7-Eleven Takes Big Gulp Out Of American Dream
LOS ANGELES — For South Asian immigrants to the United States, owning a 7-Eleven convenience store franchise has traditionally been a passport to the American dream.
The startup costs for a 7-Eleven franchise are low compared to fast-food and motel franchises — as little as $50,000. In a departure from the usual franchising model, the franchisor, 7-Eleven Inc., bears the expense of land, building and store equipment and also charges royalties based on the store’s gross profit, rather than a percentage of sales.
Last year, the National Minority Franchising Initiative included 7-Eleven in its annual list of the Top 50 Franchises for Minorities, commending its “exceptional record” of minority representation. Of the company’s franchise stores, the survey noted, 57 percent were minority-operated.
Just as the dry-cleaning industry is largely controlled by Korean-Americans, immigrants from India, Pakistan, Bangladesh and Sri Lanka have gravitated toward 7-Eleven, said Jas Dhillon, the owner of 7-Eleven franchises in the Los Angeles-area communities of Porter Ranch and Pacoima.
“It’s proven to be a success,” he told MintPress News in an interview.
But in a lawsuit filed earlier this month in federal court, a 7-Eleven franchisee group and five individual franchisees, including Dhillon, paint a very different picture, accusing Dallas-based 7-Eleven Inc., which is now owned by a Japanese corporation, of “an aggressive and discriminatory campaign” against South Asian franchisees.
“[A] foreign corporation has been allowed to transform the American Dream into an American Nightmare for countless individuals and families,” the Franchise Owners Association of Greater Los Angeles and its co-plaintiffs allege.
The suit says 7-Eleven management, at the behest of Japan’s Seven & I Holdings Co., has harassed and intimidated franchisees and falsely accused them of wrongdoing “as part of a larger corporate effort to terminate their successful franchise stores and take the stores back at no cost. 7-Eleven then ‘churns’ or re-sells the stores, realizing a windfall profit [from] new franchisees.”
South Asians have been targeted, the plaintiffs say, because of “cultural vulnerabilities” including deference to authority and fear of being shamed if allegations of impropriety become public. In a separate case, Dilip and Saroj Patel, an elderly couple who owned a franchise in Riverside, California, allege they signed away their store in December 2013 after being subjected to an eight-hour interrogation by 7-Eleven “asset protection” investigators.
“We’re trained to serve a master and take the road of least resistance,” said Dhillon, citing India’s history as a British colony.
Seven-Eleven has denied any misconduct, saying franchisees have been stripped of stores for shorting the company on royalties, often by falsifying sales records.
“Good, hardworking, independent franchisees are the backbone of the 7-Eleven brand,” the company told the Los Angeles Times in a statement. “As to those few franchisees who violate the law or the franchise agreement, we are determined to protect our guests, employees and other franchisees by ending the relationship.”
But the Franchise Owners Association’s evidence includes a court declaration in which Kurt McCord, a former corporate investigations supervisor for 7-Eleven, said the company had adopted an aggressive churning strategy to generate profits and had exploited cultural sensitivities as an investigation tactic.
“Although being accused of theft in the Anglo culture is shameful, it is not nearly as taboo as it is in the Indian culture,” McCord noted in the declaration.
Franchising has been a key engine of the growth of 7-Eleven, which was founded in 1927 when an employee of the Southland Ice Co. in Dallas began selling milk, bread and eggs in addition to ice blocks. The company began selling franchises in 1964 and, of the more than 7,800 stores that now carry its name in the U.S., about 80 percent are franchised.
Entrepreneur magazine ranked 7-Eleven No. 6 in its 2014 list of the top 500 franchises. Startup costs for franchisees, the magazine reported, range from $50,000 to $1.6 million — compared to $1 million to $2.3 million for a McDonald’s and $1.25 million to $2.53 million for a KFC restaurant.
Seven-Eleven takes a cut of about 52 percent of the gross profit of a typical store. The net income for a store without gas and with annual sales of between $900,000 and $2 million would be between $30,000 and $120,000, the trade publication Convenience Store News has estimated.
While 7-Eleven does not break down the ethnicity of its franchisees, the Franchise Owners Association says in its lawsuit that the “cultural traits of hard work, family unity, respect for authority, and community-mindedness” have made South Asians “ideal owner/operators for 7-Eleven stores.”
Among those to take advantage of the opportunity was Dhillon, a native of India who began working in his parents’ 7-Eleven store as a child in 1976 and eventually took it over. In Riverside, the Patels opened their store in 1995, turning it into a neighborhood institution by giving away free merchandise including Slurpees to students at the local elementary school.
“Historically, the South Asian franchisee contingent has been an important facet of 7-Eleven’s [business] model,” Louis Tambaro, an attorney for the Franchise Owners Association, told MintPress.
A new 7-Eleven now opens every two hours somewhere in the world. Seven & I is aiming to reach 10,000 stores in North America by the end of 2015, with growth centred in urban areas of such states as New York, New Jersey and California, and CEO Toshifumi Suzuki has said the number could ultimately increase to almost 30,000.
“Our U.S. business has entered the growth stage,” he told Bloomberg last year.
But Dhillon and other franchisees say the growth strategy is being implemented in the U.S. by executives who have a “cold, predatory and militaristic approach to business” and have sanctioned the use of hardball tactics to pressure franchisees to give up their stores.
Over the past two years, at least a dozen South Asian franchisees, including the Patels, have sued 7-Eleven, alleging they were wrongfully stripped of their livelihoods.
“I still love the brand,” Dhillon, who is a vice president of the Franchise Owners Association, said. “The problem I have is with management.”
The Patels’ problem began on the morning of Dec. 5, when they showed up for a meeting at 7-Eleven’s regional office. According to their lawsuit, they were taken to a small conference room where two asset protection staffers, Kevin New and Steve Kellison, accused them of fraud involving excessive redemption of Slurpee coupons.
Over the several next hours, the suit says, the investigators “used coercive and ‘storm trooper’ interrogation and isolation tactics to illegally coerce Plaintiffs to agree to terminate their Store Franchise Agreement,” telling the Patels that if they did not let go of the store, including their equity, 7-Eleven would sue them for $250,000.
If they were sued, Kellison allegedly said, “the Patels would be publicly embarrassed, especially in the Indian community.” The couple say they were also told the IRS would likely hear about the suit and that they “could face imprisonment.”
To end the “ordeal,” avoid litigation and save his distraught wife from a possible diabetic episode, the suit says, Dilip Patel eventually signed paperwork giving up the store.
According to former investigator McCord, what allegedly happened to the Patels is part of 7-Eleven’s effort to turn its asset protection unit — which traditionally focused on mitigating store losses from theft and fraud — into a “productive work center” that generates profits by “taking back” high-performing stores.
Franchise fees realized by 7-Eleven “for stores improperly taken back during the past several years [are] estimated to be in the tens of millions of dollars,” McCord stated in his declaration. He also testified that in September 2013, the head of the asset protection unit set a take-back quota of 120 stores for 2014. With franchise fees running at about $150,000, that would translate into revenue of $18 million.
Tambaro, the attorney for the Franchise Owners Association, believes it’s no coincidence that South Asians “are now disproportionately reporting hyper-aggressive tactics and termination efforts.”
“These franchisees are perceived as vulnerable to threats of criminal sanction and, in some cases, deportation,” he said.
In a court declaration, Brett Boyle, a professor of marketing at Saint Louis University, said ethnic groups from South Asian cultures are “particularly vulnerable to exploitation. Because of their deference to authority … even a franchisor’s false accusations of impropriety many times will go unchallenged.”
The Patels, who say their business was worth at least $450,000, are seeking the return of their store and damages. The Franchise Owners Association, meanwhile, has requested a court order declaring, among other things, that 7-Eleven has violated federal civil rights law and California’s franchising statute.
A declaration of wrongdoing by a court “will open the door for individually affected franchisees to bring their personal claims for monetary damages — likely in arbitration — in the future,” Tambaro explained.
For his part, Dhillon told MintPress that he doesn’t want any money from 7-Eleven. “All I want 7-Eleven to do,” he said, “is respect its franchisees.”
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