers paid by credit card, while 80 percent used cash. Those numbers have since swapped, as change shortages and the COVID-19 pandemic further increased shoppers’ reliance on credit cards. For Visa and Mastercard, this shift in consumer habits has been a godsend. For me, not so much.
I’ve had little choice but to increase the price tag on many of my products to offset these rising swipe fees, and slow down hiring for open positions. While I always want to avoid raising prices and creating pain points for my customers, the credit card business has thrown me between a rock and a hard place.
These companies are double dipping. Not only are they automatically able to make more money off swipe fees due to inflation, but they also do so by directly increasing the fees themselves. You couldn’t ask for a clearer example of highway robbery.
It’s not just my business that is suffering. The convenience store industry at large lost out on $13 billion to swipe fees in 2021, while the average 7-Eleven store pays an average of $85,000 each year in these fees alone. Many businesses have found themselves at the complete mercy of credit card businesses, opting to go “credit card only,” which increases the financial pain.
It’s frightening to consider that I may not be able to support the community the same way I once have due to swipe fees. In prior years, I’ve donated to both my local school district and Lurie Children’s Hospital, but that may be more difficult this year and next due to these added costs.
Congress is attempting to clamp down on unregulated swipe fees and restore competition within the credit card industry. A group of lawmakers in the U.S. House and Senate, on both sides of the aisle, introduced the Credit Card Competition Act, which would require the largest U.S. banks to offer other networks for processing credit transactions.
Senator Dick Durbin is one of the lead sponsors of the legislation and should be applauded for his efforts to help small businesses at such a difficult economic time. The entire Illinois congressional delegation—particularly those representing the Chicago area—should follow Senator Durbin’s lead and support this measure.
In all of my years of business, I’ve been able to withstand the worst of circumstances—from shoplifting incidents to the COVID-19 pandemic. But runaway swipe fees are a new serious challenge and one that may be near impossible to overcome. Washington must restore competition in the credit card industry or else Visa and Mastercard may drive my business—and others across the country—straight into the ground.
September 1, 2022
By Eric H. Karp, Esq., General Counsel To NCASEF
This assurance to investors in Seven & i Holdings Co., Ltd., the publicly held parent company of 7-Eleven, Inc., appears as a small print footnote within the 23-page report entitled “Brief Summary for the Second Quarter of FY 2022 (Year Ending February 28, 2023).” The assurance was necessary because systemwide gross profit on merchandise for the six months ended June 30, 2022 was 33.3 percent, or 1.1 percent less than the same period in 2021. Systemwide merchandise sales for the first six months of 2022 were $13.2 billion. That amounts to a loss of gross profit margin of just under $145 million systemwide.
Same store merchandise sales increased for the first six months of 2022 by 4.9 percent, a sharp reduction from the 7.6 percent increase in 2021.
Every franchisee in the system is directly affected by merchandise gross profit, but franchised stores with gasoline do not share in that gross profit, and elevated profit on fuel may be counterproductive to merchandise sales. SEI’s retail fuel margins measured as cents per gallon rose from 33.06 cents for the first six months of 2021 to 39.75 cents in the first half of 2022. This is in part why the number of gallons sold increased by 44 percent, but fuel sales more than doubled. As SEI’s parent company stated to investors: “Volume headwinds have not translated into lower profits.”
In the end, for the first six months of 2022, SEI earned operating income of $1.35 billion, an 85 percent increase from the year before. And in its separate report issued on October 6, 2022, “Presentation for the Group Management Strategy”, Seven & i reported that the synergies associated with the Speedway acquisition are substantially ahead of plan and projected to reach $450 million for the current fiscal year.
But among the four separate reports that its parent company issued for the first half of fiscal year 2022, comprising a total of 100 pages packed with financial disclosures, not one word measured franchisee financial performance in general, or franchisee merchandise sales, gross profit, net profit, or enterprise value in particular. Franchisees invest in a brand with the goal of achieving steadily increasing profits and building equity and value in the business that can be harvested or passed along to the next generation.
The question presented is what is the overall strategy of the company and the extent to which the tactics employed in pursuit of that strategy involves elevating franchisee financial performance.
About 2,500 years ago, Chinese military strategist, Sun Tzu, wrote “The Art of War.” In it, he said: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” Tactics and strategy should always complement each other and are two sides of the same coin (Emil SAYEGH, Law Journal Newsletter, August 2021).
A series of clues about company strategy can be found in a presentation “7-Eleven, Inc. Initiatives for Further Growth” issued on October 6, 2022, which describes four separate plans for the future, including (1) expanding exclusive merchandise assortments, (2) digital technology utilization, (3) restaurant business, and (4) delivery service. Let’s take a look at how these tactics might affect the lives and livelihoods of you and your fellow franchisees.
1. Merchandise Assortment
The presentation states that the year-over-year increases in fresh food and proprietary beverages sales were 14.5 percent and 12.7 percent, respectively, compared to the overall existing store sales increase of 4.9 percent. The implication is that, but for the increase in fresh food and proprietary beverages sales, the overall existing store sales increase would have been materially less. SEI is projecting that fresh food sales will grow to 25 percent in 2025. But if gross margin does not at least keep pace with sales increases, how does that elevate financial performance?
In its Group Management Strategy Presentation, the parent company noted that in order to react to the environmental dynamics of the fuel business, it expects to put effort into expanding fresh food and the restaurant business (see below). The translation is that although electric vehicle penetration remains low, it will grow steadily and that over time the massive profit from fuel will need to be replaced to some extent.
Selling fresh food involves materially more labor than selling processed food, but there is no analysis of this fact in these presentations. And SEI’s parent company does not disclose data on gross margin by merchandise category for SEI, but it does disclose that data for Seven-Eleven Japan: gross margin for fast food and daily food for the first half of 2022 were 37.2 percent and 34.4 percent, respectively, compared to gross margin for processed food of 39.8 percent. And of particular note is that the overall merchandise gross margin for the SEJ stores was 31.9 percent, compared to SEI stores at 33.3 percent. Does this mean that emphasizing a category with lower gross margin (not to mention higher labor costs) will cause the overall gross margin of the U.S. stores to drift downward?
The Group Management Strategy Presentation states that proprietary products—which now number more than 900—will yield higher gross margin, but few details are provided. The projection is that private brand products will generate $2.1 billion in sales in 2025, or double such sales in 2020.
2. Digital Technology Utilization
Seven & i discloses that 7Rewards and Speedy Rewards have approximately 80 million members combined, 1/3 of whom have used one of those apps within the last 90 days. For franchisees who are signatories to the so-called 2019 or later form of franchise agreement, the participation in all loyalty programs is required and the failure to do so is an event of default for which the agreement can be terminated. Section 17(a) of the franchise agreement specifically states that the cost of redeeming all points earned by customers, no matter at what store they were earned, rests with the franchisee, without any right to reimbursement or offset. And the franchise agreement states that the design and economics of these programs are at SEI’s sole discretion. While such loyalty programs are certainly ubiquitous at restaurants and convenience stores across the nation, responding to customer demands and preferences, any positive impact on franchisee gross margin or net profit is neither clear nor assured.
The Expanded 7Now Program Amendment appears at page F-114 of the FDD. Among its most salient provisions are those which allow SEI to determine (a) at which store any order will be directed for fulfillment, (b) when, on what basis and in what amount refunds will be granted to customers, (c) specifications for proprietary bags and packaging, the cost of which must be borne by the franchisee, (d) standards for determining whether a franchisee is fulfilling the orders in a “prompt and timely manner,” (e) the price is charged to customers for all orders, and (f) the designation of payment processor companies, which may charge higher fees than in store sales.
3. Restaurant Business
According to the presentation, SEI had a total of 488 Laredo Taco locations and 38 Raise the Roost locations as of June 30, 2022. The disclosure states that these apparently co-branded locations experienced significant increases in sales and gross profit. The disclosures include neither any detailed information regarding the financial metrics associated with the operation of these brands nor the extent to which they may differ from the convenience store model. There is no indication that franchisees are currently or will in the future be offered the opportunity to include these brands in their locations or whether they will even have a say as to whether or not that occurs. The 2022 Franchise Disclosure Document does not mention either of these brands as part of the franchise offering.
4. Delivery Service
Seven & i informs its investors that more than 50 percent of the nation’s population now live in areas within two miles of a 7-Eleven or Speedway store, that approximately 6,000 stores will be participating in delivery by the end of the fiscal year and that that sector of the business has experienced a sales growth rate of more than 47 percent. Delivery sales totaled $112 million in the second quarter of 2022.
The 2019 and later franchise agreements purport to give SEI broad discretion to design and require franchisees to participate in either third party delivery services or delivery provided by the franchisee directly. Section 17(b) of the franchise agreement states that the franchisee is responsible for the cost of these delivery programs, which could include the need to employ additional personnel and acquire and insure multiple motor vehicles. It also states that the franchisee’s delivery area is not exclusive. Section 17(c) states that the cost of maintaining computer-related equipment to facilitate pick up and delivery from the store may be charged to the franchisee. The form of Delivery Services Amendment included at page F-112 of the 2022 FDD states that the third-party delivery cost is treated as cost of goods sold and thus shared under the gross profit split. This changes the provisions of the franchise agreement which state that SEI can allocate delivery cost at its discretion.
Conclusion
At least some of this strategy and the tactics of both SEI and its parent company are revealed in a careful review of its extensive presentation to investors. As we have stated in previous columns, SEI has become much more of a gasoline company and a company owned location enterprise than in the past. All the more reasons for franchisees to be fully informed and to ask good questions when presented with the opportunity.
