Don’t be the next 7-Eleven: how to test your labour budget

7-Eleven is making headlines for all the wrong reasons. A recent Four Corners investigation highlighted claims that they’ve underpaid staff over several years. 7-Eleven is scrambling to buy out franchisees, and has promised to overhaul its fundamental business model.

Amidst the barrage of criticism, the most telling comment was from Alan Fels — former head of the ACCC. In a recent interview, he claimed that the labour budgeting in the business model set franchisees up to fail:

“The business model will only work for the franchisee if they underpay or overwork employees.”

Where did 7-Eleven go wrong?

7-Eleven’s fatal error was to import a labour model direct from the United States. In the United States, head office takes roughly 50% of gross profit. Out of that amount, head office meets some costs, such as renting the premises. However, it’s up to the franchise holder to pay staff out of the 50% remaining.

That breakdown is viable in the US, but not in Australia. In the US, labour in this sector is much cheaper. In Australia, the award rates mean that a store with one employee per shift, 24/7, would face a wages bill of over $230,000 a year. Applying the US practice left the franchisees struggling to survive.

It’s like driving a car. In America, they drive on the right-hand side of the road. If you applied that practice in Australian traffic, you’d run into a problem pretty quickly.

When Australian franchisees were forced to adopt the American model, says Alan Fels, they found it wasn’t sustainable. They started underpaying staff, and doctoring their books to hide it.

What can we learn?

We don’t condone the 7-Eleven franchisees’ behaviour. The uproar over this incident shows that Australians expect staff to be paid a fair wage. What this example does show is that when we create a labour budget, we need to test assumptions — before they run headfirst into legal problems.

Whether you’re a franchise, or some other kind of business, ask the question: does your business strategy reflect the actual cost of paying people to do the work?

Here’s how to tease out that question for your business.

Have you considered all labour costs?

• award rates
• cost of turnover (including recruitment, training, and lag-time while new employees get up to speed)
• engagement measures (incentives and strategies to retain staff)

How valid are your assumptions?

In 7-Eleven, the assumption was that a business model that worked in the United States would work in Australia. It sounds obvious when you lay it out like that, but unless you stop to ask some hard questions, it’s easy to gloss over these flawed assumptions.

What other assumptions have you made about labour costs, and how have they been tested?

Testing your labour budget is worth the time to keep you in business, and out of the headlines.