Marketing textbook, chapter 5, chapter 9

None of the well-known fast food chains has realised such rapid growth as Subway, the provider of baguettes, wraps and salads. Subway's franchise system is the key to its multinational market development.

With around 37,000 restaurants (McDonald's has around 39,000) in more than 100 countries, Subway is one of the world's largest fast food providers. The first restaurant was opened by company founder Fred DeLuca in Bridgeport (Connecticut) in 1965. After quickly developing the market in the USA, the company also entered the international market in 1984 with the opening of its first restaurant in Bahrain. The 5,000th restaurant worldwide opened in 1991, and the 40,000th in 2013.

The following aspects are largely responsible for Subway's successful multinational market development: (1) New restaurants can be realised easily and cost-effectively almost anywhere, as the franchisees bear almost the entire economic risk. (2) Subway products are a fresher and healthier alternative to hamburgers, pizza, French fries and other popular fast food products. (3) The basic idea of the Subway business model is based on the customer-specific composition of product ingredients, which takes into account the megatrend of individualisation within society. (4) The franchise model is particularly attractive for franchisees because both the investment costs and the costs for ongoing operations are lower compared to other franchise models.

The franchise fee for franchisees in Germany is currently eight per cent of net sales, plus a flat-rate advertising fee of 4.5 per cent. Anyone signing the first franchise agreement also pays a one-off fee of 10,000 euros, which is reduced to 5,000 euros per licence if further franchise licences are acquired. More than 50 per cent of the 21,000 franchisees worldwide own several restaurants.

The total investment in a classic Subway restaurant starts at 150,000 euros including the licence fee. The amount of the investment is primarily dependent on the size and the amount of work required to fit out an available shop. This sets Subway apart from other franchise providers with its relatively low total investment. The franchisee should have at least 15,000 euros available as equity capital.

After signing the franchise agreement, the new franchisee takes part in a two-week intensive training course at a Subway training centre. The training focuses on the practical processes in a restaurant and the Subway control system. The control system with close-meshed inventories and analyses of all stock levels and restaurant data enables seamless control of all processes in the restaurant.

There are fixed product specifications for all sandwiches and ingredients. Each supplier must first undergo an approval process. As soon as it has been ensured that it fulfils Subway's requirements, the supplier enters into negotiations with the purchasing association supported by the franchisees, whose aim is to negotiate conditions and ensure that franchisees receive goods at the best price. The franchisees purchase vegetables and salad from a regional supplier of their choice. All other products that meet certain Subway product specifications must be purchased. The operating and office equipment must also meet Subway's specifications, which limits the number of possible suppliers.

Subway does not grant any territorial protection in order not to impair the planned expansion. However, the system headquarters takes note of the interactions between existing restaurants and planned locations. If a new Subway franchisee wishes to open a new restaurant within a ten-mile radius of existing restaurants, all affected franchisees will be informed in writing and have the right to contest the new location within fourteen days.

In Germany, but also in other sales markets, the successful expansion strategy has come to a standstill. Franchisees and experts criticise the following points in particular: (1) Subway does not grant territorial protection: anyone operating a branch lives with the risk of new shops opening in the immediate vicinity. (2) Subway charges excessively high licence and marketing fees. A total of 12.5 per cent of net sales must be paid, regardless of current business development. (3) The initial licence fee of 10,000 euros is too high, considering that the franchisees bear almost the entire economic risk. (4) The franchisees must equip their shops with inventory specified by Subway, which often costs more than 100,000 euros. (5) The franchisor's location analyses are sometimes inadequate: it often turns out that a shop cannot run well at all due to its poor location.

Due to higher prices for ingredients, Subway's prices have risen massively in recent years. The price increases led to declining sales and to franchisees increasingly taking the remaining customers away from each other. The rapid growth achieved by simply opening Subway restaurants ultimately took its toll on the Group and led to a continuous decline in the number of restaurants.

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Sources:

• Statista (as at 27 June 2022). 
• Wikipedia (as at 27 June 2022). 
• Business Insider 1 (www.businessinsider.com/subway-business-strategy-2014-6, as at 27 June 2022). 
• Business Insider 2 (www.businessinsider.com/facts-about-subway-food-2014-5, as at 27 June 2022). 
• Spiegel (www.spiegel.de/wirtschaft/unternehmen/subway-warum-der-fast-food-weltmarktfuehrer-so-viele-filialen-schliesst-a-1266948.html, as at 27 June 2022).
• Subway (www.subway.com/de-DE/AboutUs, as of 27 June 2022).