Subway has changed much of how it does business under CEO John Chidsey. It cut much of its corporate staff; announced plans to open a second corporate headquarters in Miami and wants its franchisees to submit their restaurants to a review board before closing them.
But one quiet change going on behind the scenes is potentially bigger than all of them. The Milford, Conn.-based sandwich giant has bought out more than a third of its business development agents, or business developers (“BDs,” in Subway parlance).
Those are master franchisees that have helped fuel much of the brand’s growth over the past few decades, often controversially so, and they take a share of the royalties that operators pay the brand.
Subway is instead shifting to a more traditional franchisor-franchisee model, which it calls “Subway Market Operations (SMO),” in some of its markets.
“As Subway embarks on a multi-year transformational journey to build a better Subway, we’re committed to improving across every aspect of our business, including constantly evaluating our operations and adapting our model to best position us for long-term growth,” a Subway spokesperson said in an email.
Subway said that in some of its markets the company will provide training, operations and development support directly to its franchisees—rather than go through the business developers. The SMO team “is led by franchise industry experts who work directly with franchisees to drive excellence in their territories,” the spokesperson said.
The company is not necessarily moving away completely from its business developers. “Subway BDs have and always will play a key role in our brand development and franchisee operations and we greatly appreciate all the work they do,” the spokesperson said.
Nevertheless, the move represents a significant shift in strategy at a time of major upheaval at the chain. That includes an effort by the company to either get operators to pay a higher royalty or choose a franchise agreement that gives the brand broad powers to restrict hours of operation and require the franchisees to go along with all pricing promotions.
The company is making these changes amid a historic decline in unit count. Subway’s franchisees have closed about 5,000 locations since 2015 and operators say thousands more could close as operators walk away from the brand. With the company not actively adding franchisees in many markets, it makes some sense to shift away from the use of business developers.
Subway became the largest restaurant chain in the world by unit count—it operated 27,000 U.S. locations in 2015, almost double the number of domestic McDonald’s restaurants—in part by using intermediaries to do some of the heavy lifting.
Business developers would sell franchises, inspect restaurants and train operators and in exchange shared in the royalties paid by franchisees in their market. Operators pay Subway 8% of sales as a royalty and developers would take a third of that.
That’s an unusual strategy for a franchisor. Most restaurant franchisors, and certainly big ones, do those tasks themselves, though some will contract with third parties for things like franchise sales.
By buying out those business developers, Subway takes more of the revenue itself and can control the cost for providing franchise services—which could improve earnings. Many franchisees remain convinced that the company is being prepared for an eventual sale—though the company has said on more than one occasion that it is not on the market.
At the same time, business developers have been accused of conflicts of interest on the brand and for pushing franchisees into stores they don’t want.
Over the years as the company grew, many operators say they were pushed into opening stores near their existing restaurants by developers who said that they would sell those locations to someone else if they didn’t. Franchisees say that, by not agreeing to open those locations, they risked losing business to the new units.
Meanwhile, the agents themselves are often franchisees, and operators have long accused them of using their power of inspections and store monitoring to force operators out of their stores so they can pick them up themselves at a lower cost. Operators say these agents have a conflict of interest by inspecting stores they could later acquire themselves.
“Whether a territory is managed by a business developer or Subway Market Operations team, the end goal is the same, to ensure we’re delivering a gold standard of support by actively coaching franchisees in order to help them increase their sales and profitability,” the Subway spokesperson said.