Subway franchisees have grown increasingly frustrated with the state of their restaurants in recent years as sales and profitability shrink and a growing number of fellow operators close their restaurants.
A few of them are going over the CEO’s head. An anonymous group of Subway operators this week published an open letter to Elisabeth DeLuca, founder Fred DeLuca's widow and one of its two main shareholders, highlighting several problems they see with the chain and asking for changes.
“Subway is more than a company to us. It is an aspirational idea,” the letter says. “Subway gave us and our families hope. Many of us, especially those of us who do not have formal education, never dreamed that one person with very little means can open up a store that can generate hundreds of thousands of dollars a year.
“Sadly, for many of us, this dream has turned into a nightmare.”
The letter lists several complaints on how the brand is operated, from the ability of the franchisor to change the rules without notice to complaints that the company’s development agents will use their ability to inspect restaurants to take them over.
It also lists a half-dozen potential remedies to those problems. One of them is a big one. It requests 8% of the proceeds of any potential sale of the brand—the company has been subject to years’ worth of sale rumors—to be distributed to franchisees “as a sign of good faith for all the turmoil and heartache that we have endured throughout Subway’s 40-plus-year history.” The 8% number is the same percentage as the royalty Subway charges its operators.
In a statement, a Subway representative said the letter is not representative of the majority opinion in the system.
“This letter is not representative of the opinions of the vast majority of our dedicated franchisee network,” the spokesperson said. “Subway is committed to the long-term success of our franchisees and provides multiple forums for franchisees to share feedback, working hand in hand with them to ensure decisions are focused on maximizing their profitability. There are many exciting announcements, ranging from menu enhancements to digital upgrades and new delivery options, on the horizon and we look forward to sharing these with you in the coming weeks.”
Franchisees who were not part of the group and read the letter sympathized with many of the concerns. But they questioned the remedies, notably the request for the 8% rebate. One operator called the requests “ridiculous.”
Still, the letter is yet another indication of continued anger among operators at the state of the brand, once the second-largest chain in the U.S.—and still largest based on unit count—but which appears to be in a freefall.
Subway’s U.S. system sales declined 18.5% last year to $8.3 billion, according to data from Restaurant Business sister company Technomic. That was the lowest number of annual sales since 2006. Franchisees closed 1,800 locations, bringing the total number of Subway restaurants to 22,000, the lowest number since 2008. Franchisees in the U.S. have closed some 5,000 locations since 2015.
The biggest reason for the chain’s problems is its average unit volumes, which were low to begin with, but which have steadily eroded over the years. They are down 14% over the past five years and 19% since 2010. Last year, the typical Subway generated $365,000 in revenue per year.
That has made it more difficult for operators and has sent morale into the “toilet,” according to one operator.
Franchisees have been pushing back on some of the company’s proposals with increasing vigor in recent years—notably their protests over a 2-for-$10 Footlong promotion last summer.
In the letter, the operators argue that they were forced to use Paycheck Protection Program loans and other federal aid “to subsidize loss-leading promotions.”
The franchisees also say the company has pushed back any time one of them speaks out. “Whenever we have spoken out about any of these issues to the media, we have been silenced by cease-and-desist letters, biased arbitrations and forced non-disclosure agreements.”
Two of the bigger issues in the letter, based on discussions with franchisees, are the development agents’ use of terminations to take over restaurants and the company’s aggressive changes in its franchise agreement.
“We didn’t understand that language in our franchise agreements was written in a way so that Subway could change the rules on us at any time, without notice, for anything,” the letter says. Operators note that the company has made significant changes to its franchise agreement to require franchisees to stay open longer, even when it’s not profitable, or to remodel stores or add new technology.
The hours of operation is a particular concern in the letter, which notes that Subway wouldn’t allow franchisees to cut hours during the pandemic to maintain some profitability.
As for the development agents, the letter suggests that they use inspections to take over restaurants, an accusation that the New York Times helped expose in 2019. Subway’s development agents have historically sold stores in their markets and ran the inspection process.
The letter argues that agents, who often own their own stores, will take away some restaurants “because there was a smudge on our window, or cucumbers were not sliced to a precise thickness.”
But the letter highlights a broader historical problem with Subway: Aggressive selling of restaurants during the chain’s strong years, which many believe has weakened the brand and left operators with weak locations. “We went along when Subway development agents forced us to open stores right next to our existing locations, or else Subway would recruit a competitor to put us out of business.”
As for the remedies, the letter writers ask that changes to the franchise agreements be mutual and that operators be able to lease their own stores—at this point they sublease them from the franchisor. They also want to be able to get fresh vegetables in daily and that development agents be barred from buying stores that are closed due to inspections.
As for whether the letter will get an audience with DeLuca, that remains to be seen. Operators hear from the company’s CEO, John Chidsey, and other executives. But the company’s two primary shareholders, DeLuca and Dr. Peter Buck, generally stay out of operations.
“As our owner, we have never heard from you,” the letter says. “We have tried to make our voices heard but have always been silenced by Subway corporate. Now it is time for you to address these issues.”