7-Eleven’s Journey to Change

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7-Eleven’s Journey to Change

02/18/2014

Despite a few speed bumps along the way, the convenience giant is working diligently to resonate with a new consumer base as it moves from corporate to franchise operations

The year was 2007 and 7-Eleven Inc. announced its intent to get out of running its own stores and instead move entirely to a franchised operation. The nation’s largest convenience store chain targeted 2013 as the year when this vision would come to fruition.

It’s now 2014 and 7-Eleven acknowledges it is not fully franchised, but affirms that it is growing its franchise base every day. Currently, 75 percent of its U.S. stores are operated by independent franchisees. Before launching its franchising endeavor, that figure stood at about 60 percent.

“I can tell you that we are on a journey to be a virtually franchised company in the USA. Several years ago, we had an aspiration to be fully franchised by the end of 2013. But, and not at all surprising, business and opportunities changed. We had cleaned up our balance sheet, were poised for growth and took advantage of many acquisition opportunities that presented themselves in 2011 and 2012,” said 7-Eleven spokesperson Margaret Chabris.

While last year’s unit growth was slower, 2012 marked a record year for Dallas-based 7-Eleven as it added a net 969 locations, of which 961 were U.S. additions. The chain’s growth strategy is to build market concentration in metropolitan areas so it can increase efficiencies and leverage its scale, particularly in regards to its daily-delivery infrastructure.

New stores, though, are harder to get franchised right away since 7-Eleven has to convert each store to its brand and product offering before it can be offered up for franchise.

According to Chabris, 7-Eleven has grown its store units by 35 percent since 2008, with the majority of that growth happening in the last two to three years. “We added more than 1,000 new locations just in 2012, both ground up/new-to-industry as well as acquired stores. Our focus had to shift to doing an excellent job of studying each location, determining its potential, getting proper permits and then, the huge jobs of remodeling, installing proprietary equipment and merchandising programs,” she said. “You can imagine the work involved in conversions of this magnitude.”

Going forward, 7-Eleven is “highly interested” in finding franchisees who want to start off with several stores at one time. The company, Chabris said, believes selling franchises to those who can manage multiple stores will help accelerate its franchising efforts.

“We are a vibrant, successful, growing company looking for the right people who want to be backed by the world’s c-store leader in creating a business they can be proud of,” she concluded.

Besides the store unit growth, however, multiple sources interviewed by Convenience Store News say something else is also at play in delaying 7-Eleven’s journey from corporate to franchise. In an ironic twist, 7-Eleven’s franchisee community itself may be causing speed bumps. Sources tell CSNews that company leaders are having to expend a lot of time and energy lately trying to get the franchisees to embrace new initiatives 7-Eleven is rolling out to elevate the brand and make it resonate better with Millennials, the new “it” generation, while meeting resistance from some longtime franchisees.

One former 7-Eleven corporate employee who asked to remain anonymous said the chain’s franchisee pool is currently split between three distinct groups: old school, middle of the road, and the new regime. The one-third of operators who are old school got their stores long ago when there wasn’t a lot of criteria to become a 7-Eleven franchisee. “These guys made a lot of money and now they’re just going through the motions. They just want to run a convenience store,” the former employee said.

The middle one-third, meanwhile, has been with 7-Eleven for a moderate amount of time and they’re on the bubble. They’re not very productive, but they could be with the right influence.

Finally, there’s the new regime — operators who have joined the system most recently. This group is made up of very aggressive marketers who are pro-7-Eleven and support the company’s efforts to change, specifically 7-Eleven’s push around fresh food.

While it’s not uncommon in any franchise system to have varying levels of franchisees, the challenge for 7-Eleven is that its old school group is very vocal and influential in the retailer’s franchisee community, according to the former employee. “They wield a lot of power in the organization and the old school is now negatively influencing the middle third,” he noted.

News headlines from CSNews.com over the last year reflect a certain level of volatility:

  • 7-Eleven Ousts Several Chicago-Area Franchisees (September)
  • 7-Eleven Franchisees File Suit Alleging Abuse of Contractual Rights (July)
  • 7-Eleven Sues Long Island Franchisee for Siphoning Money (June)
  • 7-Eleven Franchisees Sue Company for Lagging Behind Competition (June)
  • Feds Raid 14 7-Eleven Stores (June)

“I think they’re right to try and elevate the level of franchisees for the good of everyone. 7-Eleven had to take action. Some of these franchisees weren’t changing. They weren’t willing to make the change to ‘the new convenience store operator’ and it was holding the chain back,” the former employee stated. “The company was put in a position of how do we move these operators to not just rely on cigarettes but embrace food, beverages, new business development and private-label products. The tactics employed is what’s causing the problems with the franchisees.”

STAYING RELEVANT

7-Eleven has a history of operating both company-owned and -operated locations and franchises, and moving divisions back and forth from one to the other, noted c-store industry consultant Steve Montgomery, president of b2b Solutions LLC, based in Lake Forest, Ill. “I admit to being surprised when it elected to move to 100-percent franchised but have heard of no negatives, although I am sure there have been some rough spots along the way.”

A couple of years into its journey to operating all franchised units, 7-Eleven CEO Joe DePinto, speaking at the NACS Leadership Forum in Miami, said the retailer was making progress not only toward increasing its franchisee base, but also in overhauling its corporate culture to one of “servant leadership” that supports the stores and franchisees. “To stay relevant, you have to listen to your customer and change,” said DePinto. “Our customers, the environment and the competition is changing rapidly. We must be mindful of that and change just as rapidly.”

Amid that change, 7-Eleven has done an excellent job of developing systems that allow it to track what is happening in its locations across the country. “Early in its franchising history, 7-Eleven elected to provide accounting services to its franchisees, which allowed the corporation to have a detailed understanding of what was occurring at each location. This capability has continued to be expanded to allow the company to provide systems to assist the franchisee in many areas of their operations,” Montgomery said. “In April 2013, 7-Eleven announced [that] its latest changes, labeled 7-Exchange Next Generation, allow it to share market-basket data with its suppliers.”

Montgomery gives the company credit for not being afraid to continually question what it is doing and make changes as necessary. The new next-generation 7-Eleven stores being tested around the country exemplify this thinking. The New York City location, for example, is a complete update of the company’s exterior and interior image. While it carries forward some of the colors, it abandons the brand’s historic red and green stripes. The interior department graphics are very clever and appealing. “The issue for any company with a very large network is changing direction takes time, and changes such as those at the New York City location require a large infusion of capital by its franchisees,” he noted.

With roughly 8,000 U.S. stores in total, 7-Eleven is more than twice the size in store count of Alimentation Couche-Tard Inc. and more than four times the size of Casey’s General Stores Inc., the two closest non-oil company controlled convenience store chains. Its size means 7-Eleven faces issues when competing against smaller, more nimble retailers — particularly in foodservice.

“7-Eleven showed all of us what was possible to do with coffee. It led the way with this foodservice foundation item,” Montgomery observed. “However, the move to prepared on-premise foodservice represents a great deal more of a challenge to a franchised operation.”

Another industry insider and former 7-Eleven executive who asked to remain anonymous told CSNews that he doesn’t think 7-Eleven will ever become 100 percent franchise-operated because “there’s just too much churn among the franchisees.”

“They have to keep some structure in place to handle franchise stores that fail. In Florida, for instance, where the company has made acquisitions, it hasn’t yet placed all the stores with franchisees, and some that were placed are coming back to them from failed owners,” he said.

The insider acknowledged some franchisees do a great job — but some don’t. “At corporately owned chains, some managers are great and some aren’t, but the difference is that with franchisees, it’s harder and takes longer to replace a poor one with a good one,” the former company exec said, adding that he thinks a large number of 7-Eleven stores in Florida look dated, especially compared to the new, larger and more modern convenience stores being opened by competitors such as Wawa Inc. and RaceTrac Petroleum Inc.

7-Eleven maintains tight control over its franchisees’ product mix. About 85 percent of a franchisee’s inventory must come from recommended vendors, but the company says it relies on its franchisees to tailor their store’s assortment to meet the needs of their customers.

“One of their problems is that they are trying to be the same thing to everybody everywhere,” the insider said. “Pizza is a great example. It doesn’t sell in some markets, but the franchisee still has to carry it. And what are they doing selling empanadas in markets where people can’t even pronounce empanada? Their inability — compared to smaller competitors — to effectively merchandise to specific markets hurts them,” the former exec maintained.

Despite these challenges, Montgomery of b2b Solutions believes 7-Eleven has done a great job in continuously working to reinvent itself. This includes developing and implementing a ready-to-go foodservice offer. “It really has little choice, because to ensure its brand integrity, it has to provide products that are centrally produced and then delivered to its locations, even though this means it is at a disadvantage when competing against companies whose locations can offer a broader menu of made/assembled on-premise items,” he said.

A recent example of the company’s innovation is the introduction of a “better-for-you” breakfast sandwich. The new menu item, consisting of fluffy egg whites, lean Canadian bacon and cheddar cheese on a whole-wheat English muffin, contains 3 grams of protein, just 5 grams of fat and is lower in sodium than most breakfast sandwiches on the market. The 180-calorie item sells for $1.99.

“Our primary task was to create a great-tasting breakfast sandwich for people looking for a better-for-you alternative,” said Kelly Buckley, 7-Eleven’s vice president of fresh food innovation. “We have fresh-cut fruits, salads, yogurt parfaits and healthy, low-calorie sandwiches, and we wanted a breakfast option that fell into that better-for-you category without sacrificing taste and quality.”

The sandwich, introduced in early January, is part of 7-Eleven’s efforts to appeal to consumers, especially Millennials, who would like to lose weight in the new year by making healthier choices and seeking better balance in the foods they choose, rather than go on a diet.

Industry consultant and professional intermediary Terry Monroe believes 7-Eleven clearly excels in two areas: private label and prepared food. “One of 7-Eleven’s claims to fame is its assortment of private-label products,” Monroe said. “They have also done an excellent job with prepared food programs and are adding more prepared food programs. 7-Eleven [offers] great food programs with good execution at the store level.”

Although 7-Eleven last year seemed to encounter more franchisee issues than in the past (a well-publicized federal immigration raid and lawsuits by and against franchisees), most observers and current franchisees tout the advantages of being part of the 7-Eleven network. Prospective franchisees are buying into a brand that has instant name recognition internationally. They also have access to state-of-the-art systems that support every aspect of a convenience store’s operation, from upfront training to ongoing support.

In addition, 7-Eleven has successfully convinced many jobbers to convert one or more of their locations to the 7-Eleven brand. “Getting entrepreneurs to convert locations to a brand that forces them to adhere to a new set of procedures and policies developed by an outside entity is a testament to the advantages some see in the brand,” Montgomery pointed out.

When it comes to any perceived disadvantages, most observers point to the sheer size of the organization as its biggest challenge. At such a big company, it takes time to develop and implement changes. A franchisee may not be able to adapt its products and services as quickly as its competitors. “Having been a franchisee and then working for a franchisor, I know that in many cases franchisees first welcome the structure that a franchise offers, but some find the franchise model limits what they want to do,” said Montgomery. “The timeframe between [those] two points is often fairly short.”

As an expert in c-store mergers and acquisitions, Monroe sees 7-Eleven’s inability to expand beyond metro areas as its one weakness compared to its convenience store peers. “I personally have presented numerous acquisition opportunities to 7-Eleven only to be told the prospective stores were located too far from their distribution centers or commissaries,” he said. “So, their focus remains in the larger metropolitan areas of the country and leaves missed opportunities for store owners to either be acquired by 7-Eleven or become a 7-Eleven franchisee.”

Like with any franchise operation, a key area of debate concerns how much control franchisees can exert over their own businesses. Individuals buy a franchise because they want to be part of a business model that has proven successful, with the general rule being that the more tightly they adhere to the franchisor’s system, the better their chances of success. However, franchisees also see themselves as entrepreneurs with the right to run their businesses as they see fit. They chafe at being treated as if they are merely store managers of a franchisor’s retail business.

THE FRANCHISEE PERSPECTIVE

At least one 7-Eleven franchisee, who spoke to CSNews on the condition of anonymity, believes his freedoms as an independent contractor are diminishing every year. He has been a 7-Eleven franchisee for more than five years and has four stores in Florida.

“They see franchisees not as franchisees anymore, but as store managers. They just want to occupy us. They want us to work 14 to 15 hours a day. I think that’s the mentality,” he said. The franchisee also said 7-Eleven tends to crowd its markets to the detriment of other franchisees. “It’s hard to compete with another 7-Eleven,” he said, citing a new 7-Eleven store that will be built within a half mile of one of his locations. “You can compete with other outlets, but not with a 7-Eleven that has a new coffee bar, brand-new sign and a new Slurpee machine.”

He wonders how corporate can truly view franchisees as independent contractors when 7-Eleven dictates virtually every aspect of store operations, from changing the temperature to choosing the different products from vendors. “There’s no partnership. If I’m an independent business owner, I should be able to make decisions and get any product I want. It’s not the case,” the franchisee said, explaining that many franchisees sidestep vendor agreements by shopping at Costco or Sam’s Club on their own for new products. “It’s not an effective way to compete.”

Another concern he has about corporate’s control is the company’s increasing use of in-store digital video recorders (DVRs). This year, 7-Eleven plans to install DVRs that will delay every one or two minutes, he said. “If I’m a partner, I should be able to say, ‘Hey listen, these are my employees and you cannot watch them.’ We have no say in that,” he explained.

The Florida franchisee contends that 7-Eleven has an ulterior motive for the DVRs. “Instead of working through problems, they want to find problems,” he said, suggesting the company is looking to sever ties with certain operators. “It’s a 24-hour business. Mistakes happen. As an independent business owner, we should sit down and discuss. A lot of [franchisees] don’t have enough money to fight with 7-Eleven and pay legal bills. Most of the time we settle and move on.”

Looking ahead, the Florida franchisee does not see things changing unless one of the current legal battles against 7-Eleven, like the one in New Jersey, advances and forces the company to make changes. Echoing similar criticisms in their formal complaint, two New Jersey 7-Eleven franchisees, Sam Younes of Cherry Hill and Tamer Atalla of Cape May, are suing 7-Eleven Inc., saying the company has “failed to change its stores, products and marketing despite the ever-changing market and the expectations of consumers.” They also allege sales and profits at their stores have fallen “due to the competition and the lack of a response by 7-Eleven.” Younes and Atalla cited several other complaints including the temperature of their stores, and said 7-Eleven has created an environment so hostile they will have to end their relationship with the company. They are asking for lost profits and punitive damages, as well as legal expenses.

“Every year, they [7-Eleven Inc.] keep making changes to the [franchisee] agreement without discussion. They keep taking more and more control,” the Florida franchisee remarked.

2014 marks 10 years since one of the biggest contract changes faced by 7-Eleven franchise owners, according to Rehan Hashmi, vice president of the Alliance of 7-Eleven Franchisees, based in Chicago. In 2004, franchisees had to sign a new contract that included the provision that 86 percent of their inventory purchases must be made through corporate-approved vendors.

“Contractually, it gave a lot of power to 7-Eleven” and took away some of the franchisees’ freedom, said Hashmi, a franchisee since 1997 who operates four Chicagoland stores. The switch to a central distribution center at the same time brought fresh products into the store on a daily basis, but didn’t succeed in leveraging group purchasing power for lower prices, he added.

Since then, maintaining control over the stores has been an ongoing struggle between corporate and the franchisees, especially since DePinto became CEO in 2005 and brought a change in corporate culture. Today, control is centralized at 7-Eleven’s Dallas headquarters, said Hashmi.

“We’ve had instances where we had to remind them that we are independent contractors,” he said, noting that while the company’s leaders bring experience, it’s different than the experience gained by working behind the counter and interacting with customers every day.

The change Hashmi would most like to see in 7-Eleven is a greater financial investment in the stores, especially where technology is concerned. While stores have more tech inside today than in the past, he doesn’t feel customers receive the same upscale experiences that they do at other major c-store chains where things like touchscreen menu ordering are commonplace. 7-Eleven “has to play a little bit of catch-up on this,” Hashmi said.

One thing the company definitely has going for it, though, is sheer name recognition. Ultimately, even Hashmi acknowledges that “7-Eleven brings in a lot of customers.”

ON THE RIGHT PATH

Other franchisees welcome and are happy with the level of involvement and guidance coming from 7-Eleven corporate. Waqar Sheikh, a franchisee for 11 years who has one store in Virginia and another in Maryland, has a very positive outlook on the company.

“Good things are happening,” reported Sheikh, who serves as president of the Virginia Franchisee Owners Association. “The 7-Eleven Executive Board is aware of the needs of the consumers and they are making every effort to satisfy their needs.” Specifically, he believes the company is making good strides in updating its technology and is pleased with 7-Eleven’s research and development.

When asked about corporate’s involvement in his day-to-day operations, Sheikh said the company does not interfere and he feels in control. “I worry less about making bigger changes — they do,” he said. “I would say that’s the biggest reason I am a 7-Eleven franchisee; that the company does a lot for me.” He feels 7-Eleven eases his workload, from managing payroll, to filing for licenses and permits, to maintaining the equipment and store.

“Our President and CEO Mr. Joe DePinto is a very intelligent and smart man. He has many qualities and the one I like the most is that he listens to you,” Sheikh added. “He is a very patient man who will listen to franchisees for hours.”

Sheikh’s sentiments about 7-Eleven’s executive leadership are similar to those of Joe Galea, new chairman of the National Coalition of Associations of 7-Eleven Franchisees (NCASEF), who spoke to CSNews following his victory in the October election. Galea explained that meetings with corporate representatives are conducted on an as-needed basis and in the past, 7-Eleven has always left the door open for him and he has always been made to feel welcomed.

The same holds true for Dave Carpenter, president/CEO of J.D. Carpenter Cos. Inc., who said 7-Eleven corporate knows they’re not perfect and are receptive to franchisee feedback.

Three years ago, Carpenter sold his ShortStop convenience store chain in Iowa to Casey’s General Stores with a non-compete provision and started building 7-Eleven stores in the Denver metro area. He has six stores now and plans to add three more this year. Carpenter’s stores are part of 7-Eleven’s highly successful Business Conversion Program (BCP), a franchise program designed for existing business that want to convert to the 7-Eleven brand. Under the BCP, franchisees retain ownership of their land and buildings.

Carpenter told CSNews several factors attracted him to 7-Eleven: the globally recognized brand name; the commissary business and daily delivery of fresh food; and the strong back-office systems. He’s excited about the changes 7-Eleven is currently making and eager for upcoming initiatives, including the rollout of auto replenishment for most of the center store, and a loyalty program.

Since he formerly ran his own retail chain, Carpenter said he does find it challenging to not have complete control over his own business, but he recognizes that this is something everyone encounters with any franchise system.

“You can’t change things on your own, but I understood that going in. There are 8,000 stores in the country and you don’t let everyone do their own thing,” he said. “The ship moves a little slower because of the size of the organization and because they do a lot of research before they make any decision, but that’s good.”

Another drawback for Carpenter is also something encountered within any franchise organization — poor franchisees can adversely impact the brand. Carpenter prides himself on running good operations physically and operationally, but says not everyone in the system does. “When you have the same name on your stores, you unfortunately get lumped in with other people that don’t share the same pride,” he stated.

The way Carpenter sees it, both sides — corporate and the franchisee community — need to take accountability and make improvements. “There’s a tremendous amount of opportunity in the 7-Eleven world for both sides to up their game. I’m all about raising the standards on both sides of the fence,” he reasoned. “I apply the same pressure to corporate as I do to the franchisees. We’re competing mostly with private companies that can turn on a dime, so we need great retailers running our stores, and programs and offers that are second to none.”

On the franchisee side, Carpenter said his fellow store operators need to look at their businesses as a retailer and not just as a paycheck to support their family. “I look at my business every day and ask: How could I put myself out of business today if I was competing against myself?”

On the corporate side, he said 7-Eleven needs to uphold its responsibility to keep its facilities, product offering and marketing programs relevant for today’s evolving consumers. He points to the McDonald’s franchise system as one that gets it right. The McDonald’s franchisee is held to very high standards and McDonald’s Corp. has a high degree of control. On the flip side, there is a tremendous amount of expectation put on McDonald’s from its franchisees, and the company meets that expectation by continually keeping its restaurants relevant and modern.

“If you want to increase expectations, you better have a system that attracts that type of person. 7-Eleven is getting there, but it’s a big, big company,” Carpenter commented.

He is confident, though, that 7-Eleven is on the right path and will complete its journey to change. Just like the convenience store industry as a whole is in the middle of a transition, evolving to attract a different demographic of shoppers, so too is 7-Eleven.

“It’s not a matter of if, but when [7-Eleven] figures it all out. And when they do, I want to be a part of that because it will be a force to be reckoned with,” he said.