Before last week’s raids of 7-Eleven stores as part of an immigration crackdown, one of the biggest issues for franchisees was the company itself.
While owning a 7-Eleven store has long been a way for people — including many immigrants — to gain a foothold in the American economy, some now see the Irving-based parent company’s demands eating into their profits.
7-Eleven and its franchisees are feuding over how to share the costs of making stores more convenient for an increasingly demanding customer. Franchisees say too much of the cost is on them just as a new contract is about to be written.
Meetings were cancelled and rescheduled. A lawsuit against 7-Eleven has been filed. Presidents and vice presidents of 43 regional groups that make up the National Coalition of Associations of 7-Eleven Franchisees voted to skip 7-Eleven’s annual convention in Las Vegas.
The leadership suggested their fellow franchisees also stay home. Twice, Irving-based 7-Eleven extended the registration period for the mid-February event. Then, the coalition said 7-Eleven pulled a fast one by hiring a hugely popular entertainer from India, A.R. Rahman, making it a bigger draw for significant numbers of South Asian immigrant franchisees.
Indian film music composer and singer A.R. Rahman and his wife, Saira Banu.
(Sujit Jaiswal/Agence France-Presse)
The immigration raids come at a time when the company wants its franchisees to offer customers more fresh-food options, which some say will increase costs. Physical improvements to stores are paid for by 7-Eleven under the existing agreement and the company has been remodeling stores. 7-Eleven spends $700 million to $800 million a year on stores.
Last week, 100 7-Eleven franchise stores, including six in Dallas-Fort Worth, were served with audit notification from U.S. Immigration and Custom Enforcement agents seeking to verify that their employees are eligible to work legally in the country.
No arrests were made locally, but 21 workers across the country were arrested on suspicion of being here illegally. Last week, 7-Eleven said it takes “compliance with immigration laws seriously and has terminated the franchise agreements of franchisees convicted of violating these laws.”
ICE officials indicated that it was just the beginning of a larger focus by the Trump administration on tracking down employers who violate immigration rules.
Despite that, the contract negotiations will likely have a bigger effect on more franchises.
While this isn’t the first time franchises have argued publicly with corporate 7-Eleven, radically changing times in retailing seem to exacerbate negotiations between franchisees running 7,000 stores and the company credited with inventing the convenience store in 1927.
Between 2019 and 2024, 80 percent of existing 10-year and 15-year franchise agreements will expire and 7-Eleven is pressuring franchisees to sign new deals, according to the coalition, which worries it will shrink their store profits.
“Franchisees fear for their future and are acutely aware they could lose the life savings they have invested in owning a 7-Eleven store,” the coalition said.
Cedrick Williams picks out a Gatorade at 7-Eleven in downtown Dallas.
Joe DePinto, 7-Eleven’s chief executive, said performance hasn’t lagged. Last year 7-Eleven franchise owners collectively earned the most money ever in a single year. During the past 10 years the 7-Eleven brand generated more than $17.7 billion in gross profit for the small, community-focused business owners, he said.
But sales growth slowed to 1.5 percent in the first half of 2017, vs. a 3.2 percent increase the previous year, the coalition noted.
To improve sales, 7-Eleven is spending $360 million to modernize IT systems, DePinto said. Also, he said, on average a franchisee’s investment is returned within three to four years.
“When the agreement is up, any franchisee can sell their store if they don’t want to sign a new agreement,” DePinto said. “If they decide to leave, we have plenty of people in the pipeline. They are under absolutely no pressure to re-up.”
Just before Christmas, the coalition of franchisees sent a letter to the Federal Trade Commission asking the agency that oversees franchise businesses to review 7-Eleven’s 384-page franchise disclosure document.
The letter from coalition lawyer Eric Karp said the documents are “so noncompliant with federal and state franchise disclosure laws, that they present a materially misleading and inaccurate picture of the store level profitability as well as the risks of investing this franchise system.”
Declining margins, minimum-wage increases, and additional labor costs associated with an increasing emphasis on hot food beyond its signature Big Bite hot dogs to menu additions such as steak-and-cheese melts and breakfast-empanada bites are among the undisclosed risks that 7-Eleven has failed to include, the group said.
The company’s financial performance representations also fail to differentiate between stores that have gasoline pumps and those that don’t. The franchisees say that the 1.5 cents per gallon commission those stores receive is substantially below the costs of running the pumps.
The coalition is also upset with purchase requirements. Franchisees said they can buy fresh bananas at a supermarket for less than the cost they are sold to them by 7-Eleven distribution centers.
“Our repeated attempts to address these issues with the franchisor have fallen on deaf ears,” said the letter to the FTC’s Bureau of Consumer Protection.
An FTC spokesman declined to say whether any review or action was being taken by the agency.
7-Eleven’s DePinto said in an email that the company has always expected franchise business owners “to run great stores and they do.”
The company has a strong productive relationship with franchise owners, he said, and that’s one reason why Entrepreneur magazine selected 7-Eleven as its 2017 franchisor of the year.
But Michael Jorgensen, a Florida franchisee and treasurer for the coalition, said many franchisees are struggling.
Last February, he said, an internal report showed that 35 percent of franchisees had balances in company accounts that were below minimum requirements. That’s a barometer of a store’s health, he said. The company responded by lowering the minimum — and DePinto said that’s a fluctuating number, and it’s up to the franchisee to decide when a draw is made.
“I absolutely believe franchisees are willing to deliver what the customer wants, but the economics have to be a proper financial arrangement,” Jorgensen said. “We are extremely flexible people.”
7-Eleven didn’t announce the Rahman appearance at the annual convention until well into the registration process, said Jorgensen, “to break the unity” that franchisees had exhibited.
7-Eleven general counsel Rankin Gasaway said nailing down Rahman took time because he lives in India, his agent is in Los Angeles and his lawyer is in London.
Rahman,a two-time Oscar (Slumdog Millionaire) and Grammy winner, will perform with his 50-person band and invites franchisees to meet him and get a photo, the email to franchisees said. Rahman was dubbed “the Mozart of Madras” by Time magazine, which put him on its list of the world’s 100 most influential people.
A significant number of 7-Eleven franchisees are from South Asia, DePinto said. They were less impressed with previous entertainment that included Kool & The Gang, KC and Sunshine Band and Cirque Dreams.
“We anticipate this year’s 7-Eleven Experience will be very well attended as always,” DePinto said. More than 7,500 people have registered to attend, he said. “It has been and continues to be a great event and tremendous learning opportunity for both 7-Eleven corporate employees and 7-Eleven franchise business owners.”
Franchise owner Bekele Tilahun poses for a photograph at his 7-Eleven in downtown Dallas.
(Rose Baca/Staff Photographer)
Seeing the benefits
Not all franchise owners are upset with their arrangement with 7-Eleven.
Bekele Tilahun, a franchisee with three Dallas stores — including a store with the only gasoline pumps in downtown Dallas — is on the board of the Texas Franchise Association. He’s planning to go to Las Vegas.
Asked about his experience as a franchisee, he said over his five-year tenure, he’s learned that it’s not just about having good locations like his, but he takes credit for running his stores well.
Sure, hot food is more labor intensive, but, Tilahun said, his peers need to look at what he calls “the whole market basket.” Chicken wings are a big seller at his stores, he said, and those customers end up buying other things, such as water, chips and candy.
He asked 7-Eleven for a second oven for each of his three stores and got them. “Now we can serve the customer faster.”
And, he said, he keeps his stores clean because “people eat with their eyes first.”