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Why Subway is no easy fix

Too many locations and low unit volumes make the chain's challenges difficult. But they're not insurmountable, says RB's The Bottom Line.
Photograph: Shutterstock

The Bottom Line

On Tuesday, we reported on continued closures of Subway restaurants around the country last year as the pandemic worsened what had been a multi-year decline.

Fixing the chain and stemming those unit closures will not be easy. With about 22,000 U.S. locations, Subway is a massive ship, one with thousands of drivers in the form of the chain’s franchisees, who operate those restaurants and have been closing in droves. Franchisees we’ve spoken with expect more restaurant closures this year.

To understand how Subway got into this problem, go back 15 years. At the time, the chain had surpassed McDonald’s to be the largest restaurant concept in the U.S. by unit count. And it was on a roll, thanks to a successful run of advertisements featuring the weight-losing spokesman Jared Fogle.

Its response to this strategy was to build a lot of units, putting its sandwich artists in gas stations and Walmarts and community centers. In 2013, the chain’s founder and longtime CEO Fred DeLuca vowed to have 100,000 global locations one day. Its development agents, which take a portion of operators’ royalty payments, frequently put restaurants close to existing restaurants.

Subway opened 5,000 locations between 2004 and 2009—growing unit count by nearly one-third in a remarkably short time for a chain that big. It would have 27,000 locations at its peak in 2013.

To put that into perspective, in that same period McDonald’s—which Subway surpassed as the country’s largest chain by unit count—dramatically reduced expansion in a bid to build average unit volumes, adding just 300 locations in that same five-year timeframe.

Not surprisingly, McDonald’s average unit volumes have grown while Subway’s has declined. Between 2009 and 2019, the burger chain’s average revenue per location climbed 31% to $2.9 million, according to data from Restaurant Business sister company Technomic.

Subway, by contrast, saw its unit volumes decline by 5.6% over that same period, to $420,000 from $445,000. Had the company simply kept unit volumes growing in pace with inflation, they would be $530,000 right now. In reality, that 5.6% decline is a 25% decline when adjusted for inflation.

Unit economics are the foundation of a restaurant chain. Strong revenues and profits per location make everything else workable—remodels, new products, technology adoption, etc. As franchisees’ costs increased, their lack of profitability made it difficult for operators to keep going and led to cuts in services and other costs. More than one franchisee suggested that many small-scale owners in the system make less than minimum wage considering how many hours they put in on the job.

It also makes some services that proved vital during the pandemic particularly difficult to execute. “They have made a push in curbside, but curbside doesn’t work that well when you’re running a two-person staff with the franchisee owner-operator being one,” restaurant consultant John Gordon said. “I love curbside. It’s critical for the industry as a whole. It just doesn’t work in many locations.”

To be fair, 2020 was a particularly difficult year for obvious reasons. But the chain’s low unit volumes, meanwhile, made it particularly susceptible to the economic challenge presented by the pandemic and made it difficult for operators to add services that would prove necessary—while many of its top competitors recovered.

Many have suggested the chain needs to close thousands of units. But simply closing units in and of itself doesn’t help a brand and can hurt it in the long run as consumers think a chain is going out of business. One simply needs to look at Subway’s deposed rival, Quiznos, which went on a multi-year downward spiral that never seemed to abate.

Chain executives clearly understand the need to improve sales and franchisee profitability—CEO John Chidsey said as much in a pair of presentations to employees after he took over management of the chain in 2019. The pandemic has made reversing those sales challenges more difficult.

Marketing has been another challenge. The company has never been able to come up with a value option to succeed its $5 Footlong, which carried it through the Great Recession, or the healthy focus under Fogle, whose arrest in 2015 made the chain’s challenges that much worse.

Subway has used an interesting new ad campaign during the NFL season featuring New England Patriots Coach Bill Belichick and former Seattle Seahawks running back Marshawn Lynch. It also has new protein bowls. But an effort to bring back the $5 Footlong in some form last year was met by anger from the chain’s franchisees, many of whom refused to honor the promotion.

Operators we spoke with mentioned speed and quality as two factors they believe should be improved. It can take too long to make a sandwich and employees have to ask too many questions—indeed, throughput is a vital element in a restaurant’s success right now as takeout has become the dominant form of restaurant commerce. Quality is another issue, especially given how much competition Subway has from the likes of Jersey Mike’s, Firehouse Subs and Jimmy John’s.

All that said, Subway can most certainly turn things around. A good marketing campaign, an innovative new product that proves popular or something random like a celebrity tweet can change fortunes in a hurry. Plenty of chains left for dead have made significant comebacks, including Domino’s, Arby’s and KFC. There’s no reason Subway can’t do the same thing.

But it will be a lot of work, and more locations may close in the meantime.

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