On Tuesday, Subway announced the retirement of John Chidsey, who will be replaced by Carrie Walsh on an interim basis as the fast-food sandwich giant searches for a permanent replacement.
Chidsey’s departure is unsurprising and, in fact, was probably inevitable from the moment the fast-food sandwich giant signed ink to paper on its sale to Roark Capital. Chidsey has long been believed to be in the job largely to fix the chain and get it ready for sale.
But the task of “fixing” Subway is not done. While the closure rate of the chain’s U.S. stores has slowed, operators are still closing locations. And this year has been a particular challenge as consumers have shifted away from dining at fast-food restaurants.
Whoever ultimately takes over for Chidsey, be they Walsh or some to-be-named chief executive, will have some further work to do to get the brand on proper footing.
Fortunately, or perhaps unfortunately depending on your perspective, I have some thoughts on what that new CEO should do.
Repair relations with franchisees
Initial comments from Subway operators on Chidsey’s departure were not, shall we say, positive on his accomplishments. “He ruined the value of our businesses,” one operator said. “Our stores are worth a fifth of what they were in 2019.”
It’s not necessarily Chidsey’s, or even Subway’s, fault for at least some of that decline. Inflation and higher interest rates have lowered restaurant industry valuations almost across the board.
But the company does have some of the industry’s lowest franchisee valuations, according to data presented at the recent Restaurant Finance and Development Conference.
Lower valuations, and some 7,000 unit closures since 2015, have sapped franchisee morale. While no franchise has great relationships with all its franchisees, any new CEO will need to contend with a large group of skeptical operators.
To be sure, plenty of owners are satisfied with the state of the brand right now. But franchisees operate 100% of the chain’s locations. They are the ones who interact with the customers who buy the chain’s sandwiches. Ensuring better relations with that group is important. And any new CEO should address that first.
“As the representatives of Subway franchisees in North America, NAASF sees a brand new opportunity for Subway with the departure of John Chidsey,” the North American Association of Subway Franchisees, a group of the company’s operators, said in a statement. “We look forward to a culture of collaboration and open communication as we work toward a mutual goal of success, measured by franchisee profitability.”
Cut the menu
Subway under Chidsey did a good job of improving the quality of ingredients and generating menu news. But the company hasn’t taken a step that is crucial in any turnaround: trim the menu.
Struggling brands will frequently turn to new menu items to generate interest. But they can be afraid to remove some items, fearful of losing those customers. The resulting “menu creep” hurts operations, making it more difficult for franchisees and for workers while adding to the number of items operators must keep on hand.
There are additional challenges with Subway, because new items often bring new ingredients customers can use for other subs because so many of its orders are customized. That costs money.
Subway’s menu is complicated. Each of Subway’s primary competitors operates with a much simpler menu with fewer breads, sauces, proteins and cheeses. Yet that hasn’t necessarily translated into stronger sales.
Cutting the menu could also give Subway a reason to reorganize the menu to make it easier for consumers to understand.
Make some key investments
Jersey Mike’s, the Subway competitor, was just sold for $8 billion at a multiple presumably much higher than the one Subway just sold for. In 2019 the company funded franchisee remodels. The remodel project was finished in a year and Jersey Mike’s says today that it has easily made its money on that investment since then.
We don’t think Subway should necessarily do that, though it would help. But the brand should pump some money into its revitalization program. That could be in the form of marketing, new equipment or remodels.
Subway has done some of this, notably the slicers now in each of their restaurants. Yet the company could do much more to support its operator base.
Many brands looking to fix things will pump tens of millions, if not hundreds, into the effort. McDonald’s had an E. coli outbreak in October that hurt traffic by about 900 basis points and it quickly announced a $100 million investment, including $35 million for marketing. Restaurant Brands International has pumped so much money into Burger King’s turnaround that we can barely keep track of it all.
An investment could provide a big boost to marketing as well as those franchisee relations we talked about.
Find a value strategy that works
Whether anybody likes it or not, quick-service restaurant chains need some low-priced items to capture certain customers. This was made blatantly last year, when consumers cut back on dining out, frustrated by high prices.
Subway has made repeated efforts to focus on value, either through its mobile app or in-store. But many of these efforts are either too aggressive, such as buy-one, get-one Footlong subs—effectively discounting its highest-priced, and most expensive sandwiches—or they don’t work, as noted by the failure of a recent $6.99 6-inch Meal Deal.
Yet discounts can also harm franchisee profitability, something Subway operators do not need right now.
The new CEO will need to find a value strategy that resonates with consumers enough to get them in the door without damaging franchisee profitability bad enough that it drives more operators to the brink of closure.
That’s a tough needle to thread. But Subway’s next CEO will have to do that with another major challenge: Many consumers still remember the $5 Footlong promotion the chain ran for years before ending it in 2012.
All these ideas are easier said than done. Subway was not easy when John Chidsey took over as CEO five years ago. And it will not be easy on his successor.