Explain the major issues associated with managing a franchise-based business

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1 Managing a franchise-based business This Case Study investigates how 7-Eleven Australia manages a franchised-based business. It examines how 7-Eleven Australia has successfully implemented a long-term strategic plan to improve operations and how it uses market research, ICT systems and other strategies to improve operational performance. By reading this Case Study students should be able to: Explain the major issues associated with managing a franchise-based business Describe the strategies implemented by 7-Eleven Australia to improve operational performance Evaluate the success of these strategies in relation to competitive forces within the retail convenience market sector. Introduction 7-Eleven is the world's largest operator of convenience stores with more than 35,000 franchised and licensed stores in 17 countries generating annual sales exceeding $36 billion. 7-Eleven Stores Pty Ltd is a wholly Australian-owned family business operating as the independent licensee of 7-Eleven in Australia. Since opening the first store in 1977 in Oakleigh, Victoria, 7-Eleven has expanded to more than 360 stores in Victoria, NSW and Queensland. 7-Eleven Australia services almost 100 million customers annually with sales approaching $1.5 billion. Franchising is a major form of business ownership in Australia. According to the Australian Bureau of Statistics, just over five percent of all businesses in Australia are involved in a franchising agreement. The Franchise Council of Australia lists almost 1,200 registered franchises and ten percent of all medium sized business in Australian (those employing ) are part of a franchise. 7-Eleven was the first franchised convenience store in Australia and has built up a formidable and culturally diverse team of franchisees. Franchisees buy into existing franchises because they offer an established market presence, brand identity and existing operational systems. According to 7-Eleven, "When you buy a 7-Eleven franchise you buy two things: A globally recognised brand and a business system that works." Effective operations management is a key concern for all business and is particularly vital for high volume retailers such as 7-Eleven. Modern commerce is increasingly using Information and Communications Technology (ICT) systems to support and streamline operations management. One of the major corporate successes enjoyed by 7-Eleven in recent times was its selection as both the retail and overall 2008 Franchisor of the Year. According to the Franchise Council of Australia, 7- Eleven's new business plan, Energising Everyone set benchmarks for " state of the art franchisee and staff support systems, superior product marketing and cutting-edge store design."

2 What is franchising? A franchise is the granting of rights by a franchisor to allow a franchisee to use the name, systems and market profile of the franchise in return for a percentage of revenue. A legally-binding franchise agreement covers issues such as profit sharing, initial or 'buy-in' fees, ongoing fees, codes of conduct, quality control, staff recruitment and training, advertising and exit strategies. 7-Eleven franchisees pay an initial franchise fee as well as costs associated with purchasing stock, although 7-Eleven may help with this (see section below on benefits for franchisees). Franchisees also pay a proportion of gross profit to 7-Eleven as part of an ongoing fee. 7-Eleven, as the franchisor, has a dedicated real estate team that researches suitable locations and secures leases. The marketing team designs store layout to suit the demographic profile of the area. 7-Eleven's construction team fit-out the store with the equipment needed to operate successfully. All costs associated with these tasks, including rent, are borne by 7-Eleven and not the franchisee. As 7- Eleven owns the equipment, franchisees do not have to find additional funds when the store needs to be refreshed or updated, as 7-Eleven will pay for this. General benefits for 7-Eleven franchisees They can be their own boss yet have the support of a well-established company and brand behind them 7-Eleven has a successful product mix targeted to the customer profile of the store's location, taking the guesswork out of stock selection and pricing 7-Eleven enjoys a strong brand identity and market presence supported by local and national advertising campaigns 7-Eleven has built up effective corporate and operations systems to support store management. The franchisee benefits from payroll, financial, occupational health and safety, equipment management, human resource and marketing systems as well as other processes, policies and systems. All the accounting and paperwork is done by 7-Eleven - a real benefit for new Australians or those new to running a business As a national chain of over 360 stores 7-Eleven enjoys significant buying power. These economies of scale increase product range and reduce unit costs. 7-Eleven handles negotiations with suppliers, delivery arrangements and general supply chain management issues 7-Eleven offer ongoing training, support and business development analysis 7-Eleven runs a stock "open account" for franchisees which operates like a credit card. Franchisees can stock up for Christmas or peak periods and pay off the account as their store s cash flow allows. Benefits for 7-Eleven as the franchisor 7-Eleven leverages their strong brand and proven systems to attract talented entrepreneurs as franchisees

3 New franchisees contribute their capital to buy into the 7-Eleven system enabling 7-Eleven to expand nationally By operating more stores 7-Eleven generates greater total revenue and more negotiating strength across the entire system, resulting in higher shared profit levelsthe diverse nature of 7-Eleven franchisees also attracts a wider customer base building a stronger brand image. A franchisee undergoes extensive training once they become a part of the 7-Eleven system. 7-Eleven Franchisee Training Course (SEFT): A six-week intensive induction program for new franchisees before they operate their own store. The SEFT includes two weeks training at head office focusing on 11 key subject areas such as store operations, retailing and merchandising, business management, safety and security, financials and other day-to-day operational competencies. This is followed by a three-week, in-store training program with a highly-trained Super Coach Franchisee in an existing store Ongoing in-store training: New franchisees are given two, one-day, follow-up training sessions six weeks and three months after they take over their store District managers: Are on-call to provide further training and assistance if required Specific targeted training: Workshops are offered whenever 7-Eleven introduces a major new initiative. Responding to a changing marketplace Since its launch in 1977 as the first franchised convenience store in Australia, 7-Eleven has had to keep pace with changing market conditions. In Eleven embarked upon its $22m Project Energise program. The objectives of this long-term strategic plan were to: Streamline operations making day-to-day store management simpler and more efficient Update and tailor product mix and store image to continually meet customer demand Grow business by 12 percent with franchisee and company profitability growing at the same rate. Four measurable criteria were developed to assess the ongoing success of Project Energise: "Deliver a better experience for customers Be simpler for stores to execute Be quicker to market than our competitors Deliver enhanced profit or bang for buck." 7-Eleven uses extensive quantitative and qualitative market research to determine the most suitable areas for new stores and to develop the most lucrative product mix to suit the profile of likely store customers. Through extensive research, 7-Eleven has developed six distinct profile categories for its stores: main road fuel sites, CBD district, suburban strip, coastal/tourist, central destinations and

4 inner-diverse store groups. Each category has its own particular customer profile, product mix and pricing and layout strategy. In the past 7-Eleven relied heavily on products such as cigarettes to generate foot traffic. However as consumer preferences have shifted 7-Eleven has created other ways to attract foot traffic, such as fuel retailing, ATMs, transport tickets and phone cards. 7-Eleven also extended profitable categories such as Slurpee, reduced reliance on confectionary and introduced healthier and fresh product lines to widen their customer base. 7-Eleven responded to changing consumer taste by providing healthier snack options. One of the most successful innovations has been the heavily promoted fresh, ready-to-eat 'munch' range. The healthier 'munch' range options such as fresh sandwiches and fruit salads complement traditional, indulgent offerings such as pies, donuts and muffins. 7-Eleven's 'Insights Program' uses quantitative market research to show whether it is satisfying customer needs. Each store is assessed four times each year to evaluate performance against the customer promise: "I could get what I wanted I could find it quickly and easily I got fast service I got friendly service It was good value for money." In 2007, "98.4 percent of all customers who shopped at 7-Eleven found the product or service they wanted " 7-Eleven also introduced a range of big selling 'mini' health and beauty products, they continue successful promotional offers such as 'Grab any 2' and are upgrading all stores to the new 'Energised Store' design (at no cost to franchisees). SLURPEE REVITALISATION PROGRAM 7-Eleven carried out an extensive review and development program of their iconic Slurpee product range to ensure that Slurpee continued to have 100 percent relevance to its target audience of teenagers - or in 7-Eleven customer profiling, 'Junior Junk Junkies' and 'Fast Fixers'. Using qualitative research 7-Eleven found out that, "Slurpee is all about the experience, and not just about the product itself." In response 7-Eleven introduced the in-store Slurpee Zone to attract young people and to encourage co-buying of products such as snacks and confectionery, resulting in growth of 53 percent. 7-Eleven launched Slurpee Juice and Sports Slurpee to tap into emerging teens trends. The marketing team designed new cups with unique names and graphics including 'Brain Freeze', 'Tongue Staining' and 'Cram It In'. Slurpee is also supported by ongoing promotions.

5 The 'Slurpee Revitalisation Program' produced more than 20 percent growth in sales and profit. The Boronia store grew its Slurpee unit sales from 30 to 250 in one day! Using technology to meet demand Like all sophisticated retailers 7-Eleven has developed a suite of ICT systems to support operations. In line with the Project Energise aim to improve operations, 7-Eleven developed its sophisticated Franchise Matrix to measure store performance and engagement against 10 key performance indicators (KPIs). This computerised continuous improvement tool gathers and analyses financial and non-financial KPIs including sales, gross profit, growth in 'munch' sales, friendly service, image and so on. Areas of strength and weaknesses are identified and training and support is offered to franchisees struggling to meet key benchmarks through each stores Individual Store Development Plan. 7-Eleven invested in a new centralised automatic stock replenishment system that creates and fills store orders automatically. The company also invested in a major upgrade of its 24/7/365 Franchisee Support Centre reducing the longest time taken for any franchisee to receive support to just 23 seconds. Each store in the network relies on world standard electronic point-of-sale technology. In Eleven integrated this POS system with its secure internal intranet system to offer a new electronic product-line of branded Gift Cards for retailers such as Sanity Records, Angus & Robinson, Sportsgirl, Rebel Sport and many others. The new system gives customer the convenience to buy and validate these e-sales gift cards immediately in-store. During 2009, 7-Eleven also introduced its advanced SAP Retail Merchandising Systems. These systems provide users with real time, 'smart' market data, to analyse customer behaviour and purchasing patterns. SAP provides systemwide, regional and store-by-store data about product-lines customers are purchasing, when they are purchasing and which items they are purchasing together. The system can tailor stock levels, pricing, promotions and optimal store layouts to maximise customer spending. Franchisees can compare KPIs to benchmark against 'like stores'. This allows franchisees to implement success strategies used in more profitable stores to improve their own performance. Building an effective supply chain Modern effective supply chains are increasingly integrating ordering, distribution, warehousing, logistics and ICT solutions as part of effective business-to-business (B2B) networks. Over recent years 7-Eleven has used technological innovation to improve the efficiency of its supply chain. 7-Eleven electronic purchasing and distribution model One B2B innovation has been the introduction of a centralised purchasing and ordering system. The system automatically creates store orders based on electronic sales or replenishment records. When stock levels fall below predetermined benchmarks, orders are created and sent electronically to a central distributor who fills the orders for delivery to stores. This centralised 'back-end' innovation:

6 Saves the franchisee time they would have spent checking stock levels, planning orders and contacting suppliers Saves unloading and administration time for franchisees as well as staffing costs Reduces the number of weekly deliveries into stores. They fell more than 70% from 110 to 30 Creates other benefits such as reduced store clutter, fewer delivery vehicles taking valuable car parking spaces and improvements in stock control. Quality management systems An effective supply chain needs to have in-built quality management processes to ensure quality standards are met throughout all stages of production and supply. When 7-Eleven introduced 'munch' it was vital that this fresh product range arrived in stores daily, at peak quality levels and with minimal spoilage. The manufacturers of the 'munch' range must meet Australian quality assurance standards associated with the production of fresh food. As part of operations to support their fresh products, 7-Eleven also established quality benchmarks that they believe are much higher than those set by other comparable Australian food retailers. To achieve these goals 7-Eleven assembled a specialised quality team to work with suppliers on a daily basis and made a significant number of changes across their system including operational quality targets. A zero tolerance target of 100 percent for the critical Slurpee brand. The performance for 2007 was 99.7 percent A target 98.5 percent for Daily Fresh products. In 2007 they achieved 98.9 percent on a continuous basis A target of 98.5 percent for ambient and frozen goods Performance was slightly below target, although performance had increased compared with Conclusion The retail convenience sector has continued to evolve, and competition, which now involves retail giants Woolworths and Coles, has become even more intense. In response 7-Eleven has embarked on an ambitious strategic plan to streamline business operations and to maintain its relevance to its customers. The multi-faceted Energising Everyone program includes ongoing product innovation and development, customer-focused research, store redesign, improvements in internal ICT systems and a shared commitment to franchisee training, performance appraisal and business success. A revitalised 7-Eleven has seen significant growth in company and franchisee profits, a sure sign of the success of its ongoing improvement program.

7 Case Study Questions 1. Explain the meaning of franchising as a type of business ownership. Give 5 different examples of franchises. (They must not be all retail businesses!) 2. Identify five issues that should normally be covered under a franchise agreement. Use examples from the 7-Eleven Australia franchise agreement to illustrate your answer. 3. Discuss three significant benefits that occur for 7-Eleven Australia s franchisees as a result of buying a franchise. 4. Discuss three significant benefits that occur for the franchisor, 7-Eleven Australia, as a result of operating as a franchised business. 5. Use examples to explain how 7-Eleven Australia s new franchisees participate in; induction, on-the-job training, off-the-job-training, mentoring and professional development. 6. Explain the meaning of operations management. Outline two examples from large-scale organisations you are familiar with to illustrate operations management in action. 7. What is a strategic plan? Use examples from 7-Eleven Australia s Project Energise to illustrate the key stages involved in a strategic plan. 8. Discuss three ways that 7-Eleven Australia uses market research to improve operations. Use evidence to evaluate how well they have done in this regard. 9. Discuss two ways that 7-Eleven Australia uses advanced ICT systems to improve operations. Use evidence to evaluate how well they have done in this regard. 10. Evaluate one other strategy that 7-Eleven Australia has implemented to improve operations. 11. Discuss why 7-Eleven has had to constantly implement change in order to remain competitive in the retail convenience market sector. Explain whether 7-Eleven Australia has treated this challenge as a pressure or as an opportunity. GROUP REPORT "7-Eleven Australia will continue to face ongoing pressures and opportunities in the retail convenience sector." In your groups prepare a mini report for the class. In your report you need to: Explain how businesses can turn pressures for change into opportunities for success. Use examples from 7-Eleven Australia to illustrate your answer. Discuss how three key market and business trends are likely to impact on 7-Eleven Australia s operations over the next 5-10 years. Suggest possible businesses strategies, products mixes and operational systems that 7-Eleven could develop and implement over the next 5-10 years to keep ahead of its competition. Suggest one strategy that the convenience retail stores could implement to become more socially responsible resulting in a win:win situation for key stakeholders.