We don’t use coupons and so mailers offering discounts on carpet cleaning or fast-food restaurants end up in the recycling before I see them. But one this week caught my eye. It was from Subway. And some of the discounts were substantial.
For instance, we could get two footlongs for $12.99. Or we could get three for $17.99. We could get 14 subs or meals from the coupon drop or, as one person said on the social media platform formerly known as Twitter, I could live off that sheet for a week. If I wanted nothing but subs, that is.
Those are some aggressive discounts. The two-fer deal, for instance, gives a customer $12 worth of free food, given that’s what a typical footlong from Subway costs these days, at least in my market. The $17.99 is effectively a half-off coupon for three footlong subs.
We have long said that value is important for fast-food brands and it likely will be more important in the coming months given a variety of challenges facing the consumer: drained pandemic savings, college loan repayments and excess credit card debt. Finding ways to get customers in the door will be crucial, so value on its own is not a bad thing.
But overly aggressive discounting can be a drug for restaurant companies. Brands have difficulty breaking free from the discounting habit, because customers then see them as the cheap concept. When traffic drops as those discounts go away, which is inevitable, pressure to resume discounting can become intense.
Aggressive discounts are a bigger problem in a franchise brand. Franchisors want sales, because they rely on royalties for their income, which come from a percentage of revenues. That can provide an incentive to push discounts as a top-line revenue driver. That can be a problem for franchisees that need to make a profit.
Coupon drops such as this one therefore build tension inside a brand because franchisees see these aggressive discounts as damaging to their earnings.
Discounts are particularly troublesome in a brand like Subway, whose franchisees have struggled with profitability for years. Low profitability is why nearly 7,000 Subway restaurants have closed since 2015. Indeed, it’s not uncommon to see signs on Subway locations indicating that they will not accept any coupons. And when that happens, it damages the chain’s relationship with customers, which is a problem.
Subway’s general problem is that it built a lot of its business on the back of a value play. The chain’s $5 footlong fueled the brand during the Great Recession. Executives at the time kept the offer going too long—and kept building more and more restaurants on top of it.
When inflation inevitably made it too difficult for franchisees to make money from that deal, the brand shifted away from that offer and its sales suffered as a result. But customers’ memory of that $5 footlong offer was so great the brand still struggles to break free from that reputation a decade after it ended.
As such, the brand needs to offer some value to keep customers interested. But it has struggled to give customers a deal that will resonate without alienating a good portion of their franchisee base.
Subway needs to generate more sales, there is no question. And it needs traffic to feed its 20,000 U.S. locations. But doing so in a way that doesn’t rely on heavy discounts of its biggest menu items will be a key question for the company under its new owner, Roark Capital. And it will be a key question for a lot of franchises as they face traffic challenges in the coming months.