National Coalition of Associations of 7-Eleven Franchisees
RE: CFR Part 436 Via: E-mail FRANPR@ftc.gov
Attached information should become part of the Federal Trade Commission's record on franchising. (16 CFR Part 436). It shows unilateral changes to a system forced upon franchises by the multi-national owner of the U.S. 7-Eleven system. .
We would also like the FTC to know:
As part of any breach, mediation, or arbitration settlements, franchisees, in the 7-Eleven System, must sign confidentiality statements. Potential 7-Eleven franchisees are not told why they are rejected by Southland . . .
Southland does shares earning statements with potential franchisees, but during their sales process they inform potential buyers, not to put any faith in the numbers. We believe that all financial information supplied by the franchisor, during registration and the sale process, should be verified by the franchisor for both the buyer and FTC. Ito Yakado's takeover of the 7-Eleven System and his policies seriously affects previous earning statements. ( In essence he is creating a new system) Special information should be mandatory in such cases and disclosures of the effects of these changes must be reported to potential franchisees.
The Wall Street Journal
7-Eleven Operators Resist System to Mointer Managers
By Norihiko Shirouzu And John Bigness
Your neighborhood 7-Eleven store may soon feature a new Japanese export: a draconian system that allows the company to monitor store managers' every keystroke to-Yokado Co., the Japanese company that controls 7-Eleven , wants to ship its philosophy of strict discipline and control across the Pacific to the U.S. The computerized cash registers embody that discipline; the company also plans to impose a version of the "just-in-time" inventory control that helped cut costs in Japan's auto factories.
"We stopped learning from U.S. retailers long ago," says Toshifumi Suzuki, Ito-Yokado's 64-year-old chief executive. "Now we have the world's most advanced retailing system."
To understand just what may be in store for U.S. managers, consider the life of Michiharu Endo, who operates one of Japan's 6,875 7-Eleven stores. When Mr. Endo quit his job marketing office supplies three years ago to buy a 7-Eleven franchise in Tokyo, he looked forward to being his own boss
It didn't quite work out that way. Like every other 7- Eleven franchisee in Japan, he uses a "point-of-sale" computer that lets headquarters know every time he makes a sale. POS systems are used in the U.S., but what makes this one different is how 7-Eleven uses it to schedule Mr. Endo's activities.
Headquarters monitors how much time he spends using the analytical tools built into the cash register to track product sales. He is expected to spend his days poring over sales data, demographic trends and local weather forecasts graphed out on the computer screen.
Mr. Endo uses all this information to fine-tune orders to a daily deadline. The POS system is central to 7-Eleven just-in-time delivery of fresh food like sandwiches, box lunches, rice balls and deli dishes.Japanese outlets receive deliveries three times a day to ensure that there's just enough fresh food and none is wasted
But the system also imposes a strict regimen on Mr. Endo Headquarters ranks stores by how often their operators use the computer.Last year, Mr. Endo's store was accessing the computer to check on an average of about 600 products a week. That wasn't enough: An inspector from headquarters warned him "to shape up and use the computer more," he says "Sometimes I don't know who's really running the store," says Mr.Endo as his back-office computer beeps a high-pitched alarm that warns him that it's 15 minutes before the 10 a.m. deadline for ordering. "It's like being under 24-hour surveillance; it's like being enslaved."
Mr. Suzuki, a onetime labor-union leader who imported the 7-Eleven name and concept to Japan in the 1970s, argues that such discipline has helped him double sales for an average 7-Eleven in Japan over two decades and dramatically cut inventory costs. The average Japanese store turns over its inventory once every seven days, down from 25 days in the 1970s. The chain is growing and as of February had 6,875 stores in Japan
The U.S. chain, meanwhile, has dwindled to 5,422 stores, including 455 outlets in Canada, from a 1987 peak of 7,818. Ito-Yokado has owned a 64% stake in the U.S. owner of the 7-Eleven franchise, Dallas-based Southland Corp., since 1991. For several years, Japanese computer specialists have been traveling to the U.S. and working with their counterparts at Southland to come up with a system for the U.S. market.American 7-Eleven stores, if run the Japanese way, would easily double daily sales, an Ito-Yokado executive says
But in America, the notion has run into resistance from the start. Last year some 300 stores in Oregon and New Jersey received a version of the system in preparation for a planned franchise-wide installation. Already, some U.S. operators are complaining, and rhetoric is running high on both sides. Ted Poggi, owner of a 7- Eleven store in Newark, N.J., and chairman of the National Coalition of Associations of 7- Eleven Franchisees, says the system goes against American workers' desire for independence, and talks of a deep "philosophical difference" between America and Japan
Many U.S. franchisees feel that veteran managers know from experience how to stock their shelves and make alternations for changes in the weather or special events like a local basketball tournament. Some feel that the Japanese system links orders too tightly to current sales, and fear they could be criticized for stocking things like candles, which may not show any sales for months and then sell out in a weather emergency. Indeed, Japanese managers generally stock only goods on a list of a few thousand approved items. Others question whether U.S. vendors can accommodate the just-in-time delivery system.
And franchisees complain that the adapted computer system, made simpler for its introduction to U.S. clerks, is too slow. To ring up a customer buying a pack of cigarettes, a six-pack of beer and a pair of pantyhose, for example, the clerk has to go through three menus on a touch-screen terminal. Mr. Poggi, the New Jersey franchisee, has been using his own computer system to track inventory for several years and finds 7-Eleven's system primitive.
"It's far from state-of-the-art," he says.
Ito-Yokado and Southland say they don't know of any formal protests from American franchisees. But some executives in Tokyo say privately that they are concerned about a small group of "militant radicals" among the franchisees that oppose Mr. Suzuki's plans.
Still, there are U.S. franchisees who welcome the rigorous system, says Southland's chief financial officer, Jim Keyes. After starting to count each item in their stores, a number of operators learned that about 1,200 items -- 40% of the products a store typically carries -- had sales of less than one unit a month
But even Mr. Keyes argues that not all of Mr. Suzuki's system will translate.
U.S. franchisees don't have to worry as much as Japanese counterparts do about slow-moving products, Mr. Keyes says, because their stores are much bigger and thus can tolerate a greater margin of error in their selection of products.
Mr. Suzuki is quick to respond to Mr. Keyes' explanation: Southland, Mr. Suzuki says, has let a culture of dependence spread among its franchisees.
"They think it's the corporation's job to find hot-selling products and take care of distribution and inventory," he says. "They just want to sit behind the cash register."
In any case, says Mr. Suzuki, "American 7-Elevens don't have a choice: It's either adopt our plans or die."--
Letter to Capital Hill
I have enclosed a copy of an article that appeared in the Wall Street Journal on June 16, 1997. The article is entitled "7-Eleven Operators Resist New System to Monitor Managers". Ito Yokado Holding Company (IYG) and it's CEO, Toshifumi Suzuki, own and operate the 7-Eleven stores in the United States.
It is obvious from the enclosed article that Mr. Suzuki does not value either the American system or the American work ethic. At 7-Eleven U.S., he is attempting to institute a systematic plan that violates the American free market system. He is forcing U.S. stores into franchisor mandated pricing. His indifference toward the American small business owner only underscores his disregard for independent American 7-Eleven Franchisees. He is determined to do things his way even though his way infringes on the legal and constitutional rights of the American small business Franchisee and exterminates their entrepreneurial spirit. His way will drive many hard working American small business Franchisees out of business because his way is to force them to "adopt his plans or die."
On countless occasions, America's small business Franchisees have asked both Houses of Congress to enact Federal Franchise Oversight Legislation. We invested in the American Dream and are now living through a cultural nightmare. 7-Eleven was once a family-owned company. Never did we imagine that during the term of our agreements we would ultimately be owned by a multi-national corporation. Never did we imagine that foreign ownership would attempt to transplant their business philosophy in direct opposition to the American system we believed we had purchased. Just think how this would have played out in Japan if an American company had attempted to force the Japanese to adopt American philosophies or die.
At the White House Conference on Small Business in 1995, we brought the franchise issues in front of the small business community and our federal legislators. It was placed among the top 60 small business issues for Congress and the President to act upon. We asked our government to assure that American business people are not stripped of the right of independent sourcing and free pricing. We asked that the basic rights enjoyed by every other small business owner in the U.S be extended to Franchisees. We asked that a "basic" floor be established beneath which the franchisor/Franchisee relationship could not sink. Now, more than ever before, American Franchisees cry out desperately for our government to give attention to these critical issues.
Please support the American Franchisee Association (AFA) Model Responsible Franchise Practices Act. For more information please contact the AFA at 312-431-1467 and protect your American Franchisees from the foreign business tactics of multi-national franchisors.
July 18, 1997
Mr. Toshifumi Suzuki
At the request of our Board of Directors, and on behalf of the 2,000 members of the National Coalition of Associations of 7-Eleven Franchisees, I am writing this letter. We are shocked and dismayed by atements you made which appeared in the Wall Street Journal on June 16, 1997. The article was entitled "7-Eleven Operators Resist New System to Monitor Managers". Your apparent disregard for U.S. retailers in general, and your warnings to American 7-Eleven Franchisees in particular, have caused great concern and anger. Your failure to appreciate the value of American Franchisees, our independent status under contract and by law, and our entrepreneurial spirit is indeed alarming.
You are to be commended on your success in developing a convenience store concept in your country which is tailored to the needs of the Japanese customer. Early on, you had the foresight to realize that the American 7-Eleven concept didn't fit the customer base of Japan. Now, in a reversal of that business philosophy, you are attempting to force fit your Japanese concepts into the American market. Just imagine how successful you would have been with 7-Eleven Japan had Southland insisted that you strictly adhere to the American system without allowing for your better understanding of how things were done in your country. It is upsetting that you don't value or solicit the input of your American Franchisees. If you did, you would find us to be hard working, knowledgeable, concerned and dedicated to our stores. In short, a very valuable asset.
Over the years, most of the innovations that have occurred at 7-Eleven have been inspired, developed and nurtured by American Franchisees, often over the objections of Southland management. The development of refill programs, fresh bakery programs, trading card displays, new item end caps and seasonal displays have been projects promoted by Franchisees. Programs like fresh coffee, fountain drinks and hot dogs, even the simple act of bringing daily newspapers into the stores, were Franchisee driven. These all came in response to our customers telling us what they wanted and our attempts to fill their needs.
Your perception of Franchisee dependence on the corporation is totally inaccurate. Southland's New Item Process is so far behind actual Franchisee introduction of new items that it is essentially useless. We rely upon vendor introduction and customer request of new items because they are months ahead of Southland. Manufacturers are advertising their new items, we are reading about them in the trade publications, and our customers are requesting them long before they appear in an NPI packet.The New Item Introduction Sheets are regularly thrown out by most Franchisees, often without even being read, because they are most often old news.
You further state that we are dependent upon the corporation for inventory and distribution. The corporation forces our dependence on their inventory mix by constantly monitoring in-stock levels on corporately defined "core items", in spite of the fact that much of "core" is simply not what our customers want to buy. More often than not a "new item" that is not being heavily ordered by Franchisees will appear on the "core item" list simply to insure that we will purchase it. If a customer doesn't want to buy it, or if its "new" to the marketplace, Franchisees know that it doesn't fit the definition of "core" - something every customer expects to find in every 7-Eleven store. Also you state that we are dependent upon the corporation for
distribution. Reality is that we are forced to accept the CDC's as a distribution system as well as being pressured to purchase from McLane Company. That dependence you seem to denigrate us for has come about as a result of our franchisor's insistence that control of Franchisees is more important than responding to customer demand.
Southland Marketing is inept at best. Over the past few months, they have promoted phone cards, balloting for the All-Star Baseball team, and omelet sausage dogs. CDC's and Commissaries are not being embraced by Franchisees because the products are not embraced by our customers. We have wasted four years on an unprofitable venture, alienating customers with products they don't want and brands they don't recognize; all in the name of leveraging Southland's buying power. Franchisees pay 52% of the gross profits of our stores for a system that should provide a degree of expertise far above what we are now receiving. We are not dependent on the Corporation; however, we fully and rightfully expect them to play a part in building the profitability of their stores.
Franchisees do not simply sit behind the courter ringing sales. We are active in our communities, religious and business organizations; we enjoy operating our businesses and interacting with our customers; we are parents and grandparents attempting to raise our families and live the American Dream. We are constantly aware of what our competitiors are doing and consistently listen to and solicit customer feedback. Many of us have worked through personal hardships, in dangerous situations, to keep the lights on and the cash registers ringing. We have built the trademark through hurricanes, floods, earthquakes, snow and ice storms, and tornadoes. We have invested and reinvested not only our money, but our time and our passion to make 7-Eleven the number one convenience store in the world.
We are most surprised by the statements expressing a lack of knowledge of any "formal protest" among U.S. Franchisees. We had hoped your Japanese ISDP program would be more sensitive than its American counterpart. ISDP as implemented here is a system of driven down/filtered up communications. ISDP - which we define as Isolate, Separate, Divide and Polarize has done more to hurt the system than to provide any benefit. We had heard that communication and problem resolution were priority issues in Japan. If that is the case, that expertise needs to be put to work here.
There are no "militant radicals" here to fear. We are just Franchisees very aware of our questionable futures who think logically and realistically about our stores. We are Franchisees who expect a return on our investment. American Franchisees are tired of being manipulated nd coerced into accepting unprofitable programs and making bad business decisions in order to be considered for renewal or "for the good of the team". We do have a choice, and we are fully prepared to defend our right to choose and protect our valued independence.
Franchisees recently received a copy of your July 9, 1997, letter to Clark Matthews which attempts to explain the message you were attempting to communicate during your interview with the Wall Street Journal. That letter only "sets the record straight" with Mr. Matthews. Franchisees remain unconvinced. If, as you and Mr. Matthews claim, the statements in the June 16, 1997, Wall Street Journal are inaccurate, we expect an apology and an explanation directly from you. It is not Clark Matthews who made those statements, it is Toshifumi Suzuki.