7 minute read
Forty Is The New 35
40 IS THE NEW 35
BY ARFAN “ART” FAROOQI
Advertisement
BOARD MEMBER, CENTRAL FLORIDA FOA
Our industry has always been a bell ringer for the “average Joe”—the first businesses to respond to the needs of our community, and the quickest to set the trends in retail. As such, our enterprises need to have the financial strength and dexterity to maintain our business operations. This means we have to make a profit above and beyond the expenses and costs. As change is inevitable, we are in a crisis of a different kind—we are in a labor shortage tsunami. The available human capital supply for retail industry is shrinking. True to the laws of supply and demand, when a resource becomes scarce, the cost goes up.
Our industry, and particularly our 7-Eleven franchises, are asking so much cerebral work from our staff on a daily basis. We have become the universal store for all needs. Do you need fuel? We got you. Do you need a money order at 2:30 a.m.? Come on in! Forgot to go grocery shopping for breakfast? Stop in and grab milk, eggs, bread, and cereal. Need to load your prepaid debit card? We handle those, as well. Plus, while you are here grab a large freshly made pizza and some chicken wings! All this convenience for the customer comes at the expense of the labor to operate a 24/7/365 business.
As an industry leader, 7-Eleven has some of the highest gross margins around. However, due to our unique gross profit split model, most franchised stores do not have the supersized bottom line to match. In 2019, our average store gross profit percentage across the nation was about 35 percent. Even though we have had great sales growth as the economy recovers from the COVID-19 pandemic, our bottom lines are shrinking as expenses slowly increase and more costs are shifted towards the franchisee side of the ledger. Add to this the reduced share of the profit split afforded to us by the 2019 franchise agreement, and it is easy math to see how all this has eroded the vast majorities of franchisees’ net income.
Our pain is still increasing with no relief in sight. The tight labor market has pushed the large employers like Amazon, Walmart, and Costco to increase their starting pay as high as $32 per hour, plus add in signing bonuses and it is easy to see the reason why we have reduced number of applicants willing to take a complex job like a 7-Eleven Sales Associate at the limited pay we are able to offer. In my area of Florida, even McDonald’s has increased their starting pay to $14.50 per hour, and some hard-pressed locations are also offering $200 signing bonuses. A few months ago, one McDonald’s franchise owner group was offering $50 just to show up for an interview! The point is, we have a tough road ahead.
So, what is the solution? Increased automation? Change the terms of the 7-Eleven franchise agreement? Or simply exit the business? All these choices are good places to search for answers, but the truth is we are years away from the type of technology needed to automate most of the retail c-store operation. Changing the terms of the 7-Eleven franchise agreement is also a long and wishful journey. Exiting is an option; many older store operators have decided to do this and are selling when lucky or simply handing back the keys to 7-Eleven and walking away with nothing.
But there is another solution: we could increase our gross margins to cover the increasing costs and expenses. Yes, we have to talk about this subject. I know, you don’t want to lose sales and customer counts. I get it. However, hear me out ...
Everyone is aiming for our customers, and I mean the customer that wants convenience. Dollar stores are adding beer and tobacco to their offerings, grocery chains are marketing “quick checkout” in every ad, and Amazon is advertising delivery in as little as one hour. Even the pizza guy now sells you a 2-liter soda with your pie. However, instead of losing sales to these competitors, 7-Eleven has had record same store sales growth. We are the market leaders in convenience. Our stores have the loyalty of so many customers because we are so focused on the guest experience, and we are in our stores daily to make them better. We need to harness this part of our business and charge enough to cover the needs of the store—we have to raise prices, slowly, to get us from the 35 percent range to above 40 percent. After all, our suppliers raise their prices all the time. In 2020 alone there were 9 to 11 cigarette and tobacco price changes. If Altria and RJR can increase their prices to protect their margins,
why should we average only a 10 percent category margin?
There are many factors to consider when planning an increase in prices: Rule #1: Do it slowly. Do not raise the price more than 10 percent at any one time. However, 5 percent on most items would be best. Then watch the customer adjust to this increase for 30 days, give or take. Then add an additional few cents per item as needed to get the total category margin above the gross profit percentage desired. You should not expect a dramatic change in total store gross profit percentage. Your margin will increase over the course of several months as you change and manage each category to slowly improve your store’s rolling 12-month total profit margin. Rule #2: Try to reduce cost whenever possible. If you need to stock up on a popular item such as imported beer, investigate the (QD) discounts available from your beer wholesaler. Sometimes simply adding 2 to 3 weeks of inventory can save you up to a $3 discount per case. If you can buy a shipper of candy and get an 8 to 12 percent discount, do it!. All these small “coupons” add up to the increases needed to add the required category GP growth. Rule #3: Understand the way GP is calculated in the 7-Eleven Retail Inventory Method. Your month’s GP is calculated when you purchase the inventory, not when you sell it. Yes (you are not alone in your confusion), your GP is added and calculated when you purchase and add the item on your book inventory for that month. If you purchase high GP items, you will have a high GP for the month, whether or not you sell those items that month. Yes, I know you need to re-read that last sentence to understand it. Go ahead, I will wait for you to catch up. The current month’s GP calculation that is shown on the DMR is a reflection of that month’s GP from purchases, NOT items sold to date. Rule #4: Push the discount promos and raise the single item price. In the vault there are several promos during the summer that are standard seasonal promotions, like Gatorade, Nestle 1-liter water, or Red Bull 12oz. All these items are sold roughly 70 percent on promo and 30 percent single. If you increase the price of the single item 10 percent but maintain the promo offer, you will increase the pool GP in your item about 2.5 percent. (This is an example not taking into account any rebates, billbacks or scanbacks.)
To get to the magic realm of 40 percent+ GP, this type of strategy will be necessary to be undertaken in each category.
If we want to be able to recruit, train, and employ enough staff to maintain the high standards of our brand, we have to compete for those labor resources by offering competitive pay and benefits. The only option available to us to achieve this is the control we have over our retail prices. We have to start thinking that 40 percent is the new 35 percent.
CAN BE REACHED AT 813-786-1895 or
dhsenergysales@gmail.com
Avanti Is Your Magazine
Avanti Magazine was created in 1981 by franchisees, for franchisees. It represents your voice within the 7-Eleven universe and requires your participation to remain relevant to the ideas, information, and knowledge floating about the franchisee community. You can contribute to the success of Avanti Magazine by submitting any of the following:
> Articles on any 7-Eleven topic that may be of interest to other franchisees. > Your FOA events and Board meeting calendars. > FOA event photos with a short description (who, what, where, when, and why). > Store or community event photos with captions. > Any combination of the above.
