Eli Greenblat, 01 February 2016

When convenience store chain 7-Eleven attempted to win over ­coffee-obsessed Australians with its do-it-yourself $1 coffee five years ago, Michael Smith was among many inside the retailer’s headquarters who thought it was a bad idea. This year 7-Eleven is on target to sell 40 million cups of coffee.

“Look, I thought it was a bad idea, so I was famous in here for saying ‘I don’t think it will work’. I wasn’t sure it would grip (with customers), so how wrong can you be?,” jokes Smith, whose bad call on coffee, however, wasn’t enough to block his rise to the top of 7-Eleven.

“I’m amazed they made me chairman with a bad judgment like that because it’s been a phenomenal success,” Smith says.

“I just wasn’t sure it would ­attract the type of numbers for the size of the discount, so I knew we were selling a cup of coffee, which if you look at it in the market is worth more, and so I thought you are providing this enormous ­discount on a good product that just didn’t seem very smart to me.

“But the customers love it in numbers that I didn’t anticipate, now I’m really proud of it and can see how wrong I was.”

Importantly for 7-Eleven, it highlighted its ability to offer the cheapest price in the market just at a time when the supermarket giants, Woolworths and Coles, were beating each other over the head to have the lowest prices on key grocery lines, which made 7-Eleven’s prices on items such as bread and milk look drastically overpriced.

While the corner milk bar is in its death throes, 7-Eleven has held its ground. For now.

But for all its business success, 7-Eleven had a much bigger battle on its hand last year when it was the source of scandal and its reputation was shredded.

What first started as a series of allegations of underpaying and exploiting its largely immigrant workforce, exploded into much worse as it became clear workers at a large slab of its 600 7-Eleven stores were being rorted, sometimes paid 50 per cent of the legal wage and even threatened by franchisee store owners with having their visas cancelled if they complained to the authorities.

It marked the worst scandal to hit 7-Eleven since it arrived in Australia nearly 40 years ago, and eventually led to major shareholder and billionaire businessman Russ Withers resigning as chairman. His exit was followed by that of CEO Warren Wilmot.

Smith is part of the new regime that is pledging to clean up its business and labour practices. But with Withers, his sister Beverley Barlow and their families still the owners of the 7-Eleven chain, the new chairman is still ultimately answerable to the Withers family, who he has known for more than 20 years.

“We have huge regret and embarrassment over what has ­happened and we are very apologetic about that; we have suffered a huge consequence of that and we are going to be absolutely ­certain it doesn’t happen again,” says Smith who is also a former chairman of iiNet and the West Coast Eagles.

For Smith it means a complete promised overhaul of its payroll system and the way it communicates with its franchisees, and ­especially the way the 7-Eleven head office will enforce new governance guidelines to its 600-plus stores.

“Our values are very much that the underpayment of wages has no part in our business.

“In the past I think there was too much acceptance that. So I guess from me and my board and reflecting on what shareholders absolutely insist on is that the ­underpayment of wages can’t happen again.

“We have to be an exemplar of how to do this really well.”

For the 7-Eleven franchisees there will be a mix of carrot and stick to bring them up to best practice in terms of the treatment of their workers.

“We have now struck a new ­arrangement with (franchisees) that gives them a significant ­financial benefit that they will not only commit to meet the standard but also use our payroll system and accept the consequences of not paying wages, which ultimately after persistent failure will be termination, and that’s a huge cost, that is taking someone’s business off them.”

Smith claims last year’s scandal it didn’t dent sales at individual 7-Eleven stores, but the message has been head loud and clear at 7-Eleven’s corporate headquarters that this type of bad corporate behaviour won’t be put up with.

“It didn’t have a significant ­effect on sales, it feels brittle, and we are a couple of per cent off, but, by and large, the business has held up but we do have sense of skating on thin ice and that our customers are expecting us to fix this issue and if we don’t then I don’t expect we will continue to enjoy their support.”

As 7-Eleven finds its way through the tougher retail environment, Smith believes 7-Eleven can win on its convenience offer by improving in particular its fresh produce as well as ready-made meals. There is also store growth on the cards, with 7-Eleven ramping up its initial expansion in WA with a footprint of about 50 stores viable.

“I don’t think there is much doubt that there will be at least 1000 7-Elevens in Australia eventually.’’

Extracted in full from The Australian.