Why Subway franchisees hate the $5 Footlong

While the offer worked when it was first proposed, a decade’s worth of food and labor costs make it difficult, if not impossible, to make a profit, says RB’s The Bottom Line.
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Subway’s franchisee association recently recommended that its members not go along with a renewed effort to bring back some form of the $5 Footlong.

It was among the more aggressive moves by operators, but one that was nevertheless unsurprising. That’s because operators have been pushing back against the brand’s discounts for years now, and nothing gets them angrier than anything resembling a 12-inch sub for $5.

For franchisees, the reason is simple: It’s difficult, if not impossible, to break even on a $5 Footlong in 2020.

The new offer gives customers two Footlong subs for $10, which operators argue is another iteration of the $5 Footlong. It also comes with $2,100 in subsidies for those who participate, though such subsidies come from rebates from Subway’s contract with Coca-Cola—rebates that franchisees say they end up paying through higher beverage costs.

To get an understanding of why franchisees do not like the $5 Footlong, or two-for-$10, we asked Keith Miller, a Subway franchisee out of California and an advocate for franchisee issues, to walk us through the cost associated with it.

We kept it at $5 for simplicity’s sake and did not include the rebate in our calculation. Yet the calculation provides a good idea why franchisees oppose such offers, and why discounts in a franchise are all the more challenging.

Start first with labor costs. Wages vary widely by jurisdiction but are increasing considerably in many markets. We used Minneapolis, which has a minimum wage of $13.25. That’s higher than average in many areas, but in most places operators are paying above the minimum, anyway.

We added 20% for workers compensation cost, bringing that wage to $15.90 per hour.

According to Miller, Subway says that operators should be able to produce an average of eight subs per hour on a typical day, including prep work, slow times and busy times.

Based on that eight subs figure, the labor cost for a sub made at a Minneapolis Subway location is $1.99.

That’s a 40% labor cost on a $5 sub.

Then there is the food cost. The cheapest sub from a food cost perspective on Subway’s menu is turkey, at $1.82.

Franchisees also have to pay royalties and ad funds on the cost of that sub. That’s 62 cents.

Add it up, and that $5 turkey sub costs the operator $4.43 before other costs are even factored in. Rent is likely about 10%, which brings that cost to $4.93. That leaves the operator with seven cents. That’s the cheapest sub.

Then there is roast beef, the most expensive sub. The food cost on that sub is $2.84, or 57% on a $5 Footlong. The food, labor and royalty cost on that sub is $5.45, meaning the operator loses 45 cents before fixed costs are even a factor.

Many operators are convinced that customers will order more expensive subs when they purchase a $5 Footlong. Still, even the cheapest sub is a breakeven prospect at best for franchisees in more expensive labor markets.

There are other factors, however.

For one thing, Subway operators have less control over their food costs than many of their competitors offering $5 price-point items. For instance, McDonald’s ensures its operators put just two pickles on a Quarter Pounder with Cheese but at Subway that number can vary and customers can easily request more pickles or olives on their sandwiches. That can quickly increase costs.

Another variable is efficiency. While Subway believes that operators should make eight subs per labor hour, in reality operators say it’s less than that because the brand has added things like toasters and other items that made operations more complex. Many operators don’t do eight subs per labor hour. Some may do more.

For Subway franchisees, the issue of discounts is important. The typical store even before the coronavirus made just about $420,000 in sales per year, so it’s less able to withstand money-losing products. More than 3,000 Subway locations have closed over the past five years, according to data from Restaurant Business sister company Technomic.

The $5 Footlong was a remarkably successful promotion in its day. The idea started with a franchisee and was expanded chainwide in 2008. During the recession it helped carry Subway when consumers were only dining on deals. And the company has struggled to develop a workable discount offer since.

Yet a decade’s worth of food and labor cost increases have made it difficult, if not impossible, for operators to break even on that price point.

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