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QSR Feature
Subway, Unscripted
Subway president Fred DeLuca started his sandwich chain 45 years ago and now opens new restaurants at the pace of one every eight hours. What does he know that you don’t?
Fred DeLuca decided when he was just 17 years old that he wanted to launch a sandwich shop.

When 17-year-old Fred DeLuca decided he’d try to earn his college tuition by launching a sandwich shop, he and partner Peter Buck set a goal of opening 32 outlets in 10 years.

“We fell a little short,” DeLuca recalls 45 years later. “I think we had 24 open” by 1975.

It might’ve been the last time his brainchild, now known as Subway, would miss an expansion target. Last year, at a time when the restaurant industry appeared to be contracting, the chain grew by 1,153 units in the U.S. alone. That’s roughly an opening every eight hours.

The brand has grown by at least 1,000 stores each year since 1987, and DeLuca doesn’t see that pace slowing. Indeed, he says, it’s getting easier. He sees capacity for another 5,000–7,000 U.S. outlets, based on current sales-to-penetration levels and his expectations for new traffic generators.

Still, predicting when Subway might hit the wall has become a sport of sorts among quick-service watchers. “After a while you run out of real estate,” says David Henkes, vice president of the research firm Technomic Inc.

Even DeLuca seems to foresee a day when the saturation point might be reached. Through another company, Franchise Brands, he and Buck are supporting two franchise upstarts, Mama DeLuca’s Pizza and Bajio Mexican Grill.

But for now, the speculation doesn’t faze DeLuca, who’s heard it incessantly since 23,000 Subways followed the Pete’s Super Submarines he opened with Buck’s $1,000 in 1965. “We get that question all the time,” he says with a hint of weariness. “‘How many stores can you build?’”

Franchisees have often been the ones asking the question, though with a decidedly sharper edge: How many units can the all-franchised chain hammer into the U.S. market without eroding their sales and profits?

Or as competitors might less kindly put it, how long can Subway stay on its tear?

Differences in the answers have led to battles over the years between the franchisees and franchisor, which has traditionally operated just one unit, a training facility near its Milford, Connecticut, headquarters. “You have franchisees who aren’t too happy when they’re opening a Subway a half a mile away from their stores,” says Technomic’s Henkes.

Tensions have also escalated when franchisees feel a home-office initiative boosts sales, the base of the franchisor’s royalty revenues, without increasing their profits. Most recently, about a third of the operators resisted the addition of breakfast, says Loren Goodridge, a 17-unit franchisee (with two under construction) and past head of the North American Association of Subway Franchisees (naasf). The a.m. menu was rolled out in May after being extensively tested in more than 7,000 restaurants.

“There was a concern among franchisees about losing money on it,” says Steve Forbes, a two-unit Vermont franchisee who serves on NAASF’s board. He counted himself among them.

Nonetheless, all parties attest that relations between licensee and licensor may be at an all-time high.

Part of that, they stress, is the rosy afterglow of doing well—all the sweeter when so much of the chain market has been gasping. “The sandwich category is doing better than most sectors, and it’s hard to tell if Subway is benefitting from that or driving it,” Henkes says.

But franchisees and franchisors also cite a new sophistication to their interactions, to the approach to the business, and even to the licensees themselves. Although “we still get a lot of new Americans” as owners, DeLuca says, the roster now includes many sizeable companies with dozens or hundreds of stores.

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