Even after thousands of closures, Subway still has too many locations

Numbers the company provided last week demonstrate that it is still far off from reconciling the number of locations with demand for its sandwiches, says RB’s The Bottom Line.

Subway peaked at just more than 27,000 restaurants in the U.S. in 2015. It began closing them the next year. Those closures accelerated in the past two years, when it closed more than 10% of its domestic locations. Today it has about the same number of locations it operated in 2006, less than 22,000.  

No restaurant company has closed that many locations that quickly. Yet numbers provided by the company last week show it is unlikely finished shrinking—even if its average unit volumes increase.

Before the sandwich giant’s franchisees began closing locations in 2016, such a pullback was unheard of. No restaurant chain in history went on an expansion binge that lasted as long and was quite as extensive as Subway.

The company’s development agents pushed expansion at all costs, driven by a company run by a founder in Fred DeLuca who thought he could put 50,000 restaurants in the U.S. and 100,000 globally. When it ran out of street corners and inline locations for its shops it looked to convenience stores, universities, Walmarts and even kiosks to continue that upward trajectory.

Subway opened locations long after it became clear it needed to slow things down once sales began stumbling in 2013.

The result was a system that had too many bad locations and franchisees who don’t make enough money per unit to do much to fix that. When Subway’s marketing collapsed with the loss of the $5 Footlong and then the end of the Jared campaign in the worst way possible, its sales worsened further and operators began walking away.

A strong marketing campaign, however, can fix a lot of ills. The chain’s “Eat Fresh Refresh” campaign started over the summer may well have accomplished that. But its sales numbers also reveal that it hasn’t quite gotten through to some of those weak locations.

Consider: Subway’s average same-store sales was 4% over 2019. But, as we pointed out, that was lower than the 6.2% same-store sales for the whole industry, according to Black Box Intelligence.

Look deeper, however, and you see better results for the chain. Its top 16,000 locations, about 75% of its units, generated an average of 14% same-store sales last month. That is a strong result, especially for so many units, and represents the first real momentum for a chain that hasn’t had much of it for nearly a decade.

Subway’s remaining locations, however, averaged a decline of 26%. Those locations, as we reported, were in places like Walmarts and shopping centers, business centers, universities and other areas hit hard by the pandemic.

Subway over-indexes to the types of locations that underperform during the pandemic largely because that was the focus of much of its latter-day expansion strategies—a put-a-Subway-anywhere mantra that has ultimately worked against the company and its franchisees.

To be sure, it’s possible that the struggling locations are struggling because of the pandemic and not because of anything Subway did. That is certainly true for universities that have been limited or closed during the pandemic, or business centers that remain mostly devoid of workers. Travel could return, too, and so could the business at travel centers and convenience stores.

But online shopping has replaced a lot of the walk-in traffic at places like Walmarts or shopping malls, and that appears unlikely to come back in anything resembling its pre-pandemic levels. Many of the other locations remain weak overall, meaning a not-insignificant percentage of Subway locations remain in real danger of closing.

By growing so much and in so many locations, Subway and its development agents sacrificed operators’ unit economics for more royalty income. That overexpansion has come back to haunt the company now, even after it’s found a marketing program that actually works.

Then again, nobody ever said that fixing Subway would be easy.   

Up Next

Trending

More from our partners