Supplier Contracts At The Center Of 7-Eleven Franchisee Dispute

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A dispute between 7-Eleven franchise owners and 7-Eleven, Inc. (SEI) is brewing, putting vendor contract negotiations in the spotlight of the franchise sector.

A press release, issued on Tuesday (April 16), revealed that the National Coalition of Associations of 7-Eleven Franchisees (NCASEF) has requested for 7-Eleven to release information about its vendor contracts — specifically, how they relate to payments that vendors made to 7-Eleven to show their products to franchisees and corporate executives at trade shows. The franchisees have argued that those payments could and should be used to lower the cost of inventory displayed at franchisees’ store locations.

“We strongly believe that the money 7-Eleven collects from vendors at trade shows should be used to help lower the cost of goods for all franchisees,” said the NCASEF’s Vice Chairman Rehan Hashmi in a statement. “The company collects millions of dollars for its Japanese parent, even as U.S. franchisees are struggling to earn solid profits.”

The group of franchisees pointed to promotional material on SEI’s website, which promises to enable franchise owners with the ability to “leverage 7-Eleven’s super buying power” when procuring from vendors.

“We buy big, so you can get the benefit of negotiated pricing and terms,” the website stated, according to the press release, which claims that franchisees could often find a better price on items if they were to procure from wholesale and warehouse retailers like Costco.

“The SEI franchise agreement makes no guarantees that franchisees receive the best pricing or most advantageous terms from the supply chain run by the corporation, even as it collects millions from the vendors who help supply stores coast to coast,” the NCASEF stated.

According to SEI, the organization is currently in the process of establishing a new way for the Franchisee Selection Committee to review supplier contracts, but the NCASEF is arguing that it is not enough.

“Franchisees should have a voice on how to best use that money,” said the NCASEF’s Executive Vice Chairman Michael Jorgensen in another statement. “SEI should not be using the millions it collects to defray expenses they should bear.”

Franchisee Headaches

The NCASEF’s press release comes months after it released a survey of 7-Eleven franchise owners, which found only 12 percent believed SEI was able to obtain the best prices from their suppliers. That same survey found that 72 percent of franchise owners said, if they were to “do it all over again,” they would not choose to enter the 7-Eleven system as a franchisee.

The statistics highlight the roles that supplier negotiation and supply chain management strategy have in the overall success and satisfaction of a franchise, which, according to separate research from the Franchise Business Review (FBR), is closely correlated to the success of a brand. The FBR’s “2018 Annual Franchisee Satisfaction Study” concluded that “brands with high franchisee satisfaction drastically outperform brands with low satisfaction on every key performance metric,” including unit growth, royalties, turnover and franchisee income.

Analysts have agreed that vendor contracts and relationships are an important, albeit challenging, aspect of the franchise industry.

Patrick J. Maslyn at Hunton & Williams and W. Andrew Scott at Paul, Hastings, Janofsky & Walker wrote — in a 2007 report for the American Bar Association, called “Contractual and Business Aspects of Structuring Supplier Agreements” — about this challenge, particularly as it relates to addressing the needs of the brands, franchisors, franchisees and vendors. However, the ability to successfully manage supplier contracts is critical to the success of the franchise system overall, they said.

“A franchisor’s ability to maintain the uniqueness and consistency of the products and services offered by the franchisees depends, in large part, on the contracts it enters into with third parties to provide these products and services,” the authors concluded.

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