Subway's DeLuca Works from Hospital to Reverse Sales Softness, Franchisee Margins Down

Qscrew questions whether Subway “smells like Quizno’s” and could “DeLuca replace Schaden as the guy who oversaw the biggest collapse in fast food history”. He surmises, “probably not”, but I think I would state absolutely not!

Let’s put things in perspective. The article talks about a 2% decline. After 5 years of unbelievable growth, I would argue a short term 2% decline is not a big deal. Many in the industry would have been celebrating a 2% decline during some of the tough years. Even the strongest brands have some times that are less than stellar; it is part of a normal business cycle.

As far as the current discounting, I count myself among those not in favor of the heavy discounting program. But again, let’s put things in perspective. I’ve been in the system 25 years, and I have been both right and wrong in my opinion on promotions. What is difficult at this time is that the industry keeps doing such heavy discounts to maintain customers that it is difficult not to get caught up in the trend. An economist I heard speak warned the QSR industry not to “freak out” with the trends and back itself into a corner on discounts that it can’t get itself out of. I think that is the bigger concern. The industry, “freaking out” to maintain customers and revenues, is discounting past a point of no return for franchisee profitability. Much of this is done to maintain franchisor investor levels of profitability because of the Wall Street influences. Subway, being privately held, has none of these pressures, yet it is hard to sit still as the rest of the industry moves in that direction.

Unlike Quizno’s, Subway’s supply chain is run by the Independent Purchasing Cooperative (IPC), which is franchisee run. Quizno’s uses the distribution and supply chain as a profit center for the franchisor, Subway does not. So while the whole industry is discounting, Subway, along with a handful of others, maintains a huge competitive advantage in supply chain costs.

Another huge difference is the advertising fund. Subway has a much larger fund than Quizno’s, and that fund is fully accounted for going to advertising uses. I think we all remember the long stretches in time that Quizno’s went silent in advertising, yet we have to assume the franchisees were still paying into the advertising fund.

Franchisees in the QSR segment continue to be upset and concerned with the continuing trends toward heavy discounting that are further eroding their already shrinking margins. This has not been met by any sharing of the shrinking margins through decreased costs in products or royalties. Franchisees are definitely shouldering the burden, and consumers of our products are benefiting. And while it is a challenging time in the industry, I would argue that Subway over the last many years has far exceeded industry performance. Subway franchisees, as they always have, will continue to express their opinions on the issues to Mr. DeLuca and the management team. And I can pretty much guarantee, we won’t always agree. That is nothing new. And while some love to speculate on a demise of one of the giants, and yes, many franchisees may be “pissed off”, I wouldn’t bet against Subway. And I can say I put my money where my mouth is, because I have no plans to divest my franchises in the near future. Oh yea, one final note. U.S. sales were up last week. Sorry doomsayers.

Keith Miller
Subway Franchisee