Opinion The 7-Eleven convenience chain is reeling from accusations of exploitation of workers, particularly immigrant employees, and indications that its franchise business model may not be sustainable. The revelations about 7-Eleven’s under-payment of employees and the difficulties of some franchisees to achieve sustainable profitability is as much a crisis for the retail franchise sector as it is for the convenience chain itself. 7-Eleven has notched up a string of corporate awards over a nu
umber of years, including the Franchise Council of Australia’s 2012 award for the Established Franchisor of the Year and the Australian Retailers Association Visa 2011 Retailer of the Year.
7-Eleven CEO, Warren Wilmot, has also received a number of commendations as the convenience chain has expanded and has been one of the most respected spokespersons of the franchising sector.
Wilmot was elected as chairman of the board of directors of the Franchising Council of Australia last February, but this week has been forced to resign in the wake of the 7-Eleven debacle and is, in all probability, also facing an exit from the CEO’s office he has occupied since 2002.
Wilmot’s position as CEO of the convenience chain seems untenable given the damage to the brand by the adverse media coverage of the past fortnight, investigations by government agencies, legal action and a possible demand for a ‘please explain’ to a Senate committee hearing.
Indeed, notwithstanding the commitment of Russell Withers, as chairman of the 7-Eleven Stores, to recompense employees who have been underpaid and to address the plight of financially distressed franchisees, Withers could also be forced to relinquish his position.
The problem for Withers, Wilmot and other executives at 7-Eleven is that the current problems are hardly surprising, as the franchise network has previously faced accusations of under-payment of employees in stores and had been embroiled in disputes with franchisees.
While the company has won kudos for its acquisition of the Mobil fuel and convenience network in 2010, continuing aggressive expansion of its store network and the acquisition of the Starbucks coffee chain in Australia through a related entity owned by Withers, the 7-Eleven store network has been struggling.
7-Eleven, launched in Australia under license to the Southland Corporation in the United States by Withers in 1977, has been impacted by new competitors in recent years, as well as extended trading hours for supermarkets and the entry of Woolworths and Coles into the convenience store sector.
7-Eleven has revamped its store models and ranges, attempting to focus more on food and drinks for immediate consumption. But foot traffic and transaction value don’t appear to be high enough to ensure the profitability of stores in high rent, high exposure locations, an observation confirmed by reports that around one-third of the national store network are struggling to survive.
Franchising model flawed?
The 7-Eleven franchise model is at the heart of the furore over the underpayment of wages, with many franchisees apparently trying to eke out a profit in their stores by reducing labour costs.
While there are some successful and celebrated 7-Eleven franchisees, including some multi-site operators, many are struggling to earn a profit with the company’s business model dividing gross profits with 57 per cent to the franchisor and 43 per cent to the franchisee.
7-Eleven Stores is now facing a potential grilling by a Senate committee, as well as the Australian Competition and Consumer Commission, which is responsible for the franchising code of conduct.
However, the more immediate concerns of the company relate to legal action by franchisees and by the Fair Work Commission.
7-Eleven is attempting to limit the fallout from the wages furore by establishing a panel to examine complaints by franchisees and to address the underpayment of wages.
The company has indicated it is prepared to recompense out of pocket staff, and will also consider buying out some disaffected franchisees.
7-Eleven Stores, the franchisor, is not directly responsible for the payment of wages to staff employed in stores owned and operated by franchisees. But the Fair Work Commission contends that a franchisor does have responsibility to ensure its franchisees are complying with laws and wages awards.
As in this case, the agency claims that monitoring compliance would ensure that the franchisor was protected from reputational damage as much as any financial or legal liability.
In the current 7-Eleven investigations, the Fair Work Commission may in any event take action against the franchisor as well as franchisees, as there are allegations that the head office was aware of the underpayment of wages. This included the practice of requiring staff to work hours that were not included on shift records, effectively requiring staff to work for no pay.
A 7-Eleven source said last week that the franchisor knew from financial reporting to head office that wages records did not tally with staffing rosters – unless the franchisees themselves were working excessive hours and not claiming wages.
Media reports indicate that the 7-Eleven head office tried to cover up knowledge of the wages underpayments. Many of the employees in the 7-Eleven stores were students, often of Indian or Asian backgrounds and, in many instances, living in Australia on limited visas.
Natalie James, the Fair Work Ombudsman, said this week 7-Eleven had been on the agency’s radar for some years because stores were not complying with award wages and conditions.
In July 2009, the Fair Work Ombudsman required five 7-Eleven stores in Melbourne to reimburse 88 employees around $112,000, an intervention that should have ensured that 7-Eleven management took action to ensure compliance with award wages and conditions by franchisees.
An investigation in 2009-2010 by the Fair Work Ombudsman found one-third of 56 stores audited were non-compliant on staff wages, including penalty rate payments and leave entitlements.
The agency has subsequently launched further prosecutions, issued caution and compliance notices, and issued on the spot fines.
James said last week that while the Fair Work Ombudsman’s office is not an, “expert in the field of franchise models and financial viability”, its inquiries raised concerns about the 7-Eleven business model.
“We are exploring whether the model places significant pressure on a franchisee’s ability to meet statutory obligations, predominantly through a lack of cash flow,” she said. “In some cases, we suspect it is the reason franchisees have underpaid staff.
“In our experience, there are many different models of franchising. Many of the effective models, from our perspective, involve the franchisor providing significant infrastructure and robust processes for franchisees to assist with meeting their regulatory responsibilities and resolving issues when they arise.
“We are concerned to see repeated cases of underpayments being facilitated through the falsification of pay information to head office occurring in the 7-Eleven network.”
“Patterns of behaviour such as this do make us curious as to the role of Head Office,” James continued. “When franchisee businesses are not succeeding and that is impacting on the way they are treating their staff, it makes good business sense that 7-Eleven would try to understand why.
“Successful franchisees must mean successful franchisors. At this stage, we’re not convinced that the processes in place for the franchisees of 7-Eleven is facilitating compliance with workplace laws.”
Damage control
7-Eleven has been advised of the concerns of the regulatory agencies, but appears not to have taken any real action until the media furore in the past fortnight.
Senior Fair Work Ombudsman officials met with 7-Eleven’s Head Office in October last year, and again in May this year, to present the agency’s preliminary findings. Once a final report is completed with recommendations to improve compliance, the franchisor will be expected to provide updated reports on changes in its business practices.
In damage control mode, 7-Eleven Stores has agreed to co-operate with the regulator in its continuing investigations and in prosecutions. It is establishing an independent panel, chaired by former ACCC chairman, Professor Alan Fels, to receive and examine claims including underpayment of staff by franchisees and franchise agreement terms.
Wilmot said the panel will receive, review, and process any claim of underpayment, and authorise repayment where this is appropriate.
Wilmot said the viability of the 7-Eleven system is in no way, never has been and never will be, dependent on franchisees underpaying their staff.
“This doesn’t let off the hook any franchisees doing the wrong thing, because we will pursue them to repay any money owed to former or present staff,” Wilmot said.
7-Eleven sought input from the Fair Work Ombudsman on the establishment of the panel and Wilmot said the company will also work with the agency to, “weed out franchisees in our network who are not doing the right thing by their staff, and further tightening our audit and monitoring systems and processes in collaboration with FWO”.
Wilmot said 7-Eleven Stores was Australia’s most successful franchisor, with a national network of 620 stores based on a business model of mutuality, and built over nearly four decades.
He said the company disputes claims there is insufficient financial viability in a system that delivers, on average, net profit of $165,000 per store, and year-on-year growth of more than nine per cent.
However, the company has committed that any existing franchisee, who no longer wants to participate in the system, will have their franchise fee refunded by 7-Eleven Stores and help to sell any store where a goodwill payment has been made.
“What has happened, has happened on our watch, and we are a company with a proud heritage and a strong reputation,” Wilmot said. “We cannot allow the few to taint the achievements of the many.”