Subway grew into the world’s most prolific franchise using an army of small-scale operators, who typically operated just one or two restaurants that they relied on for their income. Today, the typical franchisee in the system operates just two locations.
But after years of slowing sales and with thousands of closed restaurants, the sandwich giant is trying something different: larger operators.
Subway wants more franchisees who operate several stores or more. So, the company has been working with existing operators to buy more locations and has been targeting large-scale franchisees of other concepts hoping to convince them to join the system.
“We’re the largest restaurant company in the world,” said Steve Rafferty, Subway’s SVP for development in North America. “One- and two-restaurant operators built us into that company. But it’s time to evolve.”
This could certainly be the time to do it. A lot of Subway locations are on the market right now, sources tell Restaurant Business, as franchisees retire or seek to leave the system. The company hopes to put some of these stores together in packages that would give larger franchisees a foothold into the system, or existing operators more stores to operate.
By targeting large-scale franchisees, Subway is following a strategy used by many other legacy concepts. Companies frequently start by targeting smaller franchisees and over time those franchisees buy or build more stores. At McDonald’s, for instance, a company that similarly grew with small operators, its typical franchisee now operates eight locations. Two decades ago they averaged three stores.
Subway CEO John Chidsey deployed a similar strategy when he oversaw Burger King, which over the years has shifted to larger scale operators that now dominate the system. Its largest franchisee is Carrols Restaurant Group, which now operates more than 1,000 locations.
Franchisors like larger-scale franchisees because they have more access to financing and can more easily pay for remodels and new store development. There are also fewer of them to deal with, which is not an unimportant consideration for a giant brand like Subway, which has 22,000 units in the U.S. alone. At two stores per operator, Subway has about 11,000 franchisees. McDonald’s, which has 14,000 stores, has just 1,600. But some large systems like Applebee’s have just a few dozen operators that each control hundreds of restaurants.
Larger franchisees can also better withstand weaker stores. A single-store franchisee relies fully on that one store and when it struggles they face greater pressure to fix it or close. A multi-store operator can keep that restaurant going and potentially fix it before closing.
This could be an especially key point for Subway, which operates with some of the industry’s lowest average unit volumes, about $420,000 before the pandemic, according to Restaurant Business sister company Technomic.
Small-scale operators struggle with such low unit volumes. The company has closed more than 18% of its locations over the past five years as those volumes stagnated and costs increased.
Subway’s shrinking unit count
Source: Technomic
Larger franchisees may also be able to fund more remodels or make investments to move restaurants to better areas.
There are some concerns, however. Larger franchisees can be difficult for a brand to control. And when a single large operator struggles they tend to take a big swath of stores with them. For these reasons many brands have love-hate relationships with big franchisees and sometimes seek to restrict how big they can get or whether they can use private equity financing.
Subway does not have such problems right now. And its issue may simply be getting these operators into the system. “A brand that cannibalizes itself that much is concerning,” one such operator told me. The franchisee cited its large number of low-volume restaurants as a major concern.
Such franchisees are among the most sought-after in the industry. For all the concerns about large-scale franchisees, many of them tend to have their pick of potential restaurant concepts.
Still, existing Subway franchisees we’ve spoken with says it makes sense for the brand to be focused on getting larger operators. Those existing franchisees may also be the most likely ones to become the kind of multi-restaurant operators the brand covets, anyway. Rafferty cited one such operator that has gone from two restaurants five years ago to 60 today.
“He sees the opportunity, understands the unit economics,” Rafferty said. “He’s built some and acquired more. That’s one way to do it.”
The company says it is not completely abandoning its smaller operators, however, and there are some that remain perfectly happy with just one or two units. “We honor the legacy of our single-unit and smaller franchisees,” Rafferty said. “They’ll always be part of our future here.
“But in the course of any business, people move onto other things. They retire. Or franchisees might want to leave the system.”