DALLAS -- 7-Eleven Inc., as reported last week by GlobeSt.com, is accelerating its plan to grow its number of convenience stores in North Texas by targeting existing independent stores and rebranding them. Its goal is to add 20 Dallas-Fort Worth area stores by yearend, and another 35 stores next year, bringing its North Texas total to 300 by the end of 2009, said James Massey, the 7-Eleven real estate manager for the district that includes the Metroplex. During the next 18 months, the company expects half of its new stores to come from conversions, as opposed to ground-up construction or acquisitions, [image-nocss] he said.
Slowing retail sales and thinning profit margins on gasoline are giving 7-Eleven an entree with existing c-store owners who are willing to consider a new approach, said Massey, adding, "We look at this lull in the market as an opportunity for us."
Eroding profit margins on gasoline because of credit-card interchange fees were a major factor in Alan and Rick Golman's decision to convert their Beverage City c-store in Plano, Texas, reported The Dallas Business Journal. "With fuel being so volatile and the margins on credit cards being so small, we felt like we needed to have a better offering inside our store to draw customers in to buy product," he said. "That's where 7-Eleven is the industry leader."
7-Eleven worked with the Golmans to capitalize on Beverage City's specialty—its selection of fine wines, Alan Golman said. More than a third of the 4,100-square-foot store continues to be devoted to the approximately 1,000 different types of wine it carries, he said. "The goal was really to keep our wine customers, but also have the offerings that 7-Eleven provides, like Slurpees, the food items and the fountain drinks," he told the newspaper.
The conversion took five weeks, and the store opened as a 7-Eleven on July 3. The Beverage City store was the seventh in the Dallas-Fort Worth area to be switched since 7-Eleven rolled out its business conversion program last year, Massey said. Five more Metroplex switchovers are in progress, and 61 outlets have been converted to 7-Elevens nationwide, he said.
For about $25,000, existing store owners get a $250,000 property makeover, plus 7-Eleven technology, equipment and proprietary products such as Slurpees and Big Gulp-branded drinks. By comparison, the average upfront cost for a traditional 7-Eleven franchise is about $151,000, according to information provided by the company cited by the Business Journal.
Under the Business Conversion Program (BCP), the existing convenience store operator continues to own or lease the store site after it is transformed into a 7-Eleven, said the report. Franchisees in the business conversion program also pay lower gross-profit royalties to 7-Eleven because of the contribution of the store's location. Conversion franchisees pay the company 16% of gross profits the first year, 21% the second and 23% after year two. In most cases, traditional franchisees pay royalties of about 50% of the store's gross profit (total sales receipts less the wholesale cost of store merchandise).
"We share gross profits, so we make money the same way [franchisees] make money," Massey said. "Our interests are aligned. We invest, we work together and we share in the value that we work with the franchisee to create."
Existing store owners benefit from 7-Eleven's brand recognition, advertising, training, technology, inventory management support and business counseling, Massey said. 7-Eleven's signature food products, drinks and promotions—such as one last summer that coincided with the release of The Simpsons Movie—give store operators ways to differentiate themselves from other c-stores, he said. Field consultants visit the stores twice a week to analyze sales, inspect cleanliness and offer tips for effective merchandising, he said.
Rebranding existing stores gives 7-Eleven outlets economies of scale in purchasing, advertising and product delivery that come from having numerous stores in an area, Massey said. Costs to open a c-store vary widely, but the company typically spends $1.5 million to more than $2 million on new stores, depending on land expenses and whether the store will sell gasoline, he said. That compares to about $250,000 that 7-Eleven spends to convert a store.
The BCP is an unusual and aggressive growth strategy at a time when many U.S. retailers are cutting back, Margaret Chabris, 7-Eleven marketing director, told the paper. It's important that the location and the existing store owner be a good match for 7-Eleven, she said.
"The store operator needs to be familiar with what's good for their community," she said. "They have to embrace new technology...and be really, really focused on satisfying the customer."
Converting existing stores has been an uncommon practice in the United States, but it has been the primary means of growth in Japan for 7-Eleven's parent company, Seven & i Holdings Co. Ltd., Massey said. The Tokyo-based conglomerate acquired 7-Eleven Inc. and took it private in 2005.
C-store industry sales hit a new high of $577.4 billion in 2007, but profits fell 41% to $3.4 billion, largely because of higher credit-card fees, according to data cited by the paper compiled by the National Association of Convenience Stores (NACS). Credit-card fees paid by convenience stores jumped by $1 billion, or 15%, to reach $7.6 billion.
Also, alternative gasoline retailers, including supercenters and supermarkets, are eroding the c-store industry's gasoline shopper base, according to the report, citing a survey by TNS Retail Forward. The survey indicated that a third of shoppers are buying most of their gasoline at alternative outlets, up from 22% three years ago.
"It is a very tough time for those in the [c-store] industry right now," NACS spokesperson Jeff Lenard told the paper. "One advantage for 7-Eleven is they don't rely heavily on fuel, and [inside sales] is where the growth of the industry is."
C-stores also stand to be hard hit by shopping shifts related to the national economic downturn, Jennifer Halterman, senior consultant at Retail Forward, told the paper. About 34% of shoppers surveyed say they plan to shop less at c-stores, while only 2% plan to shop c-stores more, according to a May survey cited by the Business Journal. "With high gas prices, shoppers are trying to consolidate their shopping trips so they're running around less," she said.
C-stores need to reduce reliance on gasoline sales and focus efforts inside their stores, like 7-Eleven is doing, Halterman said. Unique products, innovative marketing and a strong emphasis on customer service and convenience are crucial to attracting and keeping shoppers and increasing profitability, she said.
Some of the industry's negative trends work in favor of 7-Eleven's growth plans by giving independent store operators more reasons to convert to a widely recognized brand and have the c-store giant's resources readily available, Massey said. "We have had sales increases during hard times in the past, and we believe in our model," he told the paper. "The bar is raising. You have to raise with it. Otherwise your customers are going to slowly leave you."
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