Betting on the Franchise

7-Eleven Timeline

7-Eleven Inc. began almost 81 years ago when a Dallas ice dock operator decided to add milk, eggs and bread in response to his customers’ needs. The company’s first expansion outside Texas was into Florida. The retailer entered the franchising arena in 1964 with the acquisition of Speedee Mart, a chain of franchised convenience stores in California. Since then, the company’s well-known brand and convenience retail model has spread around the world with some 33,300 stores in 17 countries and one U.S. territory. Total revenue for 7-Eleven stores worldwide was $44 billion in 2006.

1952 100th store opening
1954 First store opened outside of Texas (Florida)
1958 First cold weather store opened in the Northeast (Virginia)
1963 First 24-hour operation introduced (Las Vegas and Austin, Texas)
1964 Coffee-to-go introduced in Long Island, N.Y.
1966 Slurpee beverage introduced
1968 First domestic area license signed

1971 First $1 billion sales year, self-serve gasoline introduced
1979 First $1 billion sales quarter
1984 Super Big Gulp, ATMs introduced to 7-Eleven stores
1991 Deli Central, World Ovens proprietary foodservice lines introduced
1997 Café Select coffees launched
1999 The Southland Corp. changes name to 7-Eleven Inc.
2001 Vcom financial service centers launched in Texas and Florida

2002 7-Eleven celebrates its 75th Anniversary
2003 Company opens its 25,000th store in Chicago
2004 Introduces new franchise agreement; 95% of franchisees sign
• 7-Eleven, Inc. achieves record revenues of $12.2 billion
• 7-Eleven becomes wholly owned subsidiary of Seven-Eleven Japan
2005 Launches of Business Conversion Program to invite well-positioned independent c-stores/mom & pop operations to become 7-Eleven stores
• Joe DePinto named president and CEO of 7-Eleven Inc.
2006 Acquisition of White Hen, Pantry (Chicago and Boston areas); doubles 7-Eleven’s presence in Chicago.
• Named Convenience Store Decisions Chain of they Year
2007 Entrepreneur judges 7-Eleven as the No. 1 franchise company in the U.S.

There was a time not long ago at 7-Eleven Inc. when a Wall St. photo op was considered a good day at the office. Not so much anymore. Since taking command at 7-Eleven two years ago, Joe DePinto, a straight-shooting convenience industry veteran with a firm West Point military education, has brought a no-nonsense management approach to the Dallas-based convenience store chain. While affable and committed to learning from franchisees and customers, his goal is clear: to turn the entire organization into a franchisee-based business.

This involves two fundamental challenges: executing the plan by franchising company-operated stores to new and existing franchisees and growing the network by attracting new operators to convert to its branded retail network. The changes began in earnest two years ago, but industry observes have already noticed the strides the chain is making.

Last month, 7-Eleven was recognized as the No. 1 franchise opportunity in Entrepreneur magazine’s “Annual Franchise 500” rankings for 2008. This is an enormous honor for a variety of reasons. For starters, it validates the hard work 7-Eleven has been doing under the leadership of DePinto. This marks the first time any convenience retailer has captured the top spot and recognizes 7-Eleven for its accelerated franchising activity, expansion and solid business system.
Entrepreneur’s “Franchise 500” is considered the most comprehensive franchise ranking in the world. Factors considered for the honor include financial strength and stability, growth rate, size of the system and initial investment.

“After researching hundreds of opportunities, 7-Eleven rose to the top based on their strong growth, financial stability and long-term commitment to franchising. Their ranking is particularly significant because it’s a new No. 1 titleholder in the Franchise 500 for the first time in seven years,” says Rieva Lesonsky, editorial director and senior vice president of Entrepreneur.

7-Eleven operates, franchises and licenses more than 7,400 stores in North America. Of the more than 5,400 stores the company operates and franchises in the U.S., approximately 4,000 are franchised.

Growing the Business
The honor coincides with the chain’s announcement that it is actively converting historically company-operated stores in Virginia, Texas, Colorado, Utah and Florida to its franchise model. It also has developed a Business Conversion Program that offers existing convenience operators and other retail chains the opportunity to re-brand their stores under the 7-Eleven banner utilizing this new franchise program.

“We know our franchisees do a tremendous job operating stores and taking care of customers,” DePinto told Convenience Store Decisions in an exclusive interview. “And clearly, they have closer relationships with core 7-Eleven customers, so the decision to franchise the company makes a lot of sense from a customer service perspective.”

DePinto is quick to point out the franchisee conversion plan was also born out of practical necessity. “For years we were operating as two different companies. We were half franchised and half corporate, so we were developing programs and systems that supported both. It was, in essence, doing two times the work,” he said. “We felt that we could not only be more efficient as a franchise organization, but that we could deliver better on the customer experience because of the close relationships franchisees have with their customers.”

But the chain knows the conversion process is not going to be an easy one. “To move to a totally franchised organization, we knew we had to change the culture at 7-Eleven,” DePinto said. “The culture had to be what I call ‘servant leadership,’ one where all the folks in the organization are geared up to support the stores, our franchisees and our store operators because they serve the customers. We spent a lot of time in the implementation of the 7-Eleven Way, which is this servant culture.”

For example, 7-Eleven is committed to supporting convenience retailers by building a strong brand, creating a solid infrastructure in key areas like product offering, technology and emerging trends, such as financial services and driving retail innovation.

Coinciding with this franchise-based model, 7-Eleven also decided that as it made this transformation it would spend $1 billion over five years to remodel thousands of stores in its network, “because we felt the units needed a facelift,” DePinto said. “Plus, customers indicated it was time to reimage our stores, so this was an easy decision to make.”

Interestingly, there will be no change to 7-Eleven’s U.S. licensee program, which is being perpetuated in regional markets by strong operators, such as Alon USA through its Southwest Convenience Stores subsidiary in Texas and Garb-Ko Inc. in Michigan.

By comparison, a licensee is a retailing organization that owns or leases several retail stores in markets where 7-Eleven does not do business. Through a special agreement, the licensee uses the 7-Eleven trademark, sells proprietary products and has the advantage of being part of a major international convenience retailing chain. Some licensees additionally franchise stores to individual franchisees.

How the Franchise System Works
As 7-Eleven began to mete out the parameters of its franchise plan its first step was to decide how it was going to grow the business to capitalize on the consumers’ growing need for convenience.

“We laid out a three-pronged development strategy that included promoting our Business Conversion Program to engage our current franchisees to help them grow their businesses. Next, we focused on growth by acquisitions that we felt made sense for us strategically,” DePinto said. “Third, was organic growth through new-to-industry stores and site conversions.”
The new franchise agreement combines infrastructure changes, like bolstering the accounting system and investing in its daily distribution system, to get a wider variety of fresh food items to stores. “All of these changes have created a lot of energy and helped us improve our relationship with our franchisees,” he said.

The conversion program also is unique for 7-Eleven in that it calls for the company to scrutinize existing c-store operators and all retail folks that may want to get into convenience retailing and get them excited about rebranding to 7-Eleven.
“What we bring to the table for them is the opportunity to remodel their store, provide training and gain all the scale and clout of our brand and retailing experience, plus a state-of-the-art technology and a daily distribution infrastructure,” DePinto said. “For our existing franchisees, we are also helping them identify new store sites and assisting them in laying the groundwork to build new stores. All put together, it is a pretty powerful package that provides independent operators a chance to get into the business with major brand equity.”

Under the franchise plan, 7-Eleven buys or leases the land on which the 7-Eleven store sits. When the franchise company develops the site, the investment can range from $1 million to $2 million per store, depending on land costs and whether the store will sell gasoline. 7-Eleven also buys the store equipment and pays the utilities. The franchisee leases or subleases a fully equipped 7-Eleven store.

The 7-Eleven franchisee is responsible for ordering, buying and maintaining inventory, hiring and training employees, as well as payroll, cash variation, supplies, certain repairs, maintenance and other controllable in-store expenses. 7-Eleven maintains an open account for each franchisee. This revolving account is credited with each day’s receipts and debited with store purchases, operating expenses and other activities, and it includes the outstanding balance of any loans that 7-Eleven has made to the franchisee.

What the franchisee receives:
• A six-week training program on the management of a 7-Eleven store.
• An assigned field consultant who visits with the franchisee at least once a week for several hours to provide counsel on every aspect of business. However, all store decisions are made by the franchisee.
• Monthly financial records prepared by 7-Eleven for the franchisee’s individual store, including things like profit-and-loss statements and balance sheets.
• A President’s Leadership Council made up of franchisees and 7-Eleven management. This organization gives franchisees a voice in issues of national interest. Many important changes have been made to the 7-Eleven system through advisory councils and other local franchisee forums.
• 7-Eleven may provide various forms of advertising for the 7-Eleven stores as well as its products and services, ranging from broadcast and print media to point-of-sale signage. In addition, 7-Eleven also may support some of the franchisee’s promotional and community relations endeavors.
• 7-Eleven provides individual contractual indemnification to franchisees to help protect them from many of the risks against which most small businesses must insure, often at considerable expense.

7-Eleven is also touting its proprietary retail information systems. The technology infrastructure provides franchisees with a proprietary retail computer system that gives them valuable store information in an accurate, timely manner. It includes a state-of-the-art ordering system and electronic scanning cash registers. It also:
• Automatically collects daily merchandise sales, plus money order and other transaction information, and uses it to prepare sales and inventory reports.
• Tracks employee payroll information and helps prepare daily cash reports. It automates much of the store’s daily record keeping and provides Franchisees with information on product sales so they can do a better job of ordering the products their customers want.

Franchise Fees and Expenses
• The franchisee pays a one-time initial franchise fee to 7-Eleven (averaging approximately $70,000, depending on the store’s gross profit, but that may vary significantly depending upon the area).
• A franchisee is required to make an initial cash payment to 7-Eleven in an amount equal to the cost of the store’s initial inventory, supplies, business licenses, permits, bonds and cash register fund. 7-Eleven will finance the Franchisee’s continuing operating expenses. A typical initial cash payment to 7-Eleven for a franchise is about $89,000, but again, that may vary significantly depending upon the area.
• A prospective franchisee may wish to purchase an existing 7-Eleven franchisee’s interest in his or her store for which the prospective franchisee must negotiate a price with the current franchisee. This “goodwill” price is paid to the existing franchisee and would be over and above the typical initial cash payment made to 7-Eleven.
The changes at 7-Eleven are generating a buzz across the industry and have created a robust pipeline of retailers interested in the franchise program. Venerable industry companies like Douglass Distributing in Texas and Balmar Petroleum, operated by Richard Oneslager, the chairman of NACS, just wrapped up converting 10 of its 14 Colorado units to 7-Eleven stores.

“With high credit card fees and gas margins continuing to erode, we see the store offer as increasingly important,” Oneslager said. “This is a tremendous opportunity for us to increase merchandise sales and margins inside our stores. This a sound back-court solution for independent retailers in the convenience retailing business.”
Oneslager said he has always admired what 7-Eleven has done with its stores, especially its ability to offer a consistent fresh food program and its supply chain. “To be successful long term and improve our profitability, we needed a new business format, a well-recognized brand with trademarked products and services the consumer readily appreciates and a business system with solid marketing plans,” he said.

It’s the positive feedback like this that continues to motivate DePinto. “We have gone through a ton of change over the past couple of years, but the hard work is paying off,” he said. “It’s an honor to be recognized for the work we are doing, but the real prize is building long-term sustainable growth by satisfying our franchisees and customers.”


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