John Oliver on Subway franchisees: ‘Dream turned into a nightmare’
John Oliver took aim at Subway’s franchise rules and regulations, warning against the company’s increasingly criticised practices.
The Last Week Tonight host called the sandwich store “Dad’s attempt at dinner” before explaining that it has been in the news a lot lately and “rarely for anything good”.
There were accusations of fraud after it was claimed that the tuna being used wasn’t actually tuna, a case in Ireland where it was alleged that the bread couldn’t legally be called bread because of too much sugar, another case where the foot-long sandwiches were criticised for not being a foot long and a viral video of a Subway worker putting his penis on the bread.
Subway remains the biggest restaurant chain in the US through sheer number of stores but thousands have been closing and franchisees have been getting restless, with 100 writing an open letter expressing concerns. Oliver said that their “dream has turned into a nightmare”.
It was founded as a single sub shop in 1965 by Fred DeLuca, who was “obsessed with expansion”, Oliver said. Seeking to “create the image of success”, in DeLuca’s words, he continued to open locations, though the business didn’t make a profit for 15 years.
Oliver said DeLuca had “an insatiable appetite for growth” and as the company became bigger, one of the reasons for the extreme expansion was the ease of opening a store. All you need is a plug, no deep-fryer or gas grill. But Oliver joked: “It is a restaurant serving human food, not an air mattress.”
The startup costs are also significantly lower than for competitors, between $200-$500,000 compared with more than $1m like McDonald’s. But they bring in a lot less money, averaging about $400,000 a year compared with $3m for a McDonald’s.
There’s also the issue of how much franchisees make. For a McDonald’s, they pay about 8% of their profits but for Subway it’s more like 12.5%, the highest fees for any chain, with a quarter of this funnelled into advertising, hence the wall-to-wall ads and product placement we see.
“They are largely at the mercy of decisions their parent company makes,” Oliver noted. “So if Subway decides to change the menu or redesign the stores, franchisees may be on the hook for those costs. Also if the company announces a promotion or a discount, stores might have to go along with it even if it’s a money-loser for them.”
The company also allows locations to open near each other and cannibalise their business with contracts allowing unlimited rights to directly compete. Corporate still gets royalty fees on every sale.
There are also business development agents, who are often franchise owners themselves, who control a certain area and are tasked with finding and approving new stores and overseeing inspections for stores in their area.
But these inspections can be “exceptionally harsh”, such as one employee who was criticised for “slicing veg in a choppy manner”.
There’s an incentive to be harsh. If a store has multiple violations then Subway can terminate a franchisee agreement and resell, sometimes to the agent themselves at a discounted price.
Oliver said one big issue is that “potential owners don’t fully know what they’re signing up to”, with there being “no easy way to find out what you might earn before you open”.
The company won’t tell you and the FTC doesn’t require them to even if other companies do, such as Burger King.
The senior leadership recommends calling other franchisees but they also added an aggressive non-disparagement clause so others can’t give info to a potential franchisee. Oliver also added that “calling people is for divorcees and serial killers”.
Contracts also threaten cease-anddesist letters and biased arbitrations when speaking out to the media and the newest agreement even punishes for subjecting the brand to ridicule.
Oliver expressed sympathy for those who spend “life savings on a store stuck in a business model that was stacked against them from the start”.