Franchisees Key to 7-Eleven’s Plans
The nation’s largest convenience store operator is looking to get out of running its own stores and turn them over to franchisees instead.
7-Eleven Inc. has targeted 2013 as the year it will have its stores almost all operated by franchisees. Today, about 3,650 of 7-Eleven’s 5,600 U.S. stores are franchised.
"We’ve been franchising stores since 1964; this isn’t a new thing for us," Jeff Schenck, senior vice president of franchise and development for 7-Eleven, told The Dallas Morning News. "Now we’re ready to convert to 100 percent."
Last week, the company offered to sell all its stores in the north of Texas to franchisees. That state and Florida have the most company-owned and operated locations.
Store managers are given first shot at become franchisees at company-owned locations.
According to Mr. Schenck, it’s a good investment. "Franchise stores outperform company stores. It’s the difference between owning your home and renting a house. When an individual has invested in it and is adding sweat equity, he’s also becoming involved in the community."
Discussion Questions: What do you see as the pros and cons for 7-Eleven in its plan to go 100 percent franchisee operated? Do you see this becoming a trend in the convenience store sector?
Franchising is a viable strategy that can be successful in reducing operating expenses at the corporate level while reinvigorating the stores…if it is done deliberately and strategically. Done correctly, franchisees enjoy the benefits of a corporately driven brand and the autonomy to regionalize and customize their marketing and merchandising efforts. The ability of the franchisee to play a role in molding a store to the needs of the surrounding neighborhood will likely contribute to 7-Eleven’s continued competitiveness in the market place.
I’ve been in the successful 7-Eleven stores in Japan and Singapore and have been waiting to see the local 7-Elevens in the US be transformed. A few weeks ago I went into my local 7-Eleven just to see if the transformation had made it to the local level. The store was cleaner and there were more pre-packaged sandwiches in addition to the rotating hot dogs and everything that has traditionally been offered.
The transformation of the US 7-Eleven stores has not happened and they are currently competing with Circle K, On the Run, and every gas station store. Maybe franchising the 7-Eleven stores will work in competition with this market. However, will it work against the new Tesco and Famima concepts that are coming to the US? I wonder why 7-Eleven couldn’t make the transformation and whether a franchise system can make it happen.
I like this strategy. The convenience store industry is entering a period of increased pressure. Stabilizing gasoline prices, emergence of alternative formats, and over-reliance on low margin fuel sales for growth has created a situation where some strategic adjustments are required, and rather quickly. Seems to me completely franchising the 7-Eleven brand can inject entrepreneurial spirit, new ideas and capital in a relatively short timeframe.
Sounds like a smart move to me.
7-Eleven’s fixed costs should drop dramatically and operating margins surge in the mid to long term.
I believe it was last year or in 2005 that we discussed the business model of dollar stores and I suggested they should switch to a franchise model. I feel the same way for convenience stores, especially when the organization has reached a massive size such as 7-Eleven’s.
When you’re in a business with such razor thin margins and intense and increasing competition, a minor disruption in the food chain can cause your profits to evaporate. One way to look out for the interests of shareholders (every board’s primary job) and to become a more predictable free cash-flow generator year over year, is to convert to the franchise model.
Perhaps KKR is also thinking about this, for when it has finished trimming all the fat in Dollar General.
Outsourcing is the hot trend today. Companies want to stick to their key competencies and outsource everything else.
Franchising is essentially a form of outsourcing. It shifts the burden of real estate, labor, and operations to a local source. There are many chains that operate few or any of their own retail outlets.
7-Eleven must believe they are better served to focus on building the franchise than on operating stores. The plan makes sense so long as they are able to maintain high standards and operate with some degree of control over their franchise operators.
See the January issue of CSP Magazine for a preview of this story and insights into 7-Eleven’s plan after going private. The writers spent a day with the top execs, and among other angles, the 100% franchising was a highlight. Go to cspnet.com, then search or archives. Thanks to this site for the great discussions from great minds….
As a former 7-Eleven store employee, store manager, and National Advertising Manager for 7,000 stores, I have a few observations:
1.) All of the most innovative, forward-looking, customer-centric, and profitable ideas (in the U.S. operation) come from franchisees. During my time, we had about 3,500 of them. Strength in numbers.
2.) Franchised location owners usually hire family members to operate the business, significantly diminishing losses from employee theft and allowing more generous pricing for customers.
3.) 7-Eleven limits the number of stores a single U.S. franchisee can own. This is an excellent policy considering the previous points. (7-Eleven’s objective, however, has always been to prevent a single franchisee from accumulating too much power in the Owner’s Group.) The magic number used to be three franchises, but that has increased over the years.
4.) The practice of offering current store managers the first chance at franchising is a double-edged sword. Initially, these “current manager–future franchisees” will use their training to operate their stores superbly. But, in 3-5 years as these franchises turn over, that training and discipline will be lost.
This move to an all-franchisee model is simply a replication of the Japanese 7-Eleven model, where all stores are franchised (except for a few company-owned stores retained for test marketing purposes). Two differences in Japan are that some franchisees own a very large number of franchises, and that they depend more heavily on their suppliers than their franchisees for new ideas.
2013 is too long to wait for 7-Eleven to go 100% franchised. The company would do better to speed things up. It should only take a year at most, unless there are some lease restrictions. They already know how to do it profitably, so the learning curve is already finished. By franchising, the 7-Eleven investors can get reimbursed for a huge amount of their capital. Any time a retail chain has a viable franchise model, the ROI should always be greater than company-owned stores, because there is no investment.
It appears to be a ‘neat and tidy’ way of securing dollars for Corporate. And the owners probably desire the compensation, and patience.
Now, the issue is will the new franchises agree to a more structured and disciplined program and direction in support of the current business, and improving it, long term?
Hmmmmmmmmmmmmm
The franchisee obviously knows his/her customers better; selling franchises is a smart move, in my opinion.