It got lost amid all the news but in 2020 Subway closed more restaurants than any other chain ever has in the history of the business, even if there are disagreements as to the number of actual closures. The company in its franchise disclosure document says 1,600 locations closed in 2020. Franchisees have insisted it was well over 2,000. Either way, no restaurant chain that we could find closed that many locations, that quickly.
The closures aren’t over.
Operators have shut at least 400 locations so far this year. And a number of franchisees believe that many others are simply biding their time until their lease runs out so they can walk away from their sandwich shops.
“One quarter of people have already left their stores,” one franchisee said. “Another quarter of the franchisees are sitting waiting for their real estate lease to end so they can get out.”
“By 2024,” this operator said, “this system will be down to 15,000 stores.” It currently has fewer than 22,000.
The franchisee is among the operators that have formed a group to put pressure on Subway’s shareholders to make significant changes, including a reduction in royalties to 4.5% from 8%.
We asked other operators for their views on that number, including those that don’t generally see eye to eye with that group. The possibility of the chain declining to 15,000—while perhaps a bit aggressive—was viewed as possible, given the state of the brand at the moment.
Subway franchisees generally renew leases over five years. As more of these leases come up for renewal, more operators are questioning whether to continue in the brand given its myriad challenges both internal and external.
Subway peaked at 27,000 locations in 2015 after years of aggressive expansion into any place that could hold one of the chain’s sandwich shops. Operators have in the years since then heavily criticized development agents for forcing them to open locations near existing restaurants, lest those locations be sold to different franchisees.
It has closed at least 5,000 locations in the years since then, including 2020’s closures.
The biggest reason for the closures is unit volumes. In 2020, Subway operated with $365,000 average unit volumes, a remarkably low number that makes it difficult for operators to make the investments needed to continue operating. But that’s also $85,000 lower than it was in 2010.
While some of that was surely the pandemic—which kept consumers from walking into restaurants—the company still had an organic issue. In 2019 its unit volumes were $420,000—or more than $100,000 lower than they should have been if the chain’s sales simply kept pace with inflation since 2010.
These unit volumes are awful in the current environment. Wage rates have soared in recent months, rising 4.5% between January and March alone, three times more than normal. Fast-food chains like McDonald’s, Subway and Chipotle are boosting wages aggressively to keep and attract workers.
Subway can’t easily pay those rates. And many operators can’t find workers as a result. So they’re working a lot inside their restaurants, often 60 hours a week or more. They’re also closing stores on Sunday’s, shrinking hours and taking other steps to offset the lack of staff.
With low profits and those long hours, franchisees say they have a low-paying job.
“They have bought a minimum wage job,” one operator said. “But this minimum wage job comes with a headache that is Subway.”
Subway badly needs strong sales and improving profits to convince operators to remain in the system.
Subway has many single-store operators or franchisees with just a small number of locations. They have less room for error when a brand struggles. When Quiznos’ sales and profits plunged during the last recession, for instance, operators began walking away in droves. That brand has gone down from nearly 5,000 locations in 2006 to fewer than 300.
Subway is a bigger animal without some of the serious issues Quiznos had, but if its operators decide they’d be better off not operating its restaurants the chain could indeed face a serious, multi-year decline. Even at the chain’s current rate of closure, 1,000 per year, it could have just 19,000 by the end of 2024.