Subway Turns Blind Eye to Mayhem Surrounding Its Franchise System

Subway sandwich chain, with over 25,800 units, is facing turmoil as store locations continue to decline and hundreds more face shuttering because of unprofitability.

But Subway executives don't seem to be concerned. Don Fertman, chief development officer, expressed last month that over the next decade "they expect to see fewer restaurants but a stronger, more robust franchisee base and a stronger, more profitable system."

That sentiment came from Subway in a statement sent to Business Insider last December as the news journal was looking into the current state of the franchisor's operation. It reported, "The world's largest restaurant chain is being left behind as consumers seek healthier, fresher food and as competitors offer them better options." But the problems don't stop there. Subway's crisis is linked to other factors as well, including changing trends, oversaturation, internal conflict and past scandals the worst surrounding Subway's former pitchman, Jared Fogle, now imprisoned, convicted of child pornography and having sex with a minor.

A Subway representative had provided Business Insider with figures that revealed Subway's U.S. store count dropped by 909 locations in 2017, and that represents more than 3 percent of the chain's 2016 store count. Subway showed it had 26,744 stores at the end of 2016, which was a drop of 1.7 percent and that marked the first time in Subway's history that the company had closed more stores in the U.S. than it opened. Figures also showed that Subway shops worldwide were down by 471 locations.

Last November the chaos escalated after Subway announced its plan to bring back the "$4.99 Footlong deal" in January 2018. The original promotion of "$5 Footlong" ended in bad press and litigation (not all footlongs were 12 inches as promoted). Business Insider reported that a letter in protest was sent to Subway by the 400 franchisees protesting the upcoming campaign stating, "The national promotional focus over the past five years . . . has decimated us and left many franchisees unprofitable and even insolvent." [NOTE: Blue MauMau was told by Subway insiders that the petition was signed by 900 franchisees representing 6,000 stores.]

CEO Suzanne Greco, sister of the late Fred DeLuca, responded to the recent trials Subway is facing by saying they are "relatively short-term setbacks in the longer arc of the brand's history, which spans more than half a century."

Subway's troubles longtime coming

A Fortune magazine report in 1998 may shed some light on how Subway's problems developed over a 50-year span. The news report showed how Subway was not built in the same way as other franchise empires such as McDonald's, Kentucky Fried Chicken, Burger King and others. It told that Subway was the biggest problem in franchising according to a congressional staffer who studied the industry. While the chain's co-founder, the late Fred DeLuca, had a unique approach to the sandwich business which brought him staggering wealth, it has also brought big problems for the system, including unhappy franchisees. It said, "DeLuca has used methods all his own, creating a corporate reflection of his own complicated personality." And while every large franchise operation has its problems, Fortune said what sets Subway apart is scope. "It faces so much more trouble than its competitors on all these fronts [unhappy franchisees, disputes with landlords, and run-ins with regulators] that it's simply in a league of its own."

Fred DeLuca's success story is rather remarkable. He was born in New York to second-generation Italian parents, where they lived in low-rent housing areas, first in Brooklyn and later in the Bronx. DeLuca started his career in 1965 when he received a loan of $1000 from his close friend Peter Buck, and the two of them started Pete's Super Submarines sandwich shop in Bridgeport, Connecticut. At the young age of 17, DeLuca said he didn't want to be a businessman, his dream was to be a doctor. The business partners then formed Doctors Associates, Inc., in reference of DeLuca's aspirations and Buck's doctorate. When Fred DeLuca passed away in September 2015, after being diagnosed with leukemia in 2013, he had grown the privately-traded company to 44,268 independently owned Subway franchises in 110 countries, surpassing KFC and McDonald's.

After his death, DeLuca's sister Suzanne Greco took over the helm as chief executive officer, but soon the national media began picking up on rumblings from unhappy franchisees and longtime, well-established area developers, and some former corporate employees. Business Insider reported that Subway's current predicament revealed problems that went beyond larger restaurant-industry trends, after it conducted conversations with more than 30 current and former franchisees, employees, and others with knowledge of Subway's operation.

One former staffer told Business Insider, "I believe that Subway was more interested in the opening of stores. That is where they made the most money—the franchise fee." The person added that DeLuca made his money from the franchise fee. "The more stores he opened, the more dollars he made." A former three-store franchisee in Virginia, Scott Godwin, agreed saying, "I saw the handwriting on the wall with the focus being on opening as many units as possible, even if it angered franchisees."

Subway insiders told the publication that the factors driving customers away from the fast food chain "are deeply tied to internal conflicts within the company." The report said, "With disagreements between corporate headquarters and franchisees, franchisees say they're stuck bearing the brunt of the damage."

Franchisees are now calling for major changes at Subway's headquarters. Business Insider said three franchisees from different U.S. regions told them Subway needed new leadership, specifically, a new CEO.

Another franchisee bone of contention, mandatory remodels

CEO Suzanne Greco announced in February that change is always difficult, and that is particularly true for a massive company with more than 44,000 restaurants [worldwide] that serve 7.5 million customers per day. But the chain's most visible change will sweep across the country with Subway's new Fresh Forward Design, a new mandatory condition for all new and store remodels.

But when Greco speaks to the press about Subway's new look remodels, not everyone thinks she knows what she is talking about.

Restaurant analyst and management consultant John Gordon recently spoke out on a recent Weekend Confidential piece in the Wall Street Journal regarding Suzanne Greco's puffery which she displayed regarding her comments on new store/new look remodels saying they were generating a large sales increase. Gordon told the WSJ reporter that unfortunately that was not true. He said Subway store remodels are only generating a five percent sales increase. He explained, "On a pre-debt basis, that would equate to a 12-year payback, which is very poor. If debt is included, with the cost of debt (principal and interest included) my rough calculations show the payback would be infinity."

Gordon said Greco probably included a new store in her comment, but that is absolutely not good analytical practice, and, in fact, compares apples to oranges. "Remodels through the restaurant space generate about 5% increase for one year in the base sales.  A few McDonald's or big casual or fine dining chains might relocate a store and have reported nice increases in sales, but those are rare," the restaurant analyst said.

Gordon scolded, "Franchisor organizations simply must tell and work with the truth." He notes, "Subway does not operate even one company store."

Related Articles:

• Subway Franchisees Turn against the CEO
• Subway Execs Confirm Franchisee Fears that It Will Continue to Disappear in America
• Subway Franchisees Say Produce Is Only Delivered One or Two Times a Week
• Subway In Turmoil as Franchisees Revolt and 909 Stores Close
• Why Subway Isn't Failing, According to Subway
• Subway FDD 4/27/2018