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Marketing Mayhem at Subway

It is not an easy thing for national restaurant chains to evaluate and execute marketing promotions. Judging from the results of its January and February $4.99 sandwich promotional, Subway has shown how badly its national marketing efforts can miss the mark.

In the first two months of 2018, Subway franchisor Doctors Associates (DAI) launched a 60-day, $4.99 price on selected sandwiches that was marketed by television, digital and print campaigns. It was reported mid-February that Subway’s “marketing council” approved an extension of the original $4.99 offers for at least another 60 days.

In December 1,000 franchise owners, representing over 5,000 Subway stores, signed and forwarded a petition to DAI to stop the discounted sandwiches. The franchisor responded by launching the offer anyway, and then in mid-December Subway compounded its problems by firing its new U.S. marketing officer who was in charge of the promotion.

The $4.99 offer (consisting of five selected sandwich types) was a way to win back lapsed guests, who complained in a survey that Subway sandwich prices had risen. Subway was in a pickle to quickly launch the discounted footlong offerings in that  wraps were not yet ready to be nationally launched and that competitor McDonald’s was soon to kick off its cheaper $1/$2/$3 Value Menu offerings.

Some results of Subway’s marketing stumbles are now available. Doctors Associates documents from November and December 2017 that were circulated on the internet reveal that Subway has lost 20 percent of its customer counts during the last five years.

Now comes a peek into Subway’s latest marketing debacle. One concerned banker from a lending institution that was holding notes on multiple Subway units and therefore plugged into financial data from the restaurants shared the following approximated values of Subway same-store sales results from January until mid-February.

 

Subway store
measurement
Jan-Feb 2018
Six Week Results in U.S.
Same-store sales vs year ago -5.0%
Sales trend vs Dec 2017 flat
Sales trend in control market -2.0%
Promoted items sales mix 15-25%
1 yr / 2 yr traffic trend vs YAG -8% and -10%

Subway’s marketing staff noted that they were cheered by news of the hit rate having risen for the promoted items. In their words, “there was a hit rate lift.” Meanwhile, the brand’s franchisees noted that sales and traffic fell 5 and 8 percent despite all of the aggressive discounting. Sales fell 3 percent more for stores that offered the discounted sandwiches versus those in a clean market where there was no discount offered. Store traffic was down on not only a one-year but also a two-year basis. Counting the massive marketing fund support of this offer, the marketing effort by Subway seems to be a real waste of time and resources.

Some observations:

There are too many moving pieces to yet understand, other than sales are suffering.

Franchisees noted that Subway had aggressive coupon drops for three consecutive months to date, December-February 2018. With the $4.99 offers beginning in early January, backed by national television and digital promotions, it is difficult to tell what caused what. However, the chart above indicates that there was no sales lift from the $4.99 campaign. 

A promotional hit rate lift is almost meaningless if sales and profits do not rise.

Some marketing (and ad agency personnel) have crowed about lifts in the hit rate of promoted items for decades. That is because they have nothing else to judge the success of their marketing campaigns. A far better measurement would be to track whether perceptions of value by customers improved or whether lapsed customers returned.

Customer research takes time and money.

Franchisees have told me that Subway franchisor, DAI, does not have such research discipline in place. They also complain about the lack of leadership. For example, the chief marketing officer for the U.S. still has not been replaced after he was terminated in December. They feel that Doctors Associates invests little in brand management and research costs that other major franchisors would as a matter of course have in place. 

The goal in marketing is to retain foot traffic, trade customers up, reintroduce lapsed customers back to the brand, and have them frequently come back. Unfortunately, there was nothing new at Subway to keep customers coming back

The promoted item hit rate is too high. 

The trick for marketers is not to massively discount so that the price point impairs the brand perception with existing customers but to attract new customers while developing brand loyalty.

That is difficult to achieve. The reason is that there is a core of deal-sensitive guests who simply migrate from one low deal to another. Their brand loyalty has been seen to be very low. The promoted item hit rate rise only means that more products were discounted. There is nothing to celebrate unless real incremental sales and profits result.

Subway is not McDonald’s or another QSR brand.

Subway’s food platform is built around 6-inch and 12-inch sandwiches (although there are more). The protein cost per pound in its types of sandwiches are above that of a typical QSR. For example, Subway’s sandwiches don’t rely primarily on ground beef. Subway never executed a plan for a national value menu. That is to say, there are no smaller ‘entry’ sandwiches at a Subway quick service restaurant. Another problem is that Subway’s customization tactic, a legitimate strength for the brand, causes large variations in costs per entrée, even for the same item—for example, a ham sandwich with lots of banana peppers and one without.  Solving this variation is what concept/product development, testing and research is for.

A strong barbell execution is required.

On its last earnings call, competitor McDonald’s noted that it was able to increase its average ticket, despite earlier rolling out its 2 items for $5 offers, and more recently its $1/$2/$3 menu combinations. The Golden Arches was able to do that because it was also pushing its high-end signature sandwiches, coffee, add-ons and other products across the menu portfolio. That is called a barbell strategy, which provides both high- and low-priced offerings. Burger King and Wendy’s have also been able to execute this barbell pricing well in the last two years. Burger King calls it a balanced marketing plan. Subway needs to focus on that: otherwise, Subway franchises will continue to shutter, and no money from existing franchisees will be available to cover the costs of store remodels.

What is next?

DAI owns no company stores and has minimal capability from concept/product staff. It seems unable to execute testing to obtain the marketing information it needs. And there are messy situations. 50 percent of the Marketing Council, which is only an advisory group, are Subway “Development Agents” (known in the franchise industry as area representatives), which are primarily compensated by royalties from franchise-level revenue. Since franchisor DAI won the ability to directly control the franchisees’ own Subway Franchisee Advertising Trust, the franchisee trustees went from being elected by franchisees to now being franchisor-appointed delegates only, with two on the board being DAI appointed senior corporate officers. In essence, the franchisor has created a marketing echo chamber of its own making.

Since DAI owns no sandwich shops, it gathers information from franchisees, rather than its own stores, and then determines what reality is and what the system needs to do. Franchisees fall in line, or else.

Other franchisors in this circumstance have discovered the wisdom of using a tiger team approach, where qualified franchisees with backgrounds in business disciplines are infused in the franchisor’s leadership team. That is helpful to spark innovation and meaningful movement. If done well, that approach can provide balance to bad corporate decision-making in echo chambers. From the perspective of where the Subway brand is now, what could it hurt?

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John A. Gordon, founding principal of Pacific Management Consulting Group provides analysis and advisory services relative to complex restauant topics. This includes buy or sell due diligence, operational analysis and improvemenrs, expert litigation support and business investigation and analysis.

Gordon focuses on restaurant strategy, operations and financial management topics, and has a 45-year background in restaurant operations and financial management staff roles for both franchisors and franchisees. He is a certified Master Analyst of Financial Forensics (MAFF). He supports both franchisees and franchisors, and has a franchise standards and practices sub speciality.

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