Subway has made massive changes in recent years, to everything from its franchising strategy to quality of the bread it uses for its subs.
But even as the company says its sales are improving, it continues to push more changes, both to grow sales in the U.S. and add new locations overseas. In an interview, CEO John Chidsey would not address reports that the company is on the market, but he did discuss many of the efforts the Milford, Conn.-based fast-food sandwich chain is making to generate stronger sales both here and abroad.
If his plan comes to fruition, Subway will have a lot more locations overseas and stronger sales in the U.S., coming from restaurants that are newer, open later and with more large-scale franchisees.
More international locations
With relatively few places to put new stores in the U.S., Subway is once again eyeing international development. And it has work to do.
“If you look at McDonald’s, Burger King or Domino’s, they’re all 2-to-1 international to U.S. They’re twice as large internationally as they are domestically,” Chidsey said. “We have 20,000 restaurants in the U.S. That implies 40,000 outside the U.S.”
With some 16,000 international locations, in other words, it means Subway must add another 24,000 locations to match those other chains. “That’s a big gap,” he said. “We have 24,000 restaurants to go before we catch up with other competitors.”
While Subway has closed thousands of U.S. restaurants in recent years, it has quietly shrunk in international markets, too. The company’s international franchisees have closed nearly 2,000 locations over the past five years.
That’s been a particular problem for the brand, coming at a time when other chains have thrived outside the U.S. Both Domino’s and Burger King, for instance, have increased their international restaurants by 50% in that same period.
Subway has inked some deals with international operators in recent months. In August, for instance, the company reached a 400-store agreement with TFI TAB Food Investments to build restaurants in Turkey. And it signed a deal in Saudi Arabia in late 2021 for 145 locations.
Remodels and digital sales
Subway’s average unit volumes hit a 10-year high in 2022, the company said. But even with those increases, the volumes remain below $480,000 in revenue per year, according to data from Technomic. That’s the lowest among major restaurant chains.
Even if it does stop store closures, Chidsey expects Subway will “tread water” in the U.S. The company’s biggest opportunity is simply increasing sales per unit. “Our growth in the U.S. is going to come from driving AUVs,” Chidsey said. Indeed, if the company could simply get unit volumes to $600,000 per restaurant, Subway would generate another $2.5 billion in U.S system sales.
Getting there is not so easy, not with rivals out there like Jersey Mike’s, Inspire Brands’ Jimmy John’s and Restaurant Brands International’s Firehouse Subs.
Chidsey believes digital sales is one way to do it. The company’s digital sales have tripled since 2019 but, Chidsey said, “we have a long way to go to keep driving digital.” He also believes the company has potential to push sales with gift cards. Subway bought the gift card business from its franchisee-run cooperative last year. Catering, a business the brand is pushing now, will also help.
So will the company’s new “Subway Series” subs, which come at a higher price point. About 20% of Subway’s sales is from those 12 sandwiches. Chidsey hopes to at least double that. “We’d like to drive it closer to 40% to 45% in the coming years,” he said.
Remodels could also build sales. Some 8,500 restaurants in North America have been remodeled, with 2,600 of those finished last year. The company expects another 3,600 to 3,800 locations to be remodeled this year. “We’ll still get sales lifts from those remodeled,” Chidsey said. “There are five levers we can pull.”
The late-night debate
Chidsey also believes that Subway operators could generate more sales by simply staying open. The company has pushed operators to expand hours, believing that it would generate more revenue per store.
Franchisees have pushed back, citing the difficulty finding enough workers to staff stores, coupled with high labor costs. Many believe it simply isn’t profitable to expand hours, not given their existing unit volumes. Chidsey said that Subway’s hours of availability is down 11% since before the pandemic.
He noted that decades ago, the chain sold a lot of subs late at night. There are still some operators open 24 hours.
“Franchisees need to start pushing their hours again,” Chidsey said. “Subway is the perfect late-night opportunity. At one point the brand had a late-night business.”
There’s also something outside of Subway’s control: People returning to the office. A quarter of Subway’s U.S. restaurants continue to underperform, in part because they’re in areas that depend on employees who would visit one of the chain’s locations for lunch. Subway remains primarily a lunch destination.
But, Chidsey notes, those locations are still open. “You can make money at very low amounts in our system,” he said. “But to really get back to where they need to be, we need federal workers back in the office. We need people back to San Francisco. We need things like that to happen.”
Franchising changes
The brand continues to push changes in its franchising system. One strategy is to bring larger operators into a franchise traditionally dominated by small-scale, “mom-and-pop” franchisees.
The company is doing this by luring large-scale operators to come in and buy swaths of restaurants, and by convincing existing operators to acquire more locations.
Getting existing operators to open new locations is one thing. Take a franchisee who is in a market and let them buy new restaurants and expand that way. “The brand for a long time believed in mom-and-pop and onesie-twosie franchisees,” Chidsey said. “There are a lot of people in the system that wanted to be in 10 to 20 units but were never allowed to grow. We want to encourage those guys.”
But Subway also believes it could convince large operators in other systems to buy Subway locations and come into the brand. Chidsey believes the low cost of operations could help with that. “Look at what it costs to build a Subway,” he said. “It’s way less expensive. There’s no broiler, no fryer, no grease trap, no hood. You don’t cook any food you found in the restaurant and you need a much smaller footprint.”
Getting large-scale franchisees to come into the Subway system is not easy and some operators we spoke with said privately they wouldn’t consider the brand at this point. Still, Subway hopes to package restaurants for sale in certain markets and use them to get some of these franchisees into the system.
One way could be through remodels. “There are people in our system now. They might not have the money to do a remodel,” Chidsey said. “If they’re forced out and we get those stores into our hands, they could be packaged together.”
Thus, he said, the larger franchisees will be a combination of “existing plus new franchisees” who come into the system.
The company also expects to keep making changes to its system of development agents. Subway has been buying out development agents, who act as sub-franchisors by selling franchises and inspecting franchisees’ restaurants. In exchange, the agents share in the royalties.
The company had 135 such agents when Chidsey arrived. That is down to 35 agents that cover less than 40% of the U.S. system. But Chidsey suggested that it would continue to buy out such agents. “In five years, we might have business developers in Alaska or remote spots,” he said. “But as they come up for renewal, we will not renew them.”
That is a substantial change for the brand. The business developers were a primary force that drove the company’s growth over several decades.