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LEXINGTON, Ky. —This year's ranking by Blue MauMau, our first, lists average store profits of sandwich shops, showing some winners and losers in 2012. Yes, you read that right – store profits. Here are Blue MauMau's best store profit estimates, from trusted sources who know sub sandwich shops and quick service restaurants.
A Potbelly sandwich shop this year has the honor of delivering the highest store profits in comparison to other sub sandwich shop brands. A typical Potbelly store owner saw EBITDA of $168,000 in 2012. Compare that with a typical Blimpie sub franchisee which had no operating income before taxes and depreciation. Nada. Zip. If you think that is bad, a Quiznos franchisee had the least, with a typical store loss of $25,000 for the year. Ouch!
John Gordon, president of Pacific Management Consulting Group, explains how competitive and tough the market segment has become. "The sandwich business for most franchisees is one daypart, but really two are needed to support a business. In the sandwich segment, unless a brand can deliver strong results in a niche, such as a vibrant breakfast daypart, like what Subway is trying to develop, or a delivery service, such as Jimmy John's has done, there are just not enough sales to support rent and other fixed costs." Gordon emphasizes that having lower store and food costs, like the Subway system has, is a tremendous advantage, but few systems can deliver this.
How about Return on Investment?
Potbelly having the biggest EBITDA is great, but that still doesn't quite tell what a franchise owner needs to know. After all, the initial unit investment for a Potbelly franchise is considerably larger than a Subway, or even a Quiznos franchise. What an investor of a franchise needs to know is a quick way to calculate a return on investment. That's done by dividing the average franchise unit investment (AUI) by how much EBITDA profits in a year can be applied to the initial investment. It's called "Years to Simple Payback" (see chart column below of AUI/EBITDA = Years to Simple Payback).
In calculating return on investment, there's good news for Subway franchise owners. As the new year rolls out, Subway shop owners should see their $208,000 store investment paid off by their $70,000 annual profit more quickly compared to any other major brand. Subway's 3.0 year return on investment is followed closely by Jimmy John's 3.1 years.
Here are the rankings from fastest to slowest returns on investment in simple payback time for operating a sub sandwich shop:
Blue MauMau has been able to obtain information on Firehouse Subs, headquartered in Jacksonville, Florida. The growing chain wasn't large enough yet to be in our official table above. Chains and their store economics tend to change in growth and dynamics when they become large. Firehouse's CEO Don Fox tells Blue MauMau that the chain saw stellar growth from 481 in 2011 to 576 units at the end of 2012. Their total system-wide sales were up 35 percent, from $285 million in 2011 to $385 million. (It should be pointed out that Subway grew a record 90 franchises in the week of December 9 through 15.) Firehouse's average store EBITDA is estimated at $96,492. With an average total initial unit investment of $293,000, it puts Firehouse Subs in the enviable position of a simple payback period that matches the industry's fastest, Subway, at 3.0 years.
There is considerable bad news at the bottom of the list. The way profits have gone for Blimpie owners of late, those franchisees have a better chance of making money with the lottery than profiting from store operations.
The news gets even worse. For the average Quiznos franchise owner, the amount of bills that a franchisee wasn't able to pay was even larger. For the size and equipment needs of a Quiznos shop, the total investment number of $188,000 is exceptionally low. Store economic expert Gordon thinks this may be a reflection of Quiznos franchised shops being sold for bargain basement prices as the chain implodes. According to Technomic, Quiznos has shrunk from 4,640 franchises in 2007 to just 2,503 in 2011. Insiders tell Blue MauMau that the chain has contracted considerably more in 2012. What is alarming about the list is that it shows that even if Quiznos had given away free franchises, the beneficiary would still have lost money from operating it.
System-wide sales of the top six brands above in 2011 made up 69 percent of the sub shop market, according to Technomic. Blimpie and its $115 million contributed only half a percent to the segment. Other submarine sandwich shops were too small in sales to include. But collectively, sub shops that aren't part of these six make up 31 percent of the $24 billion total sandwich segment in the United States.
Despite the unwillingness of the industry for decades to cough it up, this is how Blue MauMau estimated and ranked the top brands by store profits. With limited resources, this journal first identified a reasonable number of chains to look into. We selected the top six submarine sandwich companies from market researcher Technomic Inc's most recent ranking of the top 500 restaurant chains by largest sales volume and unit (location) numbers. The smallest chain on our list was Blimpie, ranked number 223 in 2011 by sales volume. Technomic lists its U.S. system-wide sales as $115 million and 739 stores. Its store count is down considerably from 2007, when it had 1,233. The largest submarine sandwich chain by far was Subway. Subway had $11.4 billion in U.S. system-wide sales and 24,722 franchises in 2011. Blue MauMau was also able to gather how much the average total unit investment was for each brand through information readily available on Robert Bond's WorldFranchising.com.
The final piece is a calculation of payback time, which is a rough return on investment metric. John Gordon of San Diego-based Pacific Management Consulting Group has bottom-line economic estimates for franchise stores of many major restaurant brands. Pacific Management provided average store profit estimates in the form of earnings before interest, taxes, depreciation and amortization (EBITDA). This is a measurement of profitability of a business with its assets and operations on products and services that it sells. It is a standard that financial managers use to compare the profits of different businesses that have different tax and capital structures. Mr. Gordon notes that EBITDA itself is a subtotal. Franchise owners still need to cover their particular debt service and store renovation costs from their EBITDA. It should also be pointed out that store EBITDA estimates are for a store and do not include expenses for multiunit overhead, e.g. a separate administration office that is set up for shop management.
Finally, we spot-checked profit estimates of stores with a few insiders just to make sure we weren't being lulled by correct-looking numbers in a spreadsheet.
Why is understanding store profits important?
A franchise investor's first question when contemplating buying a franchise should be "How much does one of these franchises make in profit?" If he or she cannot get a straight answer to that question, it is this journal's opinion that the buyer should walk away. If a shop investor receives information, it typically is from a franchisor perspective of how much topline revenue a store makes. Franchisors monitor that so that they can know how much in royalties they should be paid. Learning how much in profits a store makes from franchising firms, brokers, consultants and media has been an impossible task.