The rise and fall of Subway, the world’s biggest food chain

subways store front image www.foodpassions.net

With 43,945 sandwich shops in 110 countries, Subway has become the world’s most ubiquitous restaurant chain, posting armies of “sandwich artists” in more American outposts than McDonald’s and Starbucks combined.

Yet at the dawn of its 50th birthday, all is not well in the land of Jared and jingles about $US5 footlongs. Subway’s US sales last year declined 3 per cent, or $US400 million, falling faster than any other of America’s top 25 food chains. The mega-deli was also knocked back to America’s third best-selling food chain for the first time in seven years.

Subway ascended over the last several decades on the back of broad American tastes, offering a healthy alternative for eaters leery of fast food, and at prices that made it unstoppable during the Great Recession. Even First Lady Michelle Obama praised Subway during a visit last year for “working to get kids excited about eating their vegetables”.

subways food roll image www.foodpassions.net

The ‘Subway fresh’ has lost its appeal with consumers. Photo: Rob Gunstone

But the chain’s fast-rising rivals, like Chipotle Mexican Grill and Firehouse Subs, are beating Subway at the game it helped create, offering seemingly fresher, healthier, build-your-own meals.

Diners increasingly say they want to know their meat has been cut fresh, not peeled off wax paper; their meal heated by steamer, not microwave.

That’s led to what analysts say is one of the sub empire’s biggest threats yet: What Americans see as healthy has evolved. Subway hasn’t.

maccas hamburger roll being eaten image nwww.foodpasions.net

Subway has more stores than McDonald’s in the US. Photo: Nic Walker

“The ‘Subway fresh’ has lost its appeal with consumers, because to them fresh has evolved to mean something very different,” said Darren Tristano, executive vice president of industry researcher Technomic. “More people have money to spend, and they’re choosing to spend a little bit more on better concepts where they get a better product. . . . Subway’s strategy has only been to open more stores, and ultimately those stores just cannibalise each other.”

Milford, Connecticut-based Subway’s problems run close to those of fellow food king McDonald’s, the sagging-sales chain now launching a turnaround because of “challenging industry dynamics” and changing tastes.

But in some ways, Subway’s money-making challenges look even sharper than those of the Golden Arches. The average Subway sold $US437,000 worth of subs, sodas and cookies last year, the smallest haul in half a decade, and about a fifth as much as the typical Mickey D’s, which pulls in $US2.4 million per store.

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Subway, which is privately run and closely held, would not comment. Tricia Hetherington, the company’s director of research and development, said in a statement, “We’ll continue to evolve our reasonably priced, fresh, customizable sandwiches and salads to better meet our customers tastes and needs.”

Subway debuted as Pete’s Super Submarines in Bridgeport, Connecticut, in the summer of 1965, when a Brooklyn-born 17-year-old named Fred DeLuca borrowed $US1000 from a family friend, a doctor named Peter Buck. DeLuca, an aspiring doctor who is now worth $US2.6 billion, hoped slinging sandwiches would help him pay his way through medical school.

The duo slogged through several slow years of sandwich-making until, in 1974, they started selling franchises under a new name, Subway. (One theory: The old name, on radio ads, sounded confusingly like “Pizza Marines”.)

Subway Guy' Jared Fogle was the face of the fast food chain. image www.foodpassions.net

Subway Guy’ Jared Fogle was the face of the fast food chain.

In the decades that followed those first shops, Subway franchises have expanded, yeast-like, onto what seemed like every street and strip mall in America. By 2013, Subway was opening 50 new shops a week. Today, Subways serves nearly 2800 sandwiches every minute, data from industry researcher IBISWorld shows.

Still owned by Doctor’s Associates, the founders’ holding company, Subway has opened inside hundreds of US colleges, malls, military bases and other, less-predictable locations: a car showroom in California, a Goodwill thrift store in South Carolina, a church in Buffalo.

At 1 World Trade Center, a Subway housed in an American-flag-adorned trailer was hoisted floor by floor to serve construction workers building Freedom Tower. Franchise owner Richard Schragger, who beat out nine competing bidders for the honor, served hot dogs and ice cream along with the subs.

DeLuca, the chief executive, said last year that the chain wanted to add 8,000 new American franchises to their existing 27,000, an explosion on par with adding the combined store count of Taco Bell and Chipotle.

“We’re continually looking at just about any opportunity for someone to buy a sandwich, wherever that might be,” Don Fertman, the chief development officer, told the Wall Street Journal last year. “The closer we can get to the customer, the better.”

The chain got one of its biggest early boosts in Washington in 1977, when Larry Feldman, then an assistant minority counsel to the House Banking Committee, opened one of the earliest franchises near a House office building.

Feldman’s Subway Development Corp. has grown to 1500 locations across the Washington and the mid-Atlantic states, and Feldman, the “secretary of sandwich,” has been called Subway’s most successful “development agent”.

“The reason Larry Feldman got such a huge territory was his basic answer was, ‘Yes. I will do that,’ ” DeLuca told The Washington Post in 2008. “It’s like free land. Here is a bunch of acres for your ranch, now go do it.”

Subway’s spread was soon conquering a bigger target than America’s strip malls: its airwaves. The chain spent half a billion dollars in 2013 on promotional spots, more than such prodigious advertisers as Progressive or Budweiser.

The chain has excelled at sometimes-egregious uses of product placement: In a 2012 episode of CBS’s Hawaii Five-O, an actor called Subway “serious culinary fusion” and said its food would help him lose weight, adding, “It worked for Jared, and that dude was large.”

But the all-franchise chain has expanded largely through winning over new franchisees, who run (and fund) their stores mostly independently of the corporate office. The chain grew by 3 per cent last year, opening two Subways a day.

The model is enticing for small-business owners because opening a new Subway can cost as little as $US116,000, company estimates show – a tenth as much as opening a new McDonald’s.

But some franchisees aren’t happy once their Subways are up and running. Franchise Grade, a franchisee polling and review service, ranked Subway number 468 in its latest report; Firehouse Subs and Jersey Mike’s Subs were numbers 107 and 108, respectively.

Analysts have pointed to discounted prices for existing franchises, some of which can be bought for the price of a car, as a sign that some owners want out. And as sandwich sales have shrunk, the pressure on franchisees has increased.

“We would love to be in a position where we could pay workers more,” Keith Miller, a franchise owner in California and head of the Coalition of Franchisee Associations, said during a conference call with reporters last month to discuss the frustrations of franchisees of Subway and other chains.

Franchisees have trouble boosting wages, Miller said, because they are under “extreme pressure” to keep the profits pumping amid sliding sales and the cost of keeping up with changing ingredients and menus.

Cost pressures on franchise owners have little direct effect at Subway headquarters. Franchisees have to pay the corporate office a $US15,000 start-up franchise fee, plus a 12 per cent weekly cut of all revenues, no matter how well the business is doing.

Subway’s reputation as a healthier lunch spot – though it also sells a foot-long Big Philly Cheesesteak packing 1000 calories, twice as many as a Big Mac – has helped it torpedo fast-food rivals, even 15 years after first tapping Jared Fogle, with his tale of sub-aided weight loss, as its spokesman and “the Subway Guy”.

But even with its vegetarian-friendly menu, Subway has struggled to maintain its healthful image. Consumer surveys by Technomic found Subway’s food taste, flavour and visual appeal sagged among American respondents over the past year.

“In light of the intense competitive pressure from other sandwich concepts,” said Colleen Rothman, a Technomic manager of consumer insights, “Subway’s offerings just aren’t resonating with consumers as they used to.”

The chain has also struggled with rude surprises. A petition campaign last year led by FoodBabe.com blogger Vani Hari slammed Subway for using the food additive azodicarbonamide, which she called a “yoga mat” chemical, in its bread.

Though the additive is approved by the Food and Drug Administration for use in dough and is found in hundreds of other foods, Subway pledged to remove it as part of the chain’s “bread improvement efforts.”

Subway has attempted to keep pace with changing food trends, offering toppings such as hummus and a creamy sriracha sauce to win back health-conscious back. But analysts say they have often been too little, too late in a world where fast-casual rivals are better at marketing their quality, and even Wendy’s and McDonald’s are offering organic drinks, black-bean burgers and kale.

“We’re in a new environment – the Chipotle environment . . . the fast-casual environment – with a new type of rhetoric, quality and marketability,” said Andrew Alvarez, a food analyst with IBISWorld. In comparison, “Subway’s platform, its presentation almost looks primordial.”

The Washington Post

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Henry Sapiecha

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