Retail Store Setup Franchise

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					                            Bold move’s success depends
                          on holding onto newest franchisees
                                                    By Samantha Oller

      t matters when you’re a retail behemoth                                        For Douglass Distributing and Lard Oil

I     with $15.4 billion in total annual rev-
      enues and more than 3,300 locations
      across 33 states.
   And it matters when you’re a chain with
                                                                                 Co., the franchise system has provided access
                                                                                 to the buying power and operational might
                                                                                 of a much bigger entity. This past April, these
                                                                                 two On the Run franchisees became part of
a dozen or two stores and a desire to protect margins and Couche-Tard’s network with ExxonMobil’s sale of the 12-
project power.                                                  year-old franchise. As these two retailers think through the
   When it comes to franchising, size is perhaps the most transition from major oil to massive independent, that moti-
powerful motivator of all.                                      vation remains at the forefront—as do the competitive issues
   For Alimentation Couche-Tard, it’s the quest for 15% that often arise from the marriage of two large brands.
market share that has propelled the Laval, Quebec-based            This is the tension and opportunity for Couche-Tard.
giant to enlist franchising as a                                                          Can this M&A company successfully
growth vehicle, to provide greater “I think the On the Run                                embrace a larger role as franchisor?
leverage with suppliers, and to            brand will be better                           Can it win over venerable operators
expand its footprint faster and with                                                      who enjoyed a rewarding relation-
less capital than simply corporate-
                                           served, even, within                           ship with major oil and who now
owned stores could allow.                  Couche-Tard than it could must buy into the potential of a
   The retailer’s financial adviser sees   have been, ultimately,                         massive independent?
lots of pluses in tapping franchises       with ExxonMobil.”                                 If successful, this Canadian oper-
to supplement company-operated                                                            ator can soon win its country’s pride
stores. Among the positives, says Bill Trefethen of Trefethen as the largest North American retailer. If not, an important
Capital Partners, Aliso Viejo, Calif.:                          growth strategy could be jeopardized.
      Access to revenues without a big investment in the store;
       Stable royalty revenues that are not nearly as volatile Sweetening the Deal
as a company-op’s profit stream;                                When the news hit in April that Couche-Tard had picked
       “And there’s the fact that you can grow a franchise sys- up ExxonMobil’s On the Run franchise system along with
tem a lot quicker than you can grow a company-operated 43 company-operated sites, the reaction from some analysts
system, especially in geographies where you don’t have a big and industry observers was a collective shrug. The acquisi-
presence or don’t want to have a big presence,” he says.        tion included 448 dealer- and distributor-franchised loca-
   Then there are the franchisees.                              tions in 29 states, most east of the Mississippi. (Separately,

38       CSP        J u l y    2 0 0 9
                                                                        Franchise Opportunities
                                                                        As Alimentation Couche-Tard and 7-Eleven embrace franchising for
                                                                        its get-big-quick potential, here’s a rundown of the selling points of
                                                                        their premier U.S. brands.

                                                                                                 Circle K
                                                                                                 Total U.S. franchise count: 470 (not including
                                                                                                 448 On the Run locations)
                                                                                                 Term limit: 10 years
                                                                                                 Minimum financial qualifications: $300,000
                                                                        net worth (must include $100,000 in liquid assets)
                                                                        Where franchising: California, Oregon, Washington and Hawaii
                                                                        Franchise fee: $15,000
                                                                        Royalty fee: 4%
                                                                        The perks: Circle K franchisees enjoy the buying power of the total
                                                                        volume of Alimentation Couche-Tard’s c-store brands, including
                                                                        Couche-Tard, Mac’s and now On the Run. The franchise, built on best
434 On the Run locations remain owned and operated by                   practices developed over the more than 50-year history of the Circle
ExxonMobil and are under a license agreement to continue                K brand, offers support such as monthly, detailed merchandising plans,
                                                                        and marketing and promotional plans developed specifically for each
operating as On the Run.)
                                                                        geographic area. Franchisees also have access to Circle K’s financial
    While the company-operated sites were expected to add
                                                                        services, cigarette and beverage private-label stable.
1% to 2% to Couche-Tard’s overall revenues and profits,
according to securities brokerage firm Desjardins Securi-
ties, franchisee revenues would have little to no effect. The
Street was not ecstatic: Couche-Tard’s stock gained only 4
cents that day on the Toronto Stock Exchange.                                                   7-Eleven
    Furthermore, while franchising is the lifeblood of 7-Eleven                                  Total U.S. Franchise count: 4,200
Inc. (see p. 46), it’s played a relatively smaller role at Couche-                               Term limit: 15 years
Tard, where Circle K franchised sites have made up less than                                     Minimum financial qualifications: No net
15% of the company’s 3,300-strong U.S. store count. The                                          worth requirements
On the Run acquisition, which has nearly doubled its net-                                        Where franchising: Arizona; California;
                                                                        Colorado; Connecticut; Delaware; Washington, D.C.; Florida; Idaho;
work of franchised locations, would bump up this share to
                                                                        Illinois; Indiana; Kansas; Maine; Maryland; Massachusetts; Michigan;
more than 27%.
                                                                        Missouri; Nevada; New Hampshire; New Jersey; New York; North
    But six-digit per-store dollars is just one factor. There are
                                                                        Carolina; Ohio; Oregon; Pennsylvania; Rhode Island; Texas; Utah;
other critical considerations, says Rick Hamlin, senior direc-          Vermont; Virginia; Washington; West Virginia.
tor of worldwide franchise and vice president of TMC                    Franchise fee: Varies; based on percentage of a store’s gross profits
Franchise Corp., Circle K’s franchise arm.                              over the last 12 months, starting at $10,000 for stores with gross profit
    “Franchising plays a very important role within Couche-             of $200,000 or less. The average initial franchise fee is around $139,000.
Tard,” he says in an e-mail interview. “As an additional chan-          Royalty fee: Varies; based on percentage of store’s gross profits
nel of trade, it allows for increased store growth with significantly   The perks: 7-Eleven provides a fully stocked, turnkey operation by
less capital requirements. Increased store counts and mer-              obtaining and bearing the ongoing cost of the land, building and store
chandise sales improve the buying-power potential, which ben-           equipment, investing as much as $1 million to $2 million per site.
efits both company-operated and franchised locations.                   Franchisees also have access to the company’s open account system,
    “The licensing of the Circle K brand and system also                similar to a revolving credit system, rather than having to write checks
                                                                        for store purchases and expenses.
enhances the timeline for international expansion,” Ham-
lin continues. “The decision to acquire the On the Run fran-
chise system clearly exemplifies the long-term role of

                                                                                                J u l y      2 0 0 9         CSP            39
franchising within Couche-Tard.”
    Despite these benefits, some indus-
try observers suspect that the acquisi-
tion of the franchise was simply a
backdrop to that of the 43 company-
owned ExxonMobil stores in
Phoenix—incidentally, the site of
Mobil’s first pilot test of the On the Run
concept about 12 years ago. These sites,
which have since been rebranded to Cir-
                                              A GOOD RUN: Twelve years after ExxonMobil first piloted the concept in Phoenix, the
cle K, join more than 580 Circle K com-
                                              company sold its On the Run franchise to Alimentation Couche-Tard in April. The franchise’s
pany-owned stores already in Arizona.         strengths included advanced category-management support; an upscale hot-beverage
    The remaining ExxonMobil com-             program, Bengal Traders; and a network of widely respected franchisees.
pany-op network currently totals 742
stores in 17 states, with the majority in     the gas volumes that are theirs under            the On the Run franchise system allows
Texas, Florida, California, Tennessee, Vir-   their brand, and they want a partner             us the opportunity to integrate the best
ginia and Illinois. The major oil, which      who will help them with that brand. I            practices of two sophisticated and
announced the stores’ sale in June 2008,      think that’s what’s important here. It           respected convenience-store franchise
opened bidding last December on 1,200         doesn’t give [Couche-Tard] an advan-             organizations with recognized
locations in nine East Coast states, from     tage per se in the sense that, ‘We’ve made       brands, highly qualified franchisees and
Virginia to New Hampshire, although           a deal so we’ll do the next deal with you.’      strong marketing programs.”
no sales had taken place as of press time,    No, I think it’s more of a confidence-              Since the acquisition’s announce-
the company confirms. It’s a treasure         building, as business partners. We’ll see        ment, both Hamlin and Couche-Tard
trove that could have several interested      if that indeed is helpful. But certainly it      CEO Alain Bouchard have been meet-
buyers; The Pantry, Susser Petroleum          doesn’t hurt.”                                   ing with On the Run franchisees to talk
and Delek U.S. have all publicly                                                               about their respective goals. One imme-
expressed interest in the sites.              Meeting of the Minds                             diate task: reconciling the franchisors’
    David Hartley, an analyst with BMO        Still, the franchise purchase enables            very different management styles.
Capital Markets in Toronto, cites the         Couche-Tard to tap into a network of                “Couche-Tard is one of the most
lower capital requirements for fran-          successful, highly respected retailers who       decentralized approaches you’ve ever
chising. This being said, “In the             make up the On the Run franchise net-            seen in how they approach their
Couche-Tard model, I don’t think the          work, including Wallis Oil in Missouri,          regions,” says Michael Seid of Michael
focus is on franchising. I think this is a    R.H. Foster in Maine, Douglass Distrib-          H. Seid & Associates LLC, West Hart-
unique deal, and they went with it.           uting in Texas and Lard Oil in Louisiana.        ford, Conn., a franchising consultant
They’re an acquisition-driven story, and         According to Hamlin, it was the               who has worked with both Circle K and
as such, they’re looking for corporate        quality of the On the Run franchisees,           ExxonMobil. “Exxon is one of the most
assets to own.”                               their operations and the On the Run              centrally controlled in how they
    Hartley says Couche-Tard’s purchase       system that drew Couche-Tard to the              approach On the Run. So it is ends of
of the On the Run franchise establishes       acquisition, as well as the potential syn-       the spectrum coming together.
a relationship that could come in handy       ergies with Circle K.                               “Exxon has always been a very cen-
for future company-op acquisitions.              “The programs are actually very               trally focused company,” he continues.
    “There’s a relationship and a confi-      similar and complement one another,”             “Everything drives toward the fuel busi-
dence built that you can do business          he says, pointing out that only Missouri         ness, which is important to centrally
with another party,” says Hartley.            has both Circle K and On the Run fran-           control. Centralized management, cen-
“ExxonMobil still will be dealing with        chised locations. “The acquisition of            tralized training programs, everything

                                                                                               J u l y     2 0 0 9        CSP          41
                                                                                            “[Alain Bouchard has]
                                                                                             got an excellent
is done that way. When they had                                                              opportunity to roll up
regions, they were tightly controlled                                                        some business.
nationally.”                                                                                 Besides that, my
   Couche-Tard, on the other hand,
has eight regional divisions in the
                                                                                             impression is, he’s a
United States, not including TMC                                                             decent guy. He’s not a
Franchising, which operates inde-                                                            Donald Trump or
pendently. Each region, Seid says,                                                           some corporate raider
while not a different company, has                                                           who’s all ego.”
its own flavor and management
style. Indeed, it’s a setup that                                                            BILL DOUGLASS
Couche-Tard credits for its success                                                         Douglass Distributing
[CSP—Jan. ’05, p. 28].
                                               CEO Bill Douglass was not surprised          depending on the dynamics.
Brand Barriers                                 by ExxonMobil’s sale of the franchise,           This is one possible point of con-
For Ben Litalien, founder of Fran-             he does regret the loss of On the Run’s      tention between Couche-Tard and On
chiseWell LLC, Stafford, Va., a consul-        familiar, vast support system.               the Run franchisees. As CSP went to
tancy that pairs franchises with                    “What I enjoy is that we get supe-      press, Couche-Tard had not decided
nonprofits, ExxonMobil’s sale of the           rior category management from it,            whether to keep or retire the On the Run
On the Run franchise was a surprise.           because they have the people devoted         brand, according to Hamlin. The typi-
Litalien served as the major oil’s U.S.        to it,” says Douglass. “When you have        cal franchise contract spans 10 years.
franchise development manager from             a small chain like we do … you do the            “Given the number of Circle K
2001 to 2005. The sale effectively             best you can, use suppliers as efficiently   stores in the U.S., it would seem to be
removes any access to backcourt rev-           as you can, but you can’t compare with       an easy decision,” he says. “However,
enues, he says.                                someone with 1,000 stores.”                  Couche-Tard successfully manages two
   “And it would be my guess none of                The decision to sign with On the        significant brands—Couche-Tard and
the distributors in their wildest dreams       Run paid off. According to Douglass,         Mac’s—in Canada.” The company is
would ever guess that ExxonMobil               on average, stores “that we thought we       undergoing “significant deliberation
would sell the franchise side of On the        were running really well” enjoyed a 25%      and analysis,” he says, and will continue
Run,” says Litalien. “I think they all         lift in in-store sales post-conversion. He   to consult with On the Run franchisees
rightly anticipated ExxonMobil would           cites the strength of On the Run’s Ben-      before a decision is reached.
sell company-ops to the distributor            gal Traders coffee program as well as its        Meanwhile, On the Run franchisees
class of trade. But my impression was          merchandising, signage and POS sup-          maintain their Exxon or Mobil fuel
the distributors went into On the Run          port [CSP—Oct. ’07, p. 58].                  contracts, possibly putting them at a
fully anticipating ExxonMobil would                 The combination of an ExxonMobil        competitive disadvantage against
hold onto it.”                                 forecourt and On the Run backcourt           nearby Circle K corporate stores that
   But for some On the Run franchisees,        also had its advantages, from a visual       sell unbranded fuel and are willing to
the possibility of losing their retail brand   and operational perspective. The gas         meet the street price, according to Dou-
was always in the backs of their minds.        canopy complemented the store and            glass. It’s a situation that becomes even
   Douglass Distributing, Sherman,             vice versa, while issues about either        trickier should Couche-Tard decide to
Texas, first signed on with the On the         brand could be addressed at the same         retire the On the Run concept.
Run franchise four years ago, attracted        meetings.                                        “For instance, in my town, if I
by the operational might of a major oil.            Circle K, meanwhile, partners with      wanted to be Circle K behind my
Douglass has four On the Run sites             different major fuel brands in different     Exxon canopy, I’m looking at a retailer
within its chain of 16 stores. While           markets or uses its own private brand,       selling 3 cents below my cost, called Cir-

                                                                                            J u l y    2 0 0 9      CSP          43
cle K,” says Douglass. “In all fairness,
I’m selling Exxon 3 cents below my cost
today, but I don’t want to have to.
    “I think Circle K would look a lot
stronger if it had Circle K on the build-
ing and canopy,” he continues. “I think
if [Bouchard] could do that, he could
be effective.” Regardless, Douglass is
mulling his own options, waiting to see
                                             CIRCLE AROUND: Since it acquired Circle K from ConocoPhillips in 2003, Couche-Tard has
how the transition progresses.
                                             limited the franchise’s expansion to a few states but infused it with discipline.
    Johnny Milazzo, president of Lard
Oil Co., Denham Springs, La., an On the      one another, I don’t know where the               The key: “First, can [Couche-Tard]
Run regional franchise developer, is         differentiator is any more. If we’re the      develop significant, long-term rela-
adopting an optimistic attitude about        same thing just across the street from        tionships with the distributors?” asks
the future of his 15 On the Run sites        one another, what’s the advantage for         Litaen. “[The distributors] are the ones
(with the 16th now in development).          my customers to shop me?”                     that control the keys to the kingdom.”
The 21-store chain’s market area covers                                                        Couche-Tard’s motivation for
southern Louisiana, including the out-       Keys to the Kingdom                           expanding its franchise holdings will
skirts of Baton Rouge and New Orleans.       All that said, the potential for On the       ultimately reward its franchisees. And
    Like Douglass, Milazzo was attracted     Run franchisees to enjoy even greater         the retail giant will also be rewarded by
by the vast resources of ExxonMobil.         growth under Couche-Tard is genuine.          its recently acquired knowledge base.
He also respects Couche-Tard’s retail            “Look at the history of what                  Douglass cites the wealth of retail
prowess, saying the company’s phe-           Couche-Tard did with the tired Cir-           acumen Couche-Tard has at its disposal
nomenal rise to No. 2 c-store retailer in    cle K’s after they took them over:            in the On the Run franchisee lineup.
the United States suggests a solid value     They increased volumes by leverag-            “He’s got an excellent opportunity
proposition.                                 ing their merchandising prowess,              there to roll up some business,” he says
    “That intrigues me,” Milazzo says.       chased the people out of the ivory            of Bouchard. “Besides that, my impres-
“What concerns me, though, is there is       towers and improved stores’ overall           sion is, he’s a decent guy. He’s not a
a lot of conflict here—and we have to see    productivity,” says industry consult-         Donald Trump or some corporate
how that will impact us.” About one-half     ant Dick Meyer of Meyer & Associ-             raider who’s all ego.”
of Milazzo’s On the Run stores compete       ates, New Berlin, Wis. “What I think              Milazzo says, “It’s simply a matter
directly—as in directly across the street—   you have here is a continued trend of         of, when the day is done, are we going
with a Circle K site, most of them cor-      smart companies realigning to their           to be one in consumers’ eyes or are we
porate-owned, unbranded locations.           core competencies, and that definitely        going to look different in the con-
    While Hamlin acknowledges “some”         is smart business.”                           sumers’ eyes? And if so, what does that
Circle K sites are located near On the           Litalien concurs: “ExxonMobil was         mean to the business?
Run locations, he says the exact num-        never going to be a pure franchisor. It           “We’ve got a few issues that we have
ber is not yet known. “The situations        was always adjunct to or bolted onto          to work to overcome to make this make
will be dealt with on an individual basis    the core mission. Franchises were like        sense for us,” he continues. “If you’re
with each involved franchisee,” he says.     a program to them, whereas it is core         in a race, and your car’s performing
    For franchisees such as Lard Oil, the    to who Couche-Tard is and what they           well, why would you want to switch
decision comes down to one question.         do. I think the On the Run brand will         cars? There’s a chance you can get in a
“I’m really going to have to understand      be better served, even, within Couche-        better car, and that’s kind of what we’re
the value proposition fairly well,” says     Tard than it could have been, ultimately,     being asked to do. We’ve just got to get
Milazzo. “When you’re that close to          with ExxonMobil.”                             comfortable with that, I guess.”        I

44       CSP         J u l y    2 0 0 9
         Behemoth steps up efforts for an all-franchise model
                                               By Linda Abu-Shalback Zid

       t was difficult to tell that a troubled econ-                            in California. And at the end of 2005 and

I     omy swirled around outside the small
      conference room in Lombard, Ill. Within
      the room’s confines, a full house of hope-
ful entrepreneurs listened attentively as Tim
                                                                                into 2006, the company’s world changed.
                                                                                7-Eleven was acquired by its Japanese coun-
                                                                                terpart and taken private after years as a pub-
                                                                                licly traded company. Soon after embracing
Lankford, division franchise sales manager for 7-Eleven, Japan’s big-infrastructure, local-store approach, 7-Eleven
extolled the virtues of becoming a 7-Eleven franchisee.        said it would retire its dual direct-op/franchise model. It
    One attendee arrived from India just the day before and began converting company-operated stores to franchises
was eager to learn more of this opportunity he’d heard about with the goal of being an all-franchise operation by 2013. By
from a friend. Another, who owns two independent c-stores, press time, about 4,370 of its 6,200 stores in the United States
was concerned that not choosing his own credit-card ven- and Canada were franchisee-operated.
dors could mean higher fees.                                       7-Eleven also has announced plans to add 200 stores to
    Franchise manager Susan Corral pointed out that 7-Eleven its portfolio this year, 30 more than last year. The acceler-
shares the fee with the franchisee and further addressed his ated growth is expected to continue, according to company
hesitancy: “It would be hard-pressed for me to believe that an spokeswoman Margaret Chabris. She says, “We plan to add
independent could get a better cost on anything than we could more stores than the previous year for the next several years,”
get when we’re buying for                                                                      and that growth would be
6,000 stores across the coun- “It would be hard-pressed for me to where 7-Eleven has its biggest
try. … You don’t have to focus
on that. You can focus on run-
                                         believe that an independent could presence: New York; New Jer-
                                                                                               sey; Baltimore; Washington,
ning your own business.”                 get a better cost on anything than D.C.; Tidewater, Va.; Miami;
    In fact, many topics that            we could get when we’re buying for Orlando, Tampa and Ft.
day provided a similar con-              6,000 stores across the country.”                     Myers, Fla.; Dallas-Ft. Worth;
clusion: Size has its advantages.                                                              Chicago; Denver; Salt Lake
    And after the two-hour session, two of the attendees were City; the San Francisco Bay area; Seattle; Los Angeles; San
openly committed to becoming 7-Eleven franchisees, mostly Diego; and Alberta and British Columbia, Canada.
due to the company’s corporate reputation and size. Natlia         Its growth objectives are driven by acquisition, con-
McTague said she convinced Jack Lai to attend the meeting verting other c-store operations to the 7-Eleven brand and
with her after the two had looked at franchising a laundro- new franchisees.
mat and an assisted-living business. “Why go to a franchise
that’s just started? We should go to a proven model,” she Marriage of Convenience
said, referring to 7-Eleven’s consistent ranking toward the Like Couche-Tard’s recent acquisition of more than 400 of
top of Entrepreneur magazine’s top 500 franchises, and its Exxon Mobil Corp.’s On the Run franchised sites, part of
No. 1 ranking for 2008.                                        7-Eleven’s franchisee expansion also occurred through acqui-
                                                               sitions. The most significant came three years ago with the
Behind the Curtain                                             $52.5-million purchase of White Hen Pantry Inc. and its 206
Founded in 1927, 7-Eleven didn’t begin its franchising efforts stores in the Chicago area and Northwest Indiana, and licenses
until 1964, after its purchase of 127 franchised Speedee Marts for 55 sites in Boston.

46       CSP        J u l y    2 0 0 9
                                                                  DELI DOUGH: Some White Hen
                                                                  franchisees whose stores were
                                                                  converted to 7-Eleven say any
                                                                  revenue lost by closing the White Hen
                                                                  deli has been made up in Slurpee,
                                                                  fountain and roller-grill revenue.

   To date, the transition                                                                                 and averaging about
continues with some suc-                                                                                   $139,000. Gross profits
cess and some bumps, and                                                                                   can vary depending upon
with 7-Eleven offering                                                                                     location, but the average
concessions to ensure                                                                                      $139,000 franchise fee
long-term success.                                                                                         suggests an average of
   Some of the White Hen                                                                                   $500,000 to $600,000.
Pantry locations were                                                                                            Allows franchisees to
experiencing declining                                                                                     reduce or even eliminate
profits when 7-Eleven                                                                                      the fee by increasing year-
swooped in, and franchisees took a hit in transitioning out           on-year gross profits during the two-year deferment period.
of White Hen Pantry’s popular deli offering. 7-Eleven’s pro-                 Defers the initial gasoline fee of $10,000 to $40,000, if
prietary Slurpee drinks and other products have since helped          applicable, for two years.
bridge the gap, and the company continues to ramp up its                     Provides financing for 60 months on any remaining
fresh-food offerings.                                                 amount due on the franchisee fee at the end of two years.
   “So these stores are now recovering, recouping. We’ve              The “lower-volume stores do not produce enough cash flow
done all the demo and construction and things like that,              for banks to be comfortable enough to loan money,” and
and they now are out there to be franchised,” says Timothy            the program allows candidates to be “released of the bur-
Lankford, division franchise sales manager. “But their sales          den,” Lankford says.
numbers are to a point where we need to re-create that win-                  Provides a monthly allowance to stores with gross prof-
win situation at the current sales numbers.”                          its of $300,000 or less, ranging from $354 to $2,483. Also, 7-
   Win-win efforts include the company’s store development            Eleven’s royalty payment is reduced from the range of 49%
program, which reduces the out-of-pocket franchisee costs             to 57% (also based on gross profit) to 40% for the first five
for those locations. For White Hen Pantry locations opened            years.
for 12 consecutive months with less than $350,000 gross profit            The efforts, Lankford says, are meant “to say we do realize
total for the last 12 full accounting periods, the company:           there are all sorts of different issues or customer transition
       Defers franchise fees for two years. The franchise fees        trends in these stores. We have to be able to come up with a
are based on a gross-profit sliding scale, starting at $10,000        program, whether a 7-Eleven or a White Hen, that makes our

  7-Eleven by the Numbers
 50                            200                       4.5                        2013                        60–120
 Percentage of new stores      Number of stores          Number of hours between    Year 7-Eleven hopes to      Number of days from
 that 7-Eleven believes will   7-Eleven plans to open    a new 7-Eleven opening     be all franchise-operated   applying to becoming
 be business conversions       this year (30 more than   somewhere in the world                                 a 7-Eleven franchisee
 in the near future             in 2008)

                                                                                                J u l y     2 0 0 9       CSP           47
                                                                                    Mutual Responsibility
                                                                                    Key advantages of being a 7-Eleven franchisee, as outlined
                                                                                    in literature from the company, include:
franchisees healthy partners.” (The com- roller grill, both Parlatore
                                                                                     Having a fully stocked, turnkey operation.
pany offers a similar program for lower- and Tomassoni say. To fur-
                                                                                     7-Eleven obtains and bears the ongoing cost of the
performing 7-Eleven stores.)               ther boost foodservice across
                                                                               land, building and store equipment, investing as much as
    The road to transition, as with any its network, 7-Eleven CEO
                                                                               $1 million to $2 million per site.
large acquisition, also was not without Joe DePinto said in May that
                                                                                     Sharing of the store’s gross profit.
its bumps. “It was a little chaotic,” says 7-Eleven will be adding a
                                                                                     7-Eleven pays for water, sewer, gas and electric, and
Peggy Tomassoni, who runs one of the turkey sub, roast-beef sand-
                                                                               any building rent and real-estate taxes.
converted stores in Glen Ellyn, Ill. “I wich, chicken-ranch snack
                                                                                     7-Eleven provides financing for all store-operating
was fortunate to get one of 7-Eleven’s wrap and other fresh food
                                                                               expenses; bookkeeping, bill paying and payroll services for
field consultants, and I have to say that products to its Fresh to Go
                                                                               store operations; and a support structure and business con-
any time I need anything, they’re always product line, with a goal of
                                                                               sultant who meets with the franchisee weekly to help max-
there.”                                    increasing fresh-food daily
                                                                               imize store performance.
    Joe Parlatore ran his Willowbrook, revenue from an average                     Franchisees, meanwhile, are responsible for employees
Ill., White Hen for 10 years before the $430 per store to $711 by the          and payroll, inventory and cash variation, supplies, business
conversion. “The only glitch I remem- end of 2011.                             taxes, licenses and permits, certain repairs and
ber was just with your typical stuff, with                                     maintenance, day-to-day operational decisions in the store,
your building permits and things like Conversion Equation                      and controllable in-store expenses.
that. Other than that, it went relatively Another route to growth is
smooth,” he says. 7-Eleven also pro- through the company’s
vided special assistance throughout the business conversion program (BCP), ments, quarterly audits and more. (BCPs
construction process. “They also had launched in 2006 and recently enhanced use Temple, Texas-based distributor
separate people just for the construc- with its own Internet site (bcp.7- McLane Co. for 85% of their products,
tion transition you could talk to if you The program lets existing just as new franchisees do, but can con-
were having maintenance problems.” independent retail store operators con- tinue business with local suppliers for
    At first, both Tomassoni and Parla- vert to a 7-Eleven. They continue to the remainder of their mix.)
tore lost some sandwich sales without own or lease their existing sites and pay                 Chabris says the program is doing
the White Hen                                                    a $25,000 franchis- very well and is an important part of
deli. Although Par- “7-Eleven has a vested ing fee. The retailer the company’s growth strategy. And
latore says he was        interest in making                     keeps all the profits since the program’s onset, 110 outlets
given the option to       sure you run your                      for the first three have been converted. Chabris says, “We
keep his deli, size                                              months of a BCP 7- believe that soon 50% of new stores we
constraints made
                          store properly.”                       Eleven store’s oper- open will be business conversions.”
it difficult to accommodate with 7- ation, then moves to a split of 25% for                     The company invests about $280,000
Eleven’s offerings added to the store. 7-Eleven and 75% for the conversion to convert each store, she says, and
He opted for a prep station, where he franchisee.                                           7-Eleven works very closely with the new
makes sandwiches for a display case           Potential BCP sites must have at least franchisees: “Every store is assigned a
and upon request, but customers can’t 1,800 square feet of selling space after con- business consultant who visits with the
see the meat offerings. Still, he believes version and the ability to operate 24 hours franchise two times a week; all new fran-
he does more than double the volume a day. A beer and wine license is preferred. chisees go through extensive training.”
in sandwiches than a typical 7-Eleven         In return, they get 7-Eleven’s propri-
(40 to 50 a day vs. about 17).             etary Retail Information System, equip- Franchisee Framework
    And whatever has been lost on the ment, training, consulting support, a In addition to the aforementioned
sandwich end has been made up by the distribution network with daily delivery regions for growth, 7-Eleven plans to
robust sales of Slurpees, fountain drinks of fresh foods, advertising, bookkeep- transform these traditionally direct-op
(including the famous Big Gulp) and the ing, payroll preparation, vendor pay- markets into franchised: Florida, Vir-

                                                                                               J u l y     2 0 0 9         CSP           49
ginia, Texas and Utah.                              to jump on board when the company                  another site last November. “You have to
   The average upfront total investment             began franchising on its Dallas home turf          keep an eye on a lot more details, finan-
for a 7-Eleven franchise is approximately           in 2007. He had been a 7-Eleven store              cials, inventories and things like that,”
$225,000 and includes the store’s open-             manager for 13 years prior to becoming             but “so far, so good,” he says. As for addi-
ing inventory, supplies, business licenses,         a franchisee. At the time, he told CSP             tional sites, “With the economy and
permits, bonds, cash-register fund, fran-           Daily News that if he met projections, he          everything, we’ll see what happens.”
chise fee and gasoline fee if applicable.           hoped to open more locations. That plan                While 7-Eleven hasn’t changed any
   Motiul Bhuiyan was one of the first              came to fruition when he franchised                criteria due to the economy, it has been
                                                                                                       difficult for some potential franchisees
                                                                                                       to find liquidity, Lankford acknowl-
  Fun With Franchising                                                                                 edges. “There are candidates who are
  To take a cue from an old commercial, Dennis Lane, chairman of the National Coalition of             not able to leverage their money as well
  Associations of 7-Eleven Franchisees, is not just a chairman, but he’s also a franchisee.
                                                                                                       as they used to,” he says. “A lot of them
       Lane has had a 7-Eleven franchise in Quincy, Mass., for 35 of the 45 years the company
                                                                                                       would use their homes or something
  has been in franchising. Although he does caution that “retail is for retailers” and it is “not
                                                                                                       of that nature and, of course, all that
  for the faint-hearted”—due to having long hours at times, dealing with the public and
  employees, managing inventory and being responsible for large quantities of cash—you don’t
                                                                                                       liquidity is gone.” Still, while some areas
  have to talk to him long to see how much he cares about his store and the 7-Eleven model.            are harder hit than others, many are
       “When I’m in town, I’m in my store and I love being in my store. When I’m traveling, I miss     “flat to up” in franchisee applications.
  being in my store; I miss my staff and my customers,” he says. “I’ve been on the same corner             And Lankford says the questions he’s
  for 35 years, and how many people can say that?”                                                     being asked are also more focused these
       After college, Lane was flipping through the Sunday Boston Globe, “and I saw an ad in           days: “The No. 1 question I see changing
  the business section that said ‘Be your own boss, own a 7-Eleven.’ I met with a 7-Eleven             the most is they’re more curious about
  representative, and next thing I knew, I was on my way.”                                             how our sales are doing, how we are
       Since his early beginnings, he says, 7-Eleven has become a much more sophisticated model.       doing as a group or as a whole.” 7-Eleven
  Back then, there was a week of training at a store training facility, and then they handed you       stores worldwide generated total sales of
  the keys. Today, training includes three weeks of operations excellence training at a facility and
                                                                                                       more than $53.7 billion in 2008, com-
                       then 10-day post-changeover training at your own store.
                                                                                                       pared with $46.6 billion in 2007, although
                           Lane also used to place his orders using tear strips, which were then
                                                                                                       the company declined to provide num-
                       key-punched. “The errors were sometimes significant, because everything
                       was done manually,” he says. 7-Eleven’s Retail Information System tools now
                                                                                                       bers specifically pertaining to profit.
                       allow operators to analyze sales on individual items, sales trends, customer        7-Eleven also hopes to make things
                       preferences and the factors that affect each of these. Orders are placed        easier for folks such as Bhuiyan, who are
                       using the Retail Information System and are usually received by the next day.   interested in multiple sites, with a new
                            The sales of phone cards, prepaid gift cards, service items such as        streamlined multiple prequalification
                         money orders and stamps, and lottery also have enhanced the model. “So        process. In a franchise owners association
  I think one of the reasons customer counts continue to be strong is that we’re trying to offer the   newsletter, Jeff Schenck, 7-Eleven’s sen-
  average time-starved convenience store customer everything in one stop,” he says.                    ior vice president, national franchise/real
       Being in the same location for as long as he has means the chance to “own the                   estate, said, “Using [a] one-page [crite-
  neighborhood,” and he has attended many weddings, funerals and christenings because                  ria] form, franchisees along with their
  of his involvement. “I have people coming in now that were kids in 1974 who are coming in
                                                                                                       field consultants/business consultants can
  with their kids, saying, ‘This guy used to throw me out because I was a punk, and you behave
                                                                                                       work together to determine whether or
  yourself,’ ” he says. “I’ve watched an awful lot of folks in the neighborhood grow up.”
                                                                                                       not the franchisee is prepared to take on
       And being an integral part of the neighborhood is a big motivator to Lane, who also says
  that his numbers are actually up this year, despite the troubled economy. “I believe you need
                                                                                                       the role of multiple-store owner.”
  to give back to the neighborhood, and that’s why we’re very conscious of the neighborhood’s              According to Dennis Lane, chair-
  needs,” he says. “I think we give our customers a really great shopping experience.”                 man of the National Coalition of Asso-
                                                                                                       ciations of 7-Eleven Franchisees, the

50        CSP           J u l y      2 0 0 9
typical franchisee runs three stores, with   can order products at 10 in the morn-       that’s a huge, huge advantage.”
some running five or more. But not           ing, and they’re in my store at 6 that          Lane’s positive outlook doesn’t even
everyone is interested in becoming a         same evening, which is pretty remark-       hint at frictions of the past between
multistore operation, including Lane.        able,” he says. “We can look at our own     franchise owners’ associations and the
(See sidebar, p. 50.)                        scan data and see best or worst prod-       corporation, which resulted in lawsuits
    “Usually someone like myself, who        uct analysis, and actually drill it down    over product mix and rebate reim-
owns one store, operates that store,”        into two-hour day-parts.” Lane says he      bursement (prior to the company
Lane says of his location in Quincy,         can also run comparisons to see how         becoming a wholly owned subsidiary
Mass. “I would say that [multisite oper-     many stores in his market sell each         of Seven-Eleven Japan).
ators] are involved differently. I’m more    product and how well it’s doing.                But as with any franchisor/fran-
hands-on, and they need to be more               Another benefit he outlines is the      chisee relationship, the company and
management-savvy. They’re multitask-         open account system, which is credited      the association won’t always see eye to
ing with many more moving parts than         with each day’s receipts and charged with   eye. “You’re giving [someone] status as
a single-store owner is.” Being a single-    store purchases and expenses, similar to    an independent contractor because
store operator allows him time to travel     a revolving credit system. “In some fran-   they’re a franchisee. But then you’re
for his work as chairman, as well as         chise systems, if you needed to go out      licensing them your trade name, which
spend more time at his store, he says.       and buy $20,000 to $30,000 worth of         you want to protect,” Lane says. “So 7-
    As for being with 7-Eleven in gen-       groceries, cigarettes, health and beauty    Eleven has a vested interest in making
eral, Lane points to the company’s           aids, you’d need to write a check,” he      sure you run your store properly. And
renowned electronic infrastructure. “I       says. “We have a running balance, and       I think there is always going to be a dis-

52       CSP         J u l y    2 0 0 9
connect between the way that fran-
chisees see the world of convenience
retailing and the way 7-Eleven sees the
world of convenience retailing.”
   The national coalition also is reach-
ing out to the new franchisees to help
bridge that gap. And as 7-Eleven’s fran-
chising expansion efforts continue, more
franchise-owners associations are join-
ing. In the past 18 months, the number
of associations has jumped from 23 to      THAT’S AN ORDER: An assistant store manager uses a Mobile Operations Terminal, one tool
                                           in 7-Eleven’s proprietary Retail Information System.
36 to accommodate the growth.
   Lane says he hopes to continue to
keep that disconnect between fran-            And he says the two have made great       have the same.
chisees and company to a minimum:          inroads toward making that happen.              “No matter how tough the conver-
“My two mantras with 7-Eleven and          “I’ve worked very, very hard to open         sations are, so far 7-Eleven and I have
the vendors and the franchisees is: One,   the door and to have an open dialogue,       been able to have those conversations.
build mutually beneficial relationships;   and 7-Eleven knows that they can call        And I think we work reasonably well
and two, always try and find common        me any time 24/7 and I’ll get back to        on a cooperative effort to move the
ground or the middle of the road.”         them,” he says. “And I also believe I        business forward.”                    I

                                                                                        J u l y    2 0 0 9        CSP         53

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