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.
Sources:
WaPo: The rise and fall of subway
Bloomberg: subway franchisees unhappy in germany
11 Comments
It’s very interesting to read about the trouble franchisees are having with the Subway corporation. A simple google search regarding the relative happiness of Subway franchisees reveals that the general consensus towards corporate headquarters is not doing so well.
“[You] can never keep them (subway world headquarters) happy,” Debra, a Subway manager writes, “Subway world headquarters in Milford Connecticut…makes it impossible for Subway owners to break even with [the] $5 ft. long [marketing strategy].”
This is just one example of many from posts made to unhappyfranchisee.com. A lot of these franchisees believe Subway is only using them as a short term investment to proliferate their brand. “I was told by my business consultant that all of the “twenty year” people should very worried about our stores,” another post on the same page notes. “Fred Deluca (the CEO of subway) and his cronies want us out so they can turn the stores over to make money on the start up costs.”
http://www.unhappyfranchisee.com/subway-franchise-complaints/
Workplace may be an important factor in the 21st century with the rise of job review sites such as glassdoor.com, but in different sectors this may not be applicable. Specifically regarding Subway and the fastfood industry individual employee and franchise owner happiness is hard to apply. Given the sheer number of restaurants in the U.S. and the need for low level workers to fill these positions, adapting to complaints is harder than it seems. As well, given the large number of restaurants, the corporate office would have to either implement a large scale model of change that would hopefully benefit all employees at this level or individually work with independent franchise owners and their employees. Both options appear unfeasible.
Another interesting aspect to this is that, depending on what article you click on from Google, the topic is either that Subway is having some trouble (as discussed above) or that Subway is doing well. Business Insider discusses how Subway has more open locations (40,000) versus McDonalds (35,000). The article is optimistic, and lists some of the reasons for Subway’s growth – you would never know that there is a growing rift between Subway corporate headquarters and the franchisees, or that revenue levels haven’t reached the level hoped for. Despite the large investment in advertising Subway has committed itself to for several years, I don’t think they will be able to thrive without adapting their business model to suit a younger crowd.
http://www.businessinsider.com/subway-business-strategy-2014-6
This is an interesting post considering that someone is trying to franchise (at least) a third restaurant in downtown Lexington. It also seems to me that the company has faced branding issues since the end of the “5 Dollar Footlong” campaign, as well as more recently with Jared Fogle’s recent criminal struggles. However, a family friend back home recently opened a Subway franchise (within the last 2 years) and the business has been successful thus far. But one thing is for sure – Subway has numerous problems and it will be interesting to see how the company adjusts its strategy moving forward. With the growth of the local foods movement and increased scrutiny on food labeling, will we see Subway trying to move the way of companies like Chipotle and Whole Foods when it comes to the image of their products?
The notion of the “5 Dollar Footlong” and its recent demise is interesting. Raising the price one dollar has had an alarmingly large negative outcome for the chain. According to the Daily Mail, customers were outraged and the hike in prices, taking to Twitter to air their grievances. In addition, Subway just settled a years-old lawsuit over the length of such “footlongs” after an Australian teen posted a photo of one of the sandwiches next to a tape measurer. The sandwich only measured 11 inches, and the customer base all but exploded, filing a class action lawsuit against the company. Subway has since settled the suit by promising to measure all sandwiches in-store. These two seemingly trivial issues are of paramount importance to the customer. When things change, the customers get angry. So I wonder if changing menus or updating stores will actually do anything at all.
http://www.dailymail.co.uk/news/article-3430639/Subway-kills-5-footlong-announces-6-footlong-promotion.html
http://www.businessinsider.com/subway-forced-to-change-its-sandwiches-2016-3
I think it can be useful to highlight Subway’s advertising strategies, particularly through the use of an everyday man like Jared Fogle. Jared helped perpetuate the “healthy” image that Subway prided itself on as well as highlighting that you can lose weight through their products. While his criminal charges are absolutely disgusting and he deserves to rot in jail, Jared Fogle was a great advertising campaign that seemed to have served them well until recent events. They had tried to use a lot of athletes and olympians like Michael Phelps to promote their restaurants, but after his marijuana use charges moved away from this tactic. Subway has certainly had some terrible luck as far as advertising goes, and it will be curious how they tackle these issues moving forward.
While it is clear that Subway is facing real issues generating enough sales to satisfy their corporate offices, I would argue that this is not fault of the local franchisers. In 2012 I was in England and due to a series of unfortunate events I ended up eating in a Subway. I wasn’t happy to be eating in a chain but I was truly shocked at what I saw. Other than the chips they offered, their menu was the exact same. This seemed odd to me since countries tend to have different food preferences and varying levels of accessibility to ingredients. I know that a number of other chains, such as McDonald’s and Burger King, have slight variations in their menu and restaurant atmosphere depending on their location. I would be curious to see the breakdown of sales in each country to see if this may indeed be a flaw in Subway’s business strategy.
This is spot on. A number of fast-food chains have huge menu variations depending on where in the world you are eating; I have heard that a Mcfalafel is out there somewhere… But what is most interesting about Subway’s menu is that it has not really changed with time, either. McDonalds, Burger King, and other fast food chains have recently tried to adapt their menus to fit with the popular health-food craze. Subway was really ahead of the curve here, and because of this, I have been getting pretty much the same Subway sandwich for years now. There have been a few small additions, such as breakfast, but for the most part, Subway has stayed Subway. Now, with the status quo shifting even further towards healthy food options, it will be interesting to watch whether Subway changes it’s menu and image.
So what is common across franchise systems? Without uniformity the brand name has no value; it’s part of what you pay for as a franchisee. How much uniformity? And once you have 500 locations (never mind Subway’s numbers!) how readily can you change menus and so on, which is the core of brand identity? Store layouts (for retail franchising) are even harder, old stores may not be able to modify their premises [an issue in the auto industry]. And how many franchise locations? Above a certain density, a new store’s sales rob from those of nearby stores. Total sales increase, but individual store profitability falls. Reversing that is very hard – forcing franchisees out of business is not easy, legally or as a practical strategy, given the reaction of the overall chain.
I think you’re spot on with the observation that Subway isn’t doing enough to perpetuate the “healthy” brand image. Millennials have spawned a significant health-foods movement and Subway doesn’t really fit in to that paradigm. Young people would rather take the time to find an organic or local sandwich shop, and Subway is usually a last resort. The only thing they have done to help public perception is remove all artificial flavors and preservatives from their offerings. But as others have mentioned, they have not redesigned their menu. The franchise will need to adapt moving forward
It is interesting to note the amount of Subway locations there are in the United States. Within a half mile of my house back home, there are five subway restaurants. It is hard to imagine that there are enough Subway consumers to have five franchises all in the same small area. It will be interesting to see if one of them closed down since I have been home, since last summer there used to be six locations before the last one closed.
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