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

Subway same store sales have been soft in 2013 to date. A new round of discounting, including $5 footlongs and buy one get one free 6 inch sandwich and drink coupons, will hit the market in September.

Franchisees say store level margins are down.

See today's New York Post update on Subway and Fred DeLuca. Thanks to the Post for quoting me.

Same-store sales decline at Subway

Here's an excerpt from today's New York Post article Subway franchisees decry deep discounts as hospital-bound CEO struggles to right course that is especially worth discussion:

John Gordon, who runs the Pacific Management Consulting Group, said Subway’s 2 percent same-store sales decline came as McDonald’s and Wendy’s saw slight increases.For the moment, Brooklyn-born DeLuca is ignoring the pushback from the franchisees. “There are not any subway owners who like it,” a franchisee who owns thee stores told The Post. “Everybody is pissed off.”

And another issue:

Without a clear succession plan, if DeLuca were forced to step aside from running the chain, it is likely it would be sold, sources said.

The privately held chain does not report results and profits, and total revenue could not be learned. Gordon of Pacific Management said the chain generates about $400 million in earnings before interest and taxes.

In fairness, Fred DeLuca has already said that he does indeed have a succession plan. He just isn't ready to publicly share it with the world yet.

By the way, this month this fish is really enjoying Subway's LTO pulled pork sandwich. It's delicious.

Smells Like Quiznos

The Schaden formula is simple - mandate lower prices and let franchisees eat the discounts. Sales go up and franchisees get bent over. Works extremely well when the franchisor has no company owned or very few franchisor owned locations - until the well of franchisees runs dry. Could DeLuca replace Schaden as the guy who oversaw the biggest collapse in fast food history? Schaden took Quiznos from 6,000 to 1500 sub shops in four years. Probably not but this has the potential to not end well.

Smells Like Quiznos? I Don't Think So!

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

September $5 footlong adds discount pressure to weakened sector

Quiznos zee writes: "...this has the potential to not end well."

Unfortunately, Subway's short-term discomfort has the potential to not end well for thee, poor competitor franchisee. The sandwich discounts by the giant Subway chain, in which its stores are leaner and more flexible than competitors, has just flexed its discount muscles again. Its competitors, whether they admit it or not, are already feeling the pain of a market that now has come to chronically expect footlong hoagies stuffed to the brim at $5.

Can you feel the persistent pain from deep within the bowels of your bottom line, ye weakened owners and stores of Quiznos, Blimpie, Jimmy John's, Potbelly, Schlotzsky's, Togo's, Firehouse Subs, Philly Connect, Obee's and Arby's? I think so. Ah, if only the lean giant had ignored your small little fiefdom. But he, who can eat less than you and live, is in a mood for you as Fall arrives.

His home! the Western giant smiles,
  And twirls the spotty globe to find it;
This little speck, the British Isles?
  T'is but a freckle —never mind it.
(from Oliver Wendall Homes, A good time going)

DeLuca A Schaden Wannabe

Must be nice to use someone else's money to fund all that discounting. DeLuca is no different than Schaden. He's just not as 'smart'.. He's tried for years to get control of the food and advertising funds and for the most part he's failed. He's been pulled kicking and screaming to 30,000 shops.


You have it backwards. Schaden was a DeLuca wannabe. He just didn't know how to get there.

One other point I would like

One other point I would like to make is that fact that consumers are used to paying $5.00 for a sandwich at Subway. If those same sandwiches have an increase in price due to higher food costs then consumers will not be eating at Subway. When you are used to paying a certain price for a sandwich and then they raise the prices then you're going to have a decrease in sales. $5.00 footlongs is the only thing Subway has and if you take that away then you are left with nothing. Subway has peaked and will not see increased sales anytime soon.

Very Scary

It is scary when franchisors choose to discount "Other people's Money". Before I would start writing poems, I would like to know margins.... and specifically, franchisee margins. There are lots of good points in the previous posts, but the bottom line is franchisee margins and sustainability... It sounds like Subway is better than most(in they are not forcing discounts to sell food), but can the franchisees afford the discounts. What sales increase do they need to make up for the BOGO?

Backwards again

<p>Visitor: &quot;It sounds like Subway is better than most (in they are not forcing discounts to sell food)&quot;</p>

<p>You have that backwards. Discounting sandwiches is the way of life at Subway of &quot;every day values&quot; fame.</p>

<p>Mr. Gordon has already shared the EBITDA margins of the various sandwich makers on Blue MauMau. Subway had the biggest EBITDA margin of the hoagie sandwich makers. It has less COGS and less overhead than Quiznos, Arby&#39;s or Jimmy John&#39;s. Translation: Subway store owners have the advantage during a price and discount war. Subway can better afford to force discounts - like the current whole month of $5 footlongs for September -- while competitor stores go out of business.</p>

Is Subway gaining marketshare?

<p>Any marketers out there who can share the breakdown of U.S. marketshare by submarine sandwich brand for the last 5 years?</p>


I think you missed my point. Discounts made by a franchisor at the expense of a franchisee should always be looked at through a wide lens. When I stated they seem better than most (not discounting to sell food) I was referring that Subway's upside was royalties alone and not also making money off food distribution. I was not arguing or debating whether price point dictates traffic or brand positioning. Being a "value" player as you stated, makes the need to make sure that the discounting is viable, and sustainable from the franchisee's perspective. It also, further drives my point, it would be much worst if Subway, was not only profiting from the increase in sales through discounting, but through increased distribution to it's franchisees as a result. Simply put, franchisees in the value segment can not afford to pay more than competitors for food, and expected to sell it for less. Our industry is littered with examples of Franchisors who tried to get it anyway they could. - Quizno's, Lil Cesar's of old, CiCi's Pizza to name a few, and all struggled or fail.....