Subway franchisees struggling with low unit volumes and rapidly closing stores are asking for a steep reduction in royalty fees—saying that they are too high when compared with other franchises and that the system badly needs the assistance.
The group, which has been expressing concerns in open letters to Elisabeth DeLuca, the widow of the company’s founder Fred DeLuca, wants the royalty to be 4.5% of a franchisee’s sales, down from 8% right now. The anonymous group said that this is the level Burger King reduced its royalty payment to under then-CEO John Chidsey, who currently leads Subway.
“John Chidsey implemented a 4.5% royalty during his time at Burger King,” the group said in its post. “So if it’s good enough for Burger King, it should be good enough for Subway. A reduced royalty would be a major boost for the brand and make us destined for success.”
The group highlighted a handful of chains with lower royalties. Papa John’s, Sonic and KFC charge 5%; McDonald’s, Arby’s and Dairy Queen charge 4%; and Wendy’s charges 3.5%.
But Subway also charges more than all its competitors, which generally charge around 6%. Potbelly, Jimmy John’s and Firehouse Subs all charge 6%. Jersey Mike’s charges 6.5%. Quiznos, which once charged 7%, now charges 5%.
Subway has struggled with store closures in recent years, prompting major stress between the company and the people who operate all of its restaurants. The chain’s average unit volumes fell below $400,000 last year as the pandemic hit companies that rely heavily on people walking inside of restaurants—Subway operates very few drive-thrus and did not have a big digital business going into 2020.
Unit count has fallen from a peak of 27,000 to just over 22,000 at the end of 2020, according to data from Restaurant Business sister company Technomic. “At its current pace the majority of franchisees and stores will be gone in the next three years,” the group said.
The letter was signed by “a growing group of concerned franchisees,” and it follows an earlier letter last month to DeLuca requesting major changes—including a request that operators receive 8% of the proceeds from any rumored sale. Subway is not for sale, the company has said.
An operator who is part of the group, who would speak only on the condition of anonymity, noted that even a 2% to 3% cut in royalties could make a difference. “Two to 3% is $10,000 on $400,000,” the operator said. “That’s a lot of money.”
The closures and lower sales, plus some royalty breaks last year, have hit Subway’s revenue line, which could make it less likely the franchisor agrees to lower royalties.
Subway’s franchise revenues, including fees from new operators and those royalties, were $640.2 million last year, according to Subway’s most recent franchise disclosure document. That’s down 24% from 2019. It’s down by a quarter from 2018.
Subway’s operating income actually improved last year—to $11.3 million from $6.4 million. The company trimmed $104 million from its other operating expenses, or more than a quarter of its expenses.
Subway has not yet responded to a request for comment.
“If franchisees have to pay a royalty to you every week, even in the midst of the worst economic collapse since the Great Depression, then that royalty should not be one of the highest in the industry,” the letter said.
The group chided Subway for its response to its previous open letter, saying that it received “a stale template message from a Subway spokesperson that has probably been used in the past and will be reused in the future.”
The group argued that Subway could afford to cut royalties. The company downsized its employee base “and is actively in the process of shedding the development agent model, reducing its overhead expenses.”
Subway has historically relied on area development agents who take on some of the work of the franchisor, including inspections, in exchange for a share in royalty payments. But the company has been inspecting stores itself lately and is widely believed to be shifting away from that model.
The franchisee group believes that cutting back on royalties would improve operators’ investment in the brand. “We could reinvest more money into our stores and hire more people,” the letter said. “This new savings could help offset the cost of expanded delivery options. We can even run more seasonal promotions like the $5 footlong which the customers love.”