Sub­way tak­ing a fresh look amid rat­ings drop

The Register Citizen (Torrington, CT) - - OBITUARIES - By Alexan­der Soule Alex.Soule@scni.com; 203842-2545; www.twit­ter. com/ca­soul­man

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.”

CHRIS­TIAN ABRAHAM / HEARST CON­NECTI­CUT ME­DIA FILE

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.

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