Entrepreneurs looking to potentially own a Subway franchise: proceed with caution. The globally recognized sandwich franchise has been under fire recently after The New York Times published an exposé about claims of mistreatment of franchisees by Subway. The franchisees featured in the story accused the development agents of allegedly taking away their stores. Now, the franchisees affected by this misconduct are fighting back against the franchise. In this article, we will look at how the franchise came to be, assess the issues franchisees are facing, and analyze this business opportunity as a whole.
The Story Behind the Subway Franchise
What happens when you combine the minds of a nuclear physicist and a college student? You get one of the most successful franchises of all time. Subway began more than 50 years ago with Dr. Peter Buck and freshman college student Fred DeLuca. A franchise that now makes billions of dollars every year was founded by a 17-year-old who asked a family friend for $1,000.
Buck gave Fred DeLuca the idea to open a submarine sandwich shop to help him pay his tuition. Buck gave DeLuca a $1,000 initial investment, which symbolized the beginning of a business relationship that changed the landscape of the fast-food industry.
The first Subway location, then named “Pete’s Super Submarines,” opened in Bridgeport, Connecticut, serving fresh and affordable sandwiches. On the first day of opening, the two sold 312 sandwiches, which cost 49 to 69 cents. Pete’s Subway grew rapidly and became the Subway franchise we recognize today.
By 1974, Buck and DeLuca owned 16 different submarine sandwich shops throughout the state. However, the two realized that, as a duo, they would not be able to expand efficiently to meet popular demand. They decided to begin franchising, planned to meet a 32-store goal, and launched the SUBWAY® brand. The first Subway franchise opened in Wallingford, Connecticut.
DeLuca, in a piece he wrote for Inc. in 2013, said when they started franchising, they didn’t know what they were doing. However, their decision to franchise allowed them to grow their stores from 16 stores to 200 stores in the first eight years of business. The next goal was to reach 5,000 stores by 1994 and attempt to surpass McDonald’s store count of 8,000 at the time. In 1987, they hit the thousand store milestone and by 1990, they had 5,144 stores. They passed McDonald’s U.S. store count in 2002 and their global store count in 2010. Franchising the business brought remarkable growth which has continued over the years.
The Issues Subway Franchisees are Claiming
Since DeLuca’s death in 2015, the franchise has been struggling: trying to hold their own against competitors such as Jimmy John’s and Quizno’s, falling behind new health trends, becoming a controversial company after a scandal involving their spokesperson, and now, more stores are closing rather than opening.
According to The New York Times, as of 2018, Subway “initiated the equivalent of 29 litigation actions (mostly arbitrations) per 1,000 franchisees.” According to Subway’s 2019 FDD, in total, there are 114 litigation actions, in addition to the 718 franchisor-initiated actions. On July 1st, the franchisor distributed a new, 621-page version of their FDD to potential franchisees, which includes all the pending litigation actions. There are numerous actions the restaurant franchise is involved in. Here are the key issues and conflicts arising between the franchisees and Subway:
1. Franchisees Are Losing Their Businesses to Development Agents
The biggest problem franchisees are facing right now is manipulation by the development agents. Development agents hold equal power to franchisees, they are usually franchisees themselves, however, they can recruit new franchisees, approve buyers for existing stores, and send field consultants, or inspectors, to inspect the stores monthly.
A year later, a single, blown out lightbulb marked as a violation by a field consultant caused Subway to terminate their contract.
According to the article, some franchisees had their businesses taken away because of unreasonable violation claims from inspectors sent by these development agents. For example, the article references this situation experienced by franchisees Manjo and Sadhana Tripathi.
The Tripathis have been Subway franchisees for two decades and, at one point, Manjo Tripathi owned 38 stores. In 2015, he was among the largest franchisees in the California East Bay region. His business took a turn in 2017 when inspectors sent by Subway kept citing new “problems” every month; the NYT piece lists little things like the “wrong brand of bathroom soap” or “cucumber slices being too thick.” The small infractions and write-ups began to pile up. A year later, a single, blown out lightbulb marked as a violation by a field consultant caused Subway to terminate their contract.
In 2016, the couple filed an action against the franchisor, Doctor’s Associates Inc., which “arises out of the Defendant’s successful termination of the Plaintiffs’ three stores in an arbitration forum,” according to the FDD. They claimed there was a “breach of contract, interference with contract claim, violation of California’s Franchise Relation Act and violation of B&P Code 172000. The couple sought “specific performance, punitive damages, actual damages, injunctive relief, restitution, disgorgement, attorney’s fees and court costs in an amount greater than $15,000.” In response to this claim, the franchisor motioned for arbitration in the United States District Court in Connecticut and it was granted. The Tripathis filed an appeal for the decision, which is still pending.
What Exactly Are the Development Agents Doing?
In order to expand in this industry, development agents need the rest of their competition to fail out of the system. The article states that these agents are given “the means and motivation to shut down competing stores and take over profitable ones by manipulating inspections.” In other words, the Tripathis and several other franchisees had their businesses shut down over minuscule violations and taken over by the development agent shortly after. Some development agents choose which stores they want to target and tell field consultants to purposely write up violations. In some cases, this causes the business to eventually close.
To quote the article, Subway’s franchise contract “forbids the company from unilaterally closing stores just because sales are weak. But franchisees can lose control of their restaurants for failing to meet Subway’s operating standards.
2. The Franchise Grew Too Big Too Quickly
According to the article, before his death, DeLuca wanted to open 50,000 stores by 2017. According to Business Insider, the store closed over 900 locations that year. The franchisor notes in the FDD under Item 19 that at the start of 2018, Subway had 25,906 U.S. locations, and by the end of the year, they had 24,798. 1,108 stores shut down within one year.
The Times states that this happened for a few reasons: to achieve DeLuca’s goal, Subway locations would open in the same area, some stores located within blocks of each other. Many of them felt pressure from the company to aggressively expand and the competition between franchisees intensified. For years, the company put a major focus on expanding rather than the progress of sales from the franchisees.
According to Restaurant Business, the growing number of locations, many in close proximity to each other, led to a low average of unit volumes. This makes it difficult for franchisees to handle rent, food, labor, and other costs.
3. Increase of Other Healthy Food Options
Business Insider reported that most consumers today are looking for healthier, organic, and fresh food to buy. In the past, Subway was one of the healthiest options among its fast-food competitors. Over time, this has changed as salad chains, like Sweetgreens, Fresh & Co., are growing and opening locations across the country. Although Subway paved the way for these restaurants, consumers today are better educated on nutrition and Subway does not meet their standards.
4. Scandals Are Hurting the Brand
Scandals can tarnish a brand’s reputation and make consumers not want to support their stores. Subway garnered a lot of negative press over the years and has been harmful to their business.
Should I Open a Subway?
Subway is one of the most affordable franchise opportunities, in comparison to its fast-food competitors like McDonald’s, Burger King, and so on. The startup costs are between $140,050 to $342,400 and the initial franchise fee is only $15,000. With these fees, anyone can become a franchisee. It is not completely impossible. Unfortunately, there are some claims that the relationship between the franchisees and Subway is not ideal. Overall, it is the potential franchisee’s decision whether or not they want to own a Subway franchise. Not all Subway franchisees have experienced the issues listed above, but it is important to know what is going on with the franchise before making an informed decision.
Disclaimer: The above information was derived from the year 2019 FDD of Subway. This data may not reflect the most current information. AskMrFranchise and affiliates are not responsible for any act or failure to act in reliance upon this report, article, data, and/or information. None of the information mentioned above should be used to substitute or replace consultation with legal or other professionals.