7-Eleven’s franchisee financial arrangement is “unusual”: SmartCompany compares leading Australian franchises
Wednesday, September 2, 2015/
Franchising experts have labelled the 7-Eleven financial arrangements with franchisees as “unusual” in the wake of serious allegations of employee underpayments and a cover-up by head office.
7-Eleven’s founder Russell Withers could even be forced to front a Senate inquiry into visa fraud in the wake of the allegations, according to Fairfax.
However, Withers has questioned the extent of the alleged exploitation of workers, promising to contribute to any unpaid wages if necessary, despite wages being the legal responsibility of the 7-Eleven store owners and not head office.
But how does 7-Eleven’s arrangements with its franchisees compare to other Australian franchises?
The 7-Eleven financial arrangement is “unusual”
7-Eleven’s head office confirmed to SmartCompany the franchisor takes a 57% share of each store’s gross profit, with 43% of gross profits going to the franchisees.
It is up to the franchisee to pay all costs relating to staff, including wages and superannuation, as well as store supplies, phone calls and cleaning costs.
Meanwhile, the 57% of store profits that go to 7-Eleven head office covers the cost of rent and utilities, which is uncommon among franchising models, along with the store fit-out, accounting services, marketing and training.
Professor Lorelle Frazer, director of Griffith University’s Asia Pacific Centre for Franchising Excellence, told SmartCompany the financial arrangement 7-Eleven has with its franchise owners is “unusual”.
“The majority of franchise systems charge franchisees an ongoing fee, commonly called a royalty,” Frazer says.
“The structure of the royalty varies. The most common method is a percentage of gross sales – the average is 6% of sales. Another common method is a flat fee, an average of $410 per month. Flat fees tend to be used more in service industries and percentage-based fees occur more often than in retail franchises.”
Frazer also points out the payment of ongoing costs by the franchisor’s head office, such as rent, is also rare.
“Franchisees need to be able to manage the remaining operating costs, including staff wages, in order to run a profitable and sustainable business,” Frazer says.
Companies should actively support their franchisees for a “win-win” situation
Janine Allis, founder of Boost Juice and Shark Tank investor, told SmartCompany she was not familiar with the gross profit system used by 7-Eleven stores.
“I was surprised when I saw the Four Corners story – I’ve never heard of that model,” Allis says.
“Traditionally, most franchise models are a small royalty or a royalty on the top line [of sales] and they take a marketing fee. So it’s a bit like rent. That’s the major model most franchises look at.”
Allis says Boost Juice takes an 8% royalty from franchisees for using the brand along with IT and other support head office gives them.
Other than that, Boost Juice franchisees are encouraged to run their store as if it were their own business.
“The key thing for a successful franchise is to make the franchisee successful,” Allis says.
“That’s a win-win and how you make businesses financially secure.”
Stan Gordon, the chief executive of the Franchised Food Company – which operates franchised brands such as Cold Rock, Mr Whippy and Pretzel World – told SmartCompany the 7-Eleven model is uncommon.
Despite this, Gordon points out 7-Eleven’s head office does cover a lot of costs that other franchisors do not.
“It’s not a system we’ve ever contemplated,” Gordon says.
“But, putting my franchisee hat on, if somebody says pay me 57% of your sales but you don’t have to worry about rent and I’ll give you 43% for profit and wages, I think that’s a good deal.”
The majority of Gordon’s franchisees pay a 6% royalty to the Franchised Food Company, along with a 2% marketing fee.
In some instances the marketing fee may be 3%.
Franchisees are finding it tough in other sectors
A former Eagle Boys franchisee from Western Australia told SmartCompany Eagle Boyshead office would take a 12.5% royalty from his store’s gross turnover.
This was before wages or rent, which were his biggest expenses.
The former Eagle Boys franchisee says he hopes the allegations made against 7-Eleven highlight how tough it can be for other franchisees.
“They [the head offices] need to look at other models that are more successful than their own, work out why, and emulate those,” the former franchisee says.
“A lot of them are all about the franchisor not the franchisee.”
A former Wendy’s franchisee told SmartCompany the chain’s head office would take an 11% cut of gross sales from his store.
The former franchisee says many aspects of the Four Corners report had “frightening parallels” with his own experience.
“It’s just the tip of the iceberg,” he says.
“Too often people at the top make all the money and the little guys lose everything.”
SmartCompany contacted the head office of Wendy’s and Eagle Boys but did not receive a response prior to publication.
|Company||What franchisees pay to head office|
|7-Eleven||57% of gross profit (which covers rent)|
|Boost Juice||8% royalty of gross sales plus 3% for marketing|
|Cold Rock Ice Creamery||6% royalty of gross sales plus 3% for marketing|
|Eagle Boys||12.5% royalty of gross sales*|
|Wendy’s||11% royalty of gross sales*|
*Figures with an asterisk were given to us by former franchisees