7-Eleven opens a rift with store owners
Some franchisees are bailing out, worried that new agreement terms will leave them with too little.
Sunny Sandhu bought his first 7-Eleven store in Southern California in 1999 when he was 28 years old. Like many other franchisees, the immigrant from India considered the Slurpee seller a sure path to the American dream.
Over the following 14 years, Sandhu felt so confident about his business that he bought three more outlets, which, he said, earned him and his family a comfortable living.
But he sold one of his locations last year and now is hoping to unload two more.
“It’s gotten worse every year since the new ownership took over,” Sandhu said. “They’re getting more control over everything.”
Sandhu is among a group of 7-Eleven franchisees across the country who are at odds with the American subsidiary of Seven & i Holdings Co. — the Japanese company that bought 7Eleven from its distressed American ownership in 2005 — over a new 15-year franchise agreement.
The Tokyo company has expanded the chain over the last decade to nearly 10,000 outlets across the U.S. and more than 60,000 worldwide. But in the chain’s homeland — where it started 91 years ago as Southland Ice Co. with a single Dallas store — some owners say the new agreement will milk them of their profits.
In the Los Angeles area, there are about 40 stores currently on the market compared with the usual half a dozen or so, said Darcie Fisher of the National Coalition of Assns. of 7-Eleven Franchisees, which attributes the rise to the dissatisfaction with the new pact.
Among the leading points of disagreement is a contract provision that would require franchisees to potentially split more profits with 7-Eleven Inc., which the U.S. store owners allege is a move to boost the profit of the Japanese parent.
They point to a new $50,000 fee to renew franchise agreements, which vary in length and expire at different times depending on when a store was acquired. Renewals used to cost 20% of a store owner’s franchise fee, which varies too, but the disgruntled owners say it was generally less expensive except for the highest-volume outlets.
The coalition of franchisees, which has spearheaded the opposition, encouraged its members not to attend 7-Eleven’s annual convention in Las Vegas in February in protest of those
and other changes. Then, early this month, the coalition sent a letter to 7-Eleven Chief Executive Joseph DePinto asking him to renegotiate the agreement.
The franchisees contend the contract changes are coming at a particularly bad time. While the national economy is booming, minimum wages are going up in dozens of states including in California, where it will rise to $15 in 2023.
“They’re basically ignoring us and then squeezing more money out of us,” said Jas Dhillon, coalition treasurer and a San Fernando Valley store owner since the late 1990s. “But they’re looking at short-term goals. They don’t care if two years down the road, with the minimum wage rising, that the stores won’t be profitable.”
7-Eleven has defended the agreement, saying that only a minority of owners oppose it and that the new terms will help 7-Eleven fund new fresh-food and other offerings, as well as update the stores’ technology — all of which should help boost store sales.
It also notes that franchisees who sign on before the end of this year — potentially renewing early — will keep their current profit split for as long as 11 more years.
“We have a proven model, and it’s been very successful for many years,” said Chris Tanco, 7-Eleven’s chief operating officer. “If they make more money, we make more money,” he said.
In recent years, as retail has been upended by online sales, 7-Eleven has taken steps to keep up. The U.S. stores are now heavily promoting an app that allows patrons to win points and apply them to food and drinks.
It also has a partnership with Postmates, which makes home deliveries in dozens of cities. The chain wants to innovate even more.
Dhillon is locked into his current agreement for six more years and said he will wait to see if his store’s sales increase.
However, he fears that the new agreement would wipe out his profit.
The current pact includes seven graduated brackets similar to a progressive income tax. 7-Eleven takes 48% of a store’s first $150,000 in gross profit before expenses and more than half for many stores with higher profits.
The new pact is more complicated, with 11 brackets that give 7-Eleven as little as 45% of the first $200,000 in gross profits and potentially more for higher-volume stores.
Dhillon operates a higher-volume store, with total sales that topped $2 million last year, according to financial documents supplied to The Times. Given his volume, 7-Eleven took a total of about 52% of his total gross profit in 2017 but after subtracting expenses, the store’s income barely topped $25,000.
He said last year his expenses included a salary for his wife that totaled $78,000 for working full time plus weekends.
The new agreement, assuming his sales didn’t increase, would cost him his entire profit.
“We aren’t making that much. I don’t know if people realize that. We’re hardworking people who put a lot of time into our stores,” said Dhillon, who believes the U.S. stores have become cash cows for Seven & i.
Tanco said that 7-Eleven’s parent company wasn’t involved in setting the terms of the new franchise agreement. And at least one analyst doesn’t think that the new U.S. contract is intended to prop up Seven & i — even if American stores account for a lot of the chain’s growth.
“They do [contract updates] in Japan, and it typically benefits the franchisees in the long run,” said Michael Jon Allen, an equity analyst of Japanese retail for Jefferies. “Someone has to pay for product development. If franchisees are unhappy, they’ll fight back. That’s not unique to 7-Eleven.”
Average sales at a Japanese store topped American counterparts’ sales by nearly $1,100 per day and about $390,000 annually, according to Seven & i company data.
7-Eleven Japan is more profitable too. 7-Eleven Inc.’s net income last year was about $678 million compared with 7-Eleven Japan’s $1.5 billion-plus.
Allen, who is based in Tokyo, said the American stores are 20 years behind the Japanese.
“You pass convenience stores more often in Japan, and people tend to walk in as they walk by. It’s partly geography, but the food also is just so much better,” he said.
But the challenge for Seven & i is that the convenience-store market in Japan is totally saturated, so the chain is relying on U.S. and other markets for growth.
That was reflected in the Tokyo parent spending $3.3 billion to acquire more than 1,000 convenience stores last year from Sunoco, but that still gives the U.S. only half the 20,000plus stores in Japan, a far smaller country.
Gunu Singh, who was referred to The Times by 7Eleven, owns six mostly high-volume locations across the Los Angeles area and is currently purchasing a seventh.
She bought her first store in 1991 and thinks the company is “moving in the right direction.”
“They’re updating systems, and we’ve always had innovative leadership in the company,” said Singh, who isn’t worried about the new franchise agreements but said she understands the qualms that owners with less-profitable operations may have.
Shifting to the profit split takes some adjusting, Singh said, particularly in tandem with growing wages. But she said that from a long-term perspective, the stores will see benefits.
“Back in ’91, minimum wage was $5.25,” Singh said. “That worried us, but we survived then and we’ll survive now.”