Subway taking a fresh look amid ratings drop
It was a development that went mostly unnoticed entering 2017, when Entrepreneur released its annual Franchise 500 list topped this year by 7-Eleven, and followed by usual suspects McDonald’s and Dunkin’ Donuts — but a conspicuous omission high on the page. Where was Subway? Down below, as it turned out — and way down at that, well behind the newest sandwich franchise darling in Jimmy John’s Gourmet Sandwiches, which placed fifth after leading the list in 2016. Subway ranked fifth among sandwich shops and 35th among all franchises, looking up at 15th-ranked Firehouse Subs, Jersey Mike’s Subs at 21 and McAlister’s Deli two slots behind.
It was only the second time in a generation that Milford-based Subway failed to make the top five on the Franchise 500; it placed ninth in 2011, while still the runaway leader among sandwich shops that year when Champaign, Illinois-based Jimmy John’s barely cracked the top 40. And for the decade prior under its legendary, late founder Fred DeLuca, Subway was a fixture at the top of the Entrepreneur list.
If not a big thing to the lunch crowd trying to make a snap decision between an Italian B.M.T. or Sweet Onion Chicken Teriyaki, Subway’s standing on the Franchise 500 matters no small amount for a company with cash flow pegged to royalties paid by franchisees — who have plenty of options in selecting the company they wish to ride to selfsufficiency.
For years, entrepreneurs jumped on board Subway for several advantages — a McDonald’s-like familiarity promising steady, recurring business from its regulars; relatively low startup costs compared to many franchises; massive ad visibility; influential innovations such as baking bread fresh on the premises and keeping its fresh ingredients in full view; and the ability to squeeze shops into tight storefronts, holding down rent.
That success had a direct impact on the economic vitality of Milford, with the town reporting a Subway workforce of between 900 and 1,000 people the past few years, up from 700 five years ago. Subway currently lists about 75 open jobs in Milford.
‘They want to try it’
But two years ago, Subway was buffeted by the July 2015 raid on the Indiana home of former “Subway guy” pitchman Jared Fogle, producing evidence that led to his conviction that November on charges of having sex with minors and possessing child pornography.
And in September 2015, DeLuca died of leukemia that had been diagnosed only two years before, only a few weeks past the 50th anniversary of his launch of the company in Bridgeport with backing from cofounder Peter Buck.
With DeLuca ailing, in June 2015 Subway had promoted his younger sister Suzanne Greco to president, with Greco a Sacred Heart University graduate who worked her way up the chain from an initial role in 1973 as a counter “sandwich artist” through operations and marketing.
Under Greco, Subway is attempting to refresh its image for customers and current and future franchisees — first with a major digital initiative launched in June 2016 at its Milford headquarters, and this past June unveiling a redesign of its restaurant’s signature architecture meant to evoke the Tuscany region of Italy, marking the first major change to its look in 15 years.
Contacted this week by Hearst Connecticut Media, Subway did not make an executive immediately available to share the company’s early learnings from its digital and design initiatives and how it may evolve over time as it gets early feedback from franchisees and customers.
From a customer-service perspective, the biggest change will be fixed tablets allowing customers to punch in their orders themselves. Subway also plans to update its menu with new sauces and condiments like pico de gallo.
Both initiatives echo the ongoing transformation of McDonald’s to update its menu and order flow in an effort to draw new customers, including at southwestern Connecticut locations. According to CEO Steve Easterbrook in a Tuesday conference call, the McDonald’s initiative is working, with guest counts up 3 percent in the second quarter from a year ago, and samelocation sales rising 6.6 percent from spring 2016.
“When we’ve invested the amount we have — and our owner/operators investing the amount they have in the business — whether it’s in core recipe improvements, whether it’s in the service experience, whether it’s in technology, it’s great just to have more customers visit your restaurant to actually notice the investments we’ve made,” Easterbrook said last week. “It’s ... getting more people back into our restaurants and seeing the changes we’re making. ... They’re curious, and they want to try it.”
‘Good for the whole system’
If McDonald’s metrics are easy enough to track as a publicly traded company that files regular reports with the Securities & Exchange Commission, as a privately held company Subway does not disclose specifics of its business beyond its restaurant count — 44,625 globally at last report, run by some 21,000 franchisees.
But its Doctors Associates parent company makes franchise disclosure documents available to various regulatory entities, with one such FDD form filed last year in Minnesota disclosing $1.1 billion in revenue in 2015, down 4.3 percent from the year before (franchisees pay Subway 12.5 percent of their weekly gross revenue after sales taxes, with 8 percent as royalties and 4.5 percent more supporting advertising).
Dating back to 1974 when Subway began selling franchises to entrepreneurs — at $15,000 a pop today — cash flow has not been an issue for Subway. With Greco approaching retirement age within five years and her son Jonathan not involved in the business, however, the question remains whether she, the Deluca family and Buck could cash out of the business by selling it or via an initial public offering of stock, with the pace of U.S. IPOs doubling in the second quarter, according to Stamford-based Renaissance Capital.
It is a question Fred Deluca was used to fielding over the years, saying on multiple occasions he preferred to focus on the simple task of running the business rather than deal with the complexities and distractions of running a publicly traded company.
“We weren’t quite sure that the goals of public shareholders would be the same as ours and of the franchisees,” DeLuca said during a 2010 interview with Nation’s Business News. “Franchisees’ goal is to make money at the store level, which is simultaneously good for the whole system. Shareholders may think differently from time to time, so we decided against it.”
A caterer holds up a tray of Subway sandwiches for guests during the company’s 50th anniversary celebration in its world headquarters in Milford Aug. 27, 2015.