Hundreds of operators representing thousands of locations have petitioned the Milford, Conn.-based giant to hold off on a $4.99 Footlong plan, fearing the impact the discounts could have on struggling franchisees in many markets, several sources told Restaurant Business.
The company’s primary shareholders, working to assuage operators’ concerns, are offering to invest $25 million in the brand in January, according to a memo obtained by Restaurant Business. That memo makes the case for offering select Footlong sandwiches at $4.99 in part by explaining that traffic has fallen 24.5% over the past five years.
The company acknowledged that its shareholders “have made an unprecedented investment in the Subway business.”
The shareholders include the family of the chain’s late founder, Fred DeLuca, and his co-founder, Peter Buck.
“Our franchisees are actively involved in many aspects of our decision-making process, and we welcome and encourage their feedback,” Subway said in an emailed statement. “We have support from the majority of franchisees on this program and many others we are testing. However, we typically do have a number of restaurants that don’t participate in our national promotions. It is always optional.”
“Subway is in the midst of a massive transformation, and change of this size takes time,” the statement said.
The petition underscores the challenges that large, franchise-heavy quick-service brands have in pushing value in the current environment. Many systems feel they have little choice, given intense competition and offers from major competitors.
Indeed, news of the petition comes just days after McDonald’s revealed its own upcoming value offering: a $1 $2 $3 Dollar Menu with several items and a planned Jan. 4 start date. Several other quick-service chains have their own value offerings, or are planning them.
Subway grew for years in part because of its value, driven by the ultra popular $5 Footlong promotion, which helped it establish its credentials as the value player in the growing sandwich business—while also helping the chain grow into the largest single restaurant chain in the U.S. by unit count.
But rising costs led the company to move away from that promotion in 2012. Subway has since struggled to come up with an adequate successor—similar to McDonald’s own struggles finding an adequate successor to its popular Dollar Menu.
According to the memo, the end of that deal and increasing check averages at the chain have hurt Subway’s perceived value, particularly when compared with McDonald’s.
That memo also blames growing competition from the likes of Arby’s, which has seen same-store sales increase for six straight years, as well as other sub chains Jimmy John’s and Jersey Mike’s.
In 2016, Subway’s U.S. system sales declined by 1.7% to $11.3 billion, and unit count declined by 1.3% to 26,744, according to the Technomic Top 500 Chain Restaurant Report.
“The shareholders do understand the magnitude of this situation,” the memo quotes Subway CEO Suzanne Greco as saying in discussing the $25 million investment. “However, the shareholders’ commitment to provide these significant additional resources is contingent on solidarity. The U.S. franchisees must be committed to a unified plan with solid execution and an outstanding guest experience.”
John Gordon, a restaurant consultant in San Diego, said that Subway was “stuck” in pushing value, given that it spent so much time pushing value.
“The $5 Footlong, they worked it too long,” he said. “It was the perfect thing during the Great Recession. Subway garnered a lot of market share during that time and their sales went up. Their problem is they didn’t turn it off.”
The $4.99 Footlong offer would largely resurrect that $5 deal, and has been tested in some markets.
Operators are concerned about the Footlong offer largely because establishing that price point nationwide would hurt operators in more expensive markets where labor, rent and other costs are higher. Labor costs in particular are rising annually amid competition for workers and rising minimum wages.
While other chains have used $5 price points to lure customers—like Yum Brands’ KFC and CKE Restaurants’ Hardee's and Carl’s Jr.—Subway’s small, $420,000 average unit volumes, according to data from Technomic, make such discounts more difficult to swallow, operators said.
The discounts come as the chain seeks to improve its use of technology and convince operators to remodel locations.
“Our goal is to strengthen the Subway brand in every market around the world to give Subway franchisees the greatest opportunity to successfully grow their business,” Subway said in its statement. The company said that it is “realigning markets to ensure the right Subway restaurants are in the right locations.” And the company said that remodeled restaurants “are already reporting significant lifts in sales.”
“We have built Subway into the largest restaurant chain in the world,” the company said, “and we are confident that these changes will position the brand for long-term growth.”