7-Eleven FOASC © 2012, All Rights Reserved.
PROFIT UNITY COMMUNICATION
Although 7-Eleven touts its initiative as “logistics excellence,” many franchisees are labeling it in a different way. “This is just another tactic to limit the income of store owners. Forced participation in 7-Eleven’s “BT” model raises franchisees’ labor costs, which directly impacts their bottom line on profitability,” said one store owner who asked not to be identified.
7-Eleven insists its business logistics will simplify store operations, ensure products are in stock at stores, and reduce the cost of goods for 7-Eleven and its franchisees, while better meeting customers’ convenience needs. The company said it is now in the pilot stage in about 370 Los Angeles-area stores after launching in the spring of 2010. “The primary purpose of the pilot is to further refine the program before any potential expansion. Early feedback from franchisees is that they are realizing savings in time and effort to run their stores,” Jeffrey Schenck, senior vice president of national franchise and real estate, said in a statement.
David Hendricks, a 10-year franchisee and former Franchise Owners Association (FOA) president for the Greater Los Angeles region affirms that the entire California area is “being forced” to participate in 7-Eleven’s test marketing. He said at a national meeting in San Diego last November, franchisees were vocal about the company’s new logistics and the problems they were experiencing. With deliveries being delayed, items out of stock, out of code or damaged, store owners expressed that the new system was inefficient.
One problem they see is that 7-Eleven is becoming the exclusive wholesaler. “Franchisees here can only receive merchandise through 7-Eleven,” Hendricks explained. He asserts the company is requiring vendors to turn over control of their product and assortment of product to a third-party consolidator. “If that type of system worked, why would retailgiant Walmart supplement its system fulltime with distributor McLane in direct delivery to its stores?” Hendricks asked. He said there is Also a huge difference between the two companies. “Walmart is a corporate environment and it doesn’t upcharge its stores. 7-Eleven is upcharging us and making money off of products,” he claims.
As 7-Eleven enters into contracts with vendors directly, franchisees wonder if beverage and other distributors are even allowed on the premises of their stores. Some question if this equates to trade restrictions. To find out, I called Coca-Cola. The communications person stated they were not interested at this time in participating in that discussion for this article. She said when Coke was ready to comment; they would reach out to me.
Store owners are also concerned with a change in some of the company’s long-standing policies, such as credit card processing fees that immediately take a minimum of $500 a month out of every franchisee’s pocket. Early in 2010, the company also changed the commission structure on gasoline sales. “7-Eleven went from giving to store owners 24 percent of profits on gasoline sales to one-and-a-half cents,” said a franchisee who didn’t want to be identified.
7-Eleven responded to me by saying that while its franchise agreement has stated for many years that it splits credit card transaction fees with franchisees, the company paid all of these fees per the agreement after they quadrupled over a five-year period to $160 million. “It is a common practice that franchisees pay all or a portion of these transaction fees,” according to 7-Eleven. The company said they have also worked aggressively to change the laws regulating credit card transaction fees at the national level.
But Hendricks doesn’t buy it: “7-Eleven’s response to the charging of the fees had more to do with regulatory issues of banking than anything else. It doesn’t justify the company charging franchisees with these exuberant fees on credit card processing.”
Schenck said 7-Eleven is improving franchisees’ profitability through effective merchandising programs, simplifying store operations and reducing costs.
When asked what the health of the system was today, Margaret Chabris, senior director of communications replied, “The system is quite healthy and we are thriving.” She said unlike many franchise organizations, 7-Eleven does not take a percent off the top of sales. “We share in the gross profit of the stores, so it’s important to us that a franchisee is profitable when you take the sales and subtract the cost of goods.
That’s the gross profit,” she explained.
But Hendricks wants to know why the company doesn’t take its percentage off the net profit. “Yes, 7-Eleven takes 50 percent of gross after subtracting only the cost of merchandise, not after subtracting the operational expenses like salaries, utilities, everything it takes to run our business,” one undisclosed source explained.
National Coalition Subdued
While the National Coalition of Associations of 7-Eleven Franchisees was a strong force when negotiating the 2004 franchise agreement, today it appears subdued. Some say the 38 FOAs that are under the coalition are fragmented. While 7-Eleven used to have the FOA Presidents Leadership meet four times a year at Dallas headquarters, franchisees say CEO Joe DePinto dissolved that council. One FOA president stated, “He now has a hand-picked group that doesn’t really represent the franchisees.”
But Schenck explained many of their franchisees wanted an opportunity to participate. “As a result, we opened the application process to all of our approximately 4,500 franchisees, including members of local FOAs. He said they had an overwhelming response with a significant number of applications from franchisees interested in working together to improve and enhance our system. Schenck said they “grandfathered” committee co-chairs, many of whom are FOA presidents. “The new council was formed last year, and in the past six months we have held numerous NBLC committee meetings as well as a national meeting,” he added.
One veteran franchisee lamented that back in the 1960s, store owners were allowed to run their stores as entrepreneurial businesses. “We pretty much had control of who we bought from and how we set our prices. Today with 7-Eleven in complete control, we have lost that entrepreneurial spirit. That was a valuable thing to store owners.”
In terms of franchise relations, Schenck stated that 7-Eleven offers many avenues for discussion or resolution of an issue or a franchisee concern, including a confidential ombudsman program for their franchisees.
Once again, Hendricks disagrees. “All the feedback they talk about getting from committees is only valid if it is something 7-Eleven wants to hear. Otherwise, it won’t count.”
Janet Sparks
Franchise owners of the world’s largest convenience store operator 7-Eleven are speaking out against the company’s latest logistics program currently referred to as “Business Transformation” in supplying products to United States stores from multiple vendors.
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