Subway is expected to name a new CEO in the coming weeks, if not sooner. The sandwich giant has gone a full six months without a permanent chief executive.
But the company has been making changes. It has named a new chief marketing officer in Greg Lyons. It has also removed a couple of other executives, including VP of communications Lorri Christou, to make way for a new CEO.
It’s the second-longest stretch the chain has gone without a full-time CEO. The company had previously gone without a CEO for a year before the hiring of John Chidsey in 2019, a period Chidsey himself said was damaging to the brand.
It also speaks to the difficulty of the job. Subway was, and is, the most difficult turnaround in the restaurant industry today. And while it is in better shape than it was six years ago, the new CEO will have plenty of tasks ahead to fix the brand. The brand is still closing hundreds of locations per year and customers still question its overall value.
First, let’s recall what’s happened to Subway. The brand peaked at 27,000 U.S. locations in 2015. It was singularly dominant in the sub-sandwich space. But it shifted away from the $5 Footlong in 2012 and didn’t replace it with an effective enough promotion.
And then in 2015 Jared Fogle was arrested and later sent to prison, eliminating its health-focused marketing campaign. All that hurt average-unit sales, and it exposed the chain’s excessive unit count. Subway had spent years putting stores anywhere they could and continued doing so even when the brand should have downshifted unit expansion.
Between 2012 and 2019, just before the pandemic, average unit volumes fell by $60,000 per unit, from a peak of $481,000 in 2012 to $420,000 in 2019. That’s a 15% decline at a time when costs for food and labor were increasing.
When stores stopped making money, franchisees shut down. Subway has closed 7,600 restaurants since 2015. No other restaurant chain has closed more locations. It would be the equivalent of McDonald’s closing 3,500 restaurants.
Subway has done only moderately better internationally, where the chain has closed about 2,000 locations since its 2016 peak.
Chidsey’s arrival did stabilize leadership. And the company undertook several efforts to improve unit volumes and fix some of the foundational problems that led to those closures. The company bought out most of its business developers, the people who operated like master franchisees, selling and inspecting stores and splitting royalty payments. Subway itself is largely responsible for that now.
The company also made improvements to its ingredients, added equipment like slicers and unleashed a flurry of menu changes. It also changed its marketing. That helped rebuild unit volumes, which have increased every year since 2021.
Last year, Subway’s average-unit volumes reached an all-time high of $490,000, according to data from Restaurant Business sister company Technomic. That’s 17% higher than they were in 2019.
But to put into perspective just how difficult this brand is, that is still $180,000 short of where those volumes would be if they had simply kept pace with inflation. What’s more, unit volumes increased just 1% last year.
If Subway’s relatively new owner, the private-equity firm Roark Capital, is to get a return on its $9.6 billion investment, the next CEO will need to get those unit volumes back up.
That is a particularly difficult feat these days. Consumers do not believe fast-food restaurants are a good value, and Subway in particular has been in the crosshairs. Many diners still recall the $5 Footlong.
Subway’s sandwiches are a lot more expensive these days, thanks to years of inflation and the introduction of more premium items with more meat and cheese.
According to Price Pulse data from Restaurant Business sister company Technomic, the national average price of a footlong Oven-Roasted Turkey is $10.27. For a 6-inch, the price is $6.70.
For an Ultimate BMT, the national average is $11.08. For a 6-inch, the price is $7.11.
Value scores are dismal. According to Technomic, Subway was 55th of 65 quick-service chains ranks in terms of prices relative to other, similar locations.
To fix this, Subway has used broad-based discounts across its menu to attract customers, either through the app or mass mailings. But that often generated pushback from franchisees, angry over deals such as a buy-one, get-one-free item on subs that cost $11 or more.
Those franchisees have relatively few methods left for cutting costs. A typical franchise location runs with one or two workers at a time, leaving little room for labor efficiency.
The bulk of Subway franchisees are small operators with just a couple of stores, meaning they earn their living off the profits from those restaurants. That means they have little in the way of resources to fund remodels or other improvements that could drive more sales.
In addition, the brand even after all those closures still has too many restaurants. Subway generated $9.5 billion from 19,500 locations last year. The $490,000 remains low, particularly for current costs.
At $680,000 per unit, the volumes the company should have if it kept pace with inflation, Subway could generate those system sales from just 14,000 restaurants. If we give the brand some leeway and instead say that average unit volumes should be $600,000, that would be 15,830. Or, in other words, Subway probably has 3,000 to 5,000 restaurants too many.
Of course, if consumers were excited about the chain’s sandwiches, that entire exercise would be moot because consumers would gladly go get one no matter how many locations there are. And maybe that’s really the challenge for Subway’s next CEO: Get people excited about going there again.