7-Eleven Franchisees Say New Contract Will Squeeze Profits to a Trickle

It’s known for its Slurpees and Big Gulps, but over the years, 7-Eleven has also put its logo on frozen pizza, foam cups, laundry detergent and hundreds of other products.

Customers don’t always choose these private-label items, even though they are usually cheaper than competing products from companies like Nestlé and Gatorade. Franchisees who run nearly all of the 9,100 7-Eleven stores in the United States must stock the items anyway.

At their annual convention in Kissimmee, Florida, last week, the franchisees cited the private-label items as just one way the company had made it hard for them to make money. They also criticized 7-Eleven for forcing a new contract on them that they said aggravated broader tensions over the suppliers they must use and how much they have to pay for the goods they sell in their stores.

“It’s no longer, ‘You make a dollar, we make a dollar,'” said Michael Jorgensen, the owner of three 7-Eleven stores in the area of St. Petersburg, Florida, and executive vice chairman of the National Coalition of Associations of 7-Eleven Franchisees. “The alignment of interests for 7-Eleven has changed.”

The relationship between 7-Eleven and its store owners has been deteriorating for years. In the early 2000s, the company and franchisees split profits equally. But 7-Eleven has taken an increasingly bigger cut, franchisees say, and is now saying that store owners who do not renew their contracts by the end of 2018 could see their profits shrink further.

Franchisees say they have no ability to negotiate with 7-Eleven. Many of them must decide whether to sign the new deal or simply walk away.

“I’ve never in my 35 years seen a more opaque, top-down, my-way-or-the-highway franchise system,” said Eric Karp, a lawyer for the national coalition.

The most contentious provisions include a new $50,000 franchise renewal fee and a requirement that stores open on Christmas. The new contract also makes it clearer, Karp said, that franchisees are being forced to use suppliers that cannot guarantee the best prices for the items sold in stores.

In a statement, 7-Eleven said it enjoyed a “strong, productive relationship” with its franchisees. The company denied pressuring store owners to sign the new contract, arguing instead that it was offering an incentive to lock in current profit-sharing rates. It also said that Christmas was one of its most popular shopping days, and that only 1.7 percent of its stores had closed for the holiday last year.

Seven & I Holdings, the Japanese company that owns 7-Eleven, said gross profit margins at its overseas convenience stores, including those in the United States, fell half a percent in the most recent fiscal year.

The chain is privately held in the United States and does not disclose average store sales or profits. Regulatory filings offer some details about slices of the market: In the Northern Chicago region, for example, average revenue at 65 stores was between $971,000 and $1.8 million last year; gross profits were between $353,000 and $655,000.

“Most fundamentally, the stores aren’t as profitable as they used to be,” said John Gordon, the principal at the restaurant advisory firm Pacific Management Consulting Group. Changes in the product mix, he said, had “exacerbated” tensions between 7-Eleven and franchisees.

The dispute underscores the shifting nature of the franchise business, traditionally a path to the middle class for would-be entrepreneurs.

In the past, franchisers typically operated some stores themselves, aligning their interests with those of their franchisees. That is less true today, a change that franchisees said had made the companies less interested in the profitability of individual stores and more willing to make strategic decisions that could hurt store owners.

Karp, the coalition lawyer, pointed to a company push for stores to sell more hot food as an example. Seven & I Holdings credits hot dogs and pizza with helping bolster sales. But they also add waste and labor costs that franchisees said they must pay out of their dwindling share of gross profits.

Franchisees tend to like 7-Eleven’s own products because they offer higher margins. But they complain that the company sometimes favors its items over competing products that customers prefer.

Rehan Hashmi, who owns four stores in the Chicago suburbs, used the popular children’s drink Bug Juice as one example. He said that when 7-Eleven came up with its own version, it made selling the name-brand offering more difficult.

“Sometimes 7-Eleven is so aggressive that they would delete the market leader,” he said. Another issue involves where 7-Eleven franchisees buy their inventory.

Many franchisers require store owners to buy goods from approved vendors to help ensure safety and to maintain uniform standards.

“You don’t want your franchisees running out and buying lettuce and tomatoes from some unapproved vendor,” said Justin M. Klein, a franchise lawyer with the firm Marks & Klein who has represented 7-Eleven franchisees in the past.

The recommended vendors that 7-Eleven franchisees are required to use give rebates to 7-Eleven. That raises a question for store owners like Jorgensen, the St. Petersburg-area franchisee.

He said that when he can buy bottled water more cheaply at a local beer distributor, or pay less for bananas from a big box store, he wonders whether the company’s vendors charge him more to help pay for those rebates.

“When you’re seeing your competitors getting better pricing,” Klein said, “that’s when you call into question whether the model makes sense.”

But Barry Friends, a partner at the food consulting firm Pentallect, said big-box stores like Walmart and Target did not offer good comparisons. Those retailers, he said, could negotiate better prices from suppliers because their orders were much larger than convenience stores’.

A convenience store, Friends noted, might want three tubes of toothpaste, while a big box store buys entire pallets. In both cases, he said, the items must be sorted, packed and shipped. The cost of that work goes into the premium that convenience-store shoppers pay.

Asked about the rebates, 7-Eleven said they benefited franchisees, including through the price of goods.

Like Hashmi, Jorgensen said he liked the higher profit margins that 7-Eleven’s private-label products offered. But since the mid-2000s, the number of such items has grown to more than 1,000 from a few dozen, and he said he resented not having a choice about which ones to stock.

“I give them a good shot,” he said. “But when they don’t work, they don’t work.”