Subway is requiring franchisees to go through an extra review process when they want to close stores as the fast-food sandwich giant seeks to slow the pullback in its U.S. business.
In a message to franchisees seen by Restaurant Business, Mary Greenlee, SVP of development for the Miami-based brand, told operators that any closure must be reviewed by a committee. Those reviews started this month.
The message also included a reminder that franchisees could owe future royalties and marketing fund payments on stores they close before their agreements are up, which some operators perceived as a threat.
“A single closure looks small,” Greenlee wrote. “Several hundred of them reset the economics of the entire system, and the franchisees who stay and invest are the ones who pay for it.”
The review comes as the franchise is about to launch a big push to build late-night sales on Aug. 16.
Along with that push comes new requirements on franchisees, including one requiring they keep stores open 98 hours a week, rather than 91 that was previously required. They are also required to accept third-party delivery and keep it on most of the time, according to a system message from Subway’s President of North America Damien Harmon.
“It makes no sense,” one franchisee said. “Sales are down, profits are low, and the answer is to be open more hours because third-party delivery will make you profitable for those additional hours.”
We sent a list of questions to Subway seeking comment. The company did not respond. But we did receive unsolicited emails from six different franchisees, each of which featured glowing comments about late-night hours. None of them included comments about the new closure process or other requirements.
One of the operators, Chris Leshovsky, said he extended hours to 11 p.m. in early July and generated “close to a whole extra day’s worth of sales” between 9 p.m. and 11 p.m. He is now extending hours to midnight on Thursdays, Fridays and Saturdays at that location and is extending hours at his other locations.
When we asked the franchisees about the closures requirement, only half of the franchisees responded.
One of them, Ash Manchanda, an operator in Elk Grove and Redding, California, said he understands why the company wants to “have a conversation” before operators close stores. “In my own experience, the company has been supportive and understanding when a business model truly isn’t working,” Manchanda said, noting that he didn’t perceive the message on closures as a threat.
But the requirements highlight the pressure Subway is under to boost sales amid a difficult environment and its own challenges. And it highlights the sensitivity of the topic of closures, given that many franchisees are closing stores and walking away because they’re frustrated and losing money.
Subway operates a large network of low-volume stores, effectively trading unit economics for omnipresence.
But those volumes have not kept pace with inflation. A typical Subway unit generates only about $500,000 in revenues per year. Firehouse Subs, Jimmy John’s, Potbelly and Jersey Mike’s all do close to $1 million or more.
That has led to large numbers of closures. Subway has closed more than 8,000 locations since it peaked at more than 27,000 locations in 2015. That includes more than 700 last year.
To put that into perspective: Only four restaurant chains, including Subway, have more than 8,000 U.S. locations. The closures have shed more than $2.5 billion in total system sales at the chain, which is now the 10th-largest U.S. restaurant brand, according to Technomic. Subway has closed more locations than Taco Bell has U.S. restaurants.
Even franchisees that do sell stores are sometimes walking away with nothing. One operator, for instance, said that they sold one of their stores for $1 and is looking to offload another. That said, Subway resale values range considerably on broker sites, though the value of one of the chain’s shops is just over half that of the average for all deli and sandwich shops listed on BizBuySell.com.
All of which has resulted in frequent pushback from franchisees over strategies such as new discounts, extended hours, and even the company’s new slicers. And franchisees often refuse to go along with the company on some of its initiatives, such as digital offers.
That has frustrated management dating back years, because the lack of consistency can damage a brand’s reputation and weaken marketing efforts.
In his message, Harmon noted that 30% of the chain’s restaurants didn’t participate in a recent deal in partnership with the Disney movie "Moana," which provided a collectible cup whenever customers agreed to pay an extra $1 to upgrade their bundled meals. “This was a full-priced promotion with an average check of $21, and cups provided to restaurants at no cost,” he wrote.
Subway’s relatively new owner, Roark Capital, used a substantial amount of debt to buy the chain, which mean there are more serious potential implications for the brand if management can’t slow the company’s decline.
The company is now requiring franchisees submit an “Existing Location Viability Review,” which puts the potential closure in front of a committee, led by Greenlee. That committee will evaluate each location to determine whether it could be saved, sold, relocated, or open a new location in its place.
“Closure is the last resort,” Greenlee wrote, “and results in triggering obligations under the franchise agreement.”
She argued that closures cut purchasing power, reduce the ad fund, diminish the brand’s market presence and slow funding from vendors, notably promotional incentives.
“Every restaurant that closes takes money out of your pocket and your neighbor’s, not just the pocket of the franchisee that closes it,” Greenlee wrote. “When a restaurant closes, its sales will likely go to a competitor.”
Some operators we spoke with privately said that the new process will slow closures. The threat regarding unpaid future royalties, meanwhile, could potentially frighten some franchisees into keeping money-losing stores open.
One operator called it “a bully’s attempt to slow store closures.” But that operator also said that some franchisees are losing too much money to keep their stores open, even with the prospect of legal action from Subway.
Three out of 10 Subway operators didn't participate in a Moana Meal promotion.| Photo courtesy of Subway.
Subway is also planning to launch a nationwide marketing campaign on late-night hours, driven by third-party delivery. The company will require operators to be open during the chain’s “core hours” of 9 a.m. to 10 p.m., which amounts to 91 hours a week. They will also be required to be open seven more hours. Some operators can apply for a waiver from the hours requirement, but the franchisor has also sent notices to franchisees who have not complied with the previous, 91-hour rule.
“The opportunity in front of us is too big to pass up, and the franchisees who have already extended late-night hours are seeing great progress,” Courtney Hindorff, recently named interim head of North America franchisee performance, said in a message seen by Restaurant Business.
Much of the business comes through third-party delivery. Manchanda said being open late at night has pushed his restaurants’ sales up 20% to 30%. “I joke with my team that our third-party delivery providers have become our new best friends,” he said.
But that has also come along with new franchise requirements, including extended hours, and the acceptance of digital offers. Franchisees must maintain a delivery “uptime” of 98% or more. They must also use “all available” providers, including DoorDash, Uber Eats, and Grubhub. Franchisees must also follow all delivery offers.
“If this year has taught me one thing, it’s this,” Harmon said, “when franchisees don’t follow the same brand and operating standards, they erode the brand for everyone, including those already doing it right.”