Adele Ferguson and Sarah Danckert, 07 September 2015
Scandal-ridden convenience store chain 7-Eleven made more than $9 million last year from churning failed franchisees through its system.
The chain is in crisis over a wage fraud scandal that has sparked two reviews and also seen franchisees claim the model is set up for them to fail in favour of head office.
Internal documents, obtained by Fairfax Media, show 68 franchisees left the 7-Eleven system in the 12 months to June 2015.
When franchises are turned over the company’s head office receives a sign-on fee from the new franchisee. It is not known if it also charges cancellation fees.
As part the process 7-Eleven raked in $9.56 million from changing over old franchisees with new franchisees during the last financial year which was ahead of the budgeted $8.5 million figure.
That meant 7-Eleven Australia made an average of $140,514 for each of the store changeovers over the past year.
According to the documents the convenience store chain had set an internal target 79 “changeovers” for the year across its network of 620 stores. There are currently 78 franchises up for sale.
“Churning” is a common term in the franchise industry which refers to a practice where head office either terminates the franchisee agreement or allows a franchisee to terminate an agreement because they want to leave the network.
A spokeswoman for 7-Eleven declined to address the issue of churn when asked about the volume of changeovers at the company’s stores.
“In the last financial year, 7-Eleven had 11 per cent of our total store network changeover. On average 7-Eleven franchisees remain with the company for just over 7 years, which is a long period for operators of a 24/7 business, thus we regard as a reflection on the strength and attractiveness of our model,” the spokeswoman said.
The store is then sold to a new franchisee and 7-Eleven head office collects a further franchising fee.
In the wake of the wage scam scandal and criticism of the franchise model, 7-Eleven agreed to repay franchisee fees to any franchisee wanting to leave the network. It also agreed to almost triple the financial support offered to franchisees from $120,000 to $310,000.
The US arm of the company, 7-Eleven Inc, has recently faced accusations of deliberately “churning” franchisees in order to reap more fees.
Last year 1200 former 7-Eleven franchisees launched legal action against 7-Eleven Inc, alleging they had lost their franchises unfairly and were victims of the company’s churn policy.
7-Eleven Inc has not responded to inquiries regarding legal action against the company.
7-Eleven has been rocked by revelations the company’s head office in Australia has been complicit in a major cover-up of exploitation of workers at the chain’s stores.
A joint media investigation by Four Corners and BusinessDay revealed 69 per cent of stores reviewed in a four week period between July and August this year were not paying staff properly.
The investigation also uncovered evidence of the financial plight of over a third of 7-Eleven’s stores in Australia, forcing the company to extend income support to any stores that earn $310,000 or less a year in gross income – or a third of the company’s entire network of stores.
7-Eleven has also begun a company-funded investigation into the widespread exploitation of thousands of workers across the convenience store giant’s franchise network.
The investigation will be led by former ACCC chairman Allan Fels, who has strongly criticised 7-Eleven’s franchise model as encouraging wage fraud.
A class action against 7-Eleven Australia and its US parent 7-Eleven Inc is being prepared by Levitt Robinson Solicitors.
The internal documents on changeovers do not detail the reason why the franchisees left the business, though two of the four franchisees who have been subject to legal or regulatory action by Fair Work over the past seven years still operate 7-Eleven stores.
The other two store owners who have been subject to Fair Work action have left the network.
Levitt Robinson Solicitors principal Stewart Levitt said the store management agreement franchisees sign gave little protection to franchisees being “churned” by head office.
“They’re holding them [franchisees] essentially in a vice for the period of their tenure and therefore they are in a position to effectively dictate terms,” Mr Levitt said.
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Extracted in full from the Sydney Morning Herald.