An association of Subway franchisees is pushing back on the franchisor's remodel requirements, arguing that the company has not done enough to justify the financial investment, particularly given the chain’s struggles in recent years.
The North American Association of Subway Franchisees, or NAASF, is backing a franchisee’s arbitration case against the company over the remodel requirement. Details of the case were not available.
“Subway has imposed a non-negotiable remodel timeline that treats franchisees not as business partners, but as corporate ATMs,” the association said in a statement. “These aren’t cosmetic touch-ups we’re talking about [but] six-figure investments that could devastate family businesses, drain retirement savings, and force store closures across communities nationwide.”
Subway in a statement said that it has extended deadlines for remodels and taken steps to cut the costs for franchisees. And it acknowledged the financial challenges operators face.
“We recognize franchisees are facing increased pressures in today’s economic environment and have taken steps to reduce remodel costs, extend deadlines from seven to 10 years, and offer flexible options based on franchisee needs,” Subway said. “Our goal is to help balance their investment with meaningful results, ensuring franchisees can remain competitive in a cost-effective and sustainable way.”
“In today’s competitive environment guests expect a consistent, modern and inviting dining experience,” Subway added. “Maintaining this modern restaurant image is necessary and may require remodeling for any Subway restaurants that currently have an outdated image. This is standard industry practice across the restaurant and QSR marketplace.”
The dispute illustrates one of the challenges for Subway and its franchisees as they navigate a difficult environment.
Many franchise brands require operators remodel their locations periodically. Remodeled locations are generally considered good for brand health, because in a competitive industry consumers prefer dining in nicer establishments and workers prefer working in such locations.
Yet when brands struggle and franchisee profitability declines, their ability to fund remodels takes a hit and operators push back or simply ignore such those requirements. If franchisees are struggling to keep their locations open, remodels frequently become an afterthought.
That can further sales challenges because of the outdated locations. It can also engender frustration in a system in which some operators remodel and others do not.
Subway may illustrate this challenge more distinctly than other brands. The chain has 19,500 locations, but franchisees have closed 7,500 restaurants over the past 10 years, or about 28% of its U.S. footprint. Its stores last year averaged $490,000 in revenue, a record for the chain but only less than $10,000 more than the system generated in 2012. Franchisees own every location.
And this year hasn’t been easy, as consumers cut back on fast food. Earlier this year the company sent cash to franchisees to make up for the loss of an annual payment from its beverage vendor following the recent shift from Coke to Pepsi.
Subway has been sending letters to franchisees who fall behind on remodels, but it’s unclear how far it is pushing its demands that operators fix up their stores.
In the case of the franchisee taking a remodel demand to arbitration, the company in its statement said the specific issue with the operator isn’t just limited to remodels. “This franchisee is facing a number of issues beyond overdue remodels and is currently not in good standing with the brand.”
NAASF in its statement argued that Subway hasn’t provided evidence to show that remodeling stores will generate stronger sales, which could help operators generate a return on their investment.
“What makes this mandate particularly egregious is Subway’s refusal to provide any empirical data proving financial justification that these costly remodels will generate sufficient revenue to justify the massive expense,” the group wrote. “Franchisees are essentially being told: ‘Invest blindly, hope for the best, and trust us completely.’”
Remodel requirements can generate considerable tension within franchise systems. McDonald’s 2017 remodel demand led to the creation of the National Owners Association, the first systemwide, independent franchisee association in that chain’s storied history. In years past, remodel requirements led to a number of bankruptcies at the Yum Brands-owned KFC.
Some brands have taken it upon themselves to fund remodels to speed the process. Burger King for years struggled to convince many of its financially strapped operators to spruce up their restaurants. But it is now investing $2 billion in a combination of financial assistance, its purchase of Carrols Restaurant Group and its own remodel spending, to speed that process. It now expects most of its restaurants to be remodeled by 2028.
Subway rival Jersey Mike’s in 2020 funded remodels for franchisees, which the company credited with a steep increase in average unit volumes.
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