Subway’s franchise-only business model is simply to knit a “healthy fast food” chain as closely and wide-reaching as possible.
With 43,945 sandwich shops in 110 countries as of 2015, including 27,000 in the U.S., Subway is the world’s largest fast food chain. To franchise a Subway, compared to McDonald’s or Jimmy John’s, is easier but in the long run a better deal for the corporation than for the franchisees. While that sounds like a good growing strategy, the chain now faces challenges on the corporate level – its definition of “healthy” has not evolved with the consumers’, especially millennials, and its menu has had few additions. The company now plans to focus on serving captive audience, which could feed into short term growth, but eventually it will have to address criticisms of its handling of food materials and update its menu.
Subway strategically locate its stores so wherever a consumer wants a sandwich, ideally there is a Subway in front of her/him, its chief development officer Don Fertman told the Wall Street Journal in 2014. “We’re continually looking at just about any opportunity for someone to buy a sandwich, wherever that might be,” said Fertman. “The closer we can get to the customer, the better.”
Because the making of a Subway sandwich doesn’t involve frying, shaking, grilling or even flipping, that means anywhere bigger than 350 square feet: in a car dealership in California, a Goodwill store in South Carolina, a Brazilian appliance store, on a German riverboat, in a high school in Detroit and a church in upstate New York. (“I’ve got one backstage in my bathroom,” stand-up comedian Jim Gaffigan said in a 2012 routine.)
Going forward, Fertman told Bloomberg that more than half of North America’s new franchise will be in “nontraditional” locations—schools, hospitals, military bases, zoos, anywhere with a captive audience.
The problem is opening new stores and pulling in money from franchisees isn’t a business plan healthy for the corporation.
Subway shops on average sold $437,000 of subs, sodas and cookies in 2014, the smallest sales in half a decade, and about 1/5 as much as a typical McDonald’s $2.4 million. Bloomberg reports that even in the best years, the average sales per Subway store are still among the lowest of the chains. Nonetheless, Subway is enticing to small business owners because one can open a Subway shop with as little as $116,000, company estimates show. To start a McDonald’s, you need at least $1 million and sometimes up to $2 million. The “catch” of a low barrier of entry, however, is high royalties at Subway – 12 percent weekly cut of revenues by the head offices, regardless of a franchised shop’s profitability, (according to the Washington Post; Bloomberg says it’s 8 percent). In comparison, at McDonald’s, headquarters gets 4 percent; at Jimmy John’s, 6 percent, according to Bloomberg.
The chain opened two new shops a day in 2014. As its growth rate rose to 4 percent, its overall turnover rate, including transfers, terminations and closures, was at 8 percent in the same year, according to Franchise Grade, which analyzes the investment value of franchises, reported by Bloomberg. That’s the highest since 2009 but still lower than the industry average of 10 percent.
Having spent $500 million in 2013 on promotional spots, more than Progressive or Budweiser, Subway still didn’t see the kind of growth in sales it had expected. And that bothered both the corporate office and the franchisees. On the shop level, managers constantly had to keep up with changing costs of ingredients while still offering corporate promotions like the $5 foot-long subs. On the corporate level, the leadership is frustrated because Subway’s image just isn’t what it used to be – the hip, healthy fast food chain. Newer, smaller brands have gobbled significantly larger market share in that genre.
The Washington Post reported that some franchisees want out. Discounted prices for existing franchises is as low as the price of a car.