Subway’s 42,000 locations are the most of any fast-food chain on the planet, but franchise owners are taking a hit

Subway has the most locations of any fast-food chain on the planet, with more than 42,000 restaurants in over 100 countries.
Its franchising model helped it expand rapidly, but it has negatively impacted franchise owners.
In recent years, Subway has closed thousands of stores and the fast-food chain seems to be on the rocks.
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Following is a transcript of the video.

Narrator: With more than 42,000 restaurants in over 100 countries, Subway has the most locations of any fast-food chain on the planet. And at first, that sounds like a sign of a thriving sub giant. However, Subway is anything but. Subway’s closed thousands of stores in the last three years and saw a 25% fall in business from 2012 to 2017. So what happened?

The chain began as Pete’s Super Submarines in Bridgeport, Connecticut, in 1965. Three years later, cofounders Fred DeLuca and Peter Buck rebranded it to simply Subway.

Announcer: Subway’s famous giant foot-long sandwiches are made right before your eyes, the way you want ’em.

Len Van Popering: What was so compelling then and still is today about Subway is really an open-kitchen format. In many ways, they really pioneered that and the ability to customize your sandwich.

Narrator: The brand redefined fast food with fresh ingredients that customers could see. Compared to other fast-food chains at the time, it felt healthy. And it worked. By 1981, there were 200 locations across the US, and soon after, Subway went international.

Joel Libava: In the late ’70s, and in the ’80s, and in the ’90s, everyone knew about Subway. I mean, they were everywhere. They’re still everywhere.

Narrator: That’s Joel Libava, an expert in franchising. While each store looks and smells the same, they’re all independently owned franchises.

Libava: The format is pretty simple. You buy a franchise, you get trained, they help you secure a location. They help with a grand opening, and you’re open. You’re open for business. Follow the several-hundred-page operating manual, do the advertising, and customers will come in.

Narrator: Not only were Subway franchises successful, they were, and still are, one of the cheapest chains to franchise. It costs between $116,000 and $263,000 to open a Subway franchise. Compare that to opening a McDonald’s, which costs up to $2.2 million.

Because Subways were easy to open, the number of stores skyrocketed. Between 1990 and 1998, store locations rose from 5,000 to 13,200. And in that same period of time, gross sales rose by about $2.1 billion. Subway’s success continued into the early 2000s. At a time when obesity was rising rapidly in America, Subway continued to market itself as a healthy alternative to fast food.

Kate Taylor: One of their biggest successes for sure was the Jared Fogle story. Everyone remembers those ads, where it’s him in those huge pants where he’s showing how he lost all of this weight. And that just made them so much money, and it really made people think about Subway as a really great health brand. It was one of the biggest advertising wins that any chain’s had in recent decades. So that was a huge, huge part of their brand.

Narrator: Subway carried Fogle’s success story for nearly a decade. But by 2008, the world was suffering from the effects of the Great Recession. And for many Americans, hunting for deals replaced the obsession with weight loss. So Subway changed up its message. In March 2008, it introduced a new promotion that would come to define the chain.

♪ Five ♪ ♪ Five dollar ♪ ♪ Five dollar footlongs ♪

Narrator: By August 2009, as other restaurant chains were struggling through the Recession, the $5 footlong had pulled in $3.8 billion in sales for Subway, a 17% jump in US sales from the year before. But even the best deals run their course.

♪ Five dollar ♪ ♪ Five dollar footlong ♪

Narrator: Starting in 2014, Subway’s sales began steadily dropping. Behind the scenes, many of the reasons for Subway’s success had turned on them. Quiznos was once Subway’s main competition, but tons of sub chains, like Jimmy John’s, Firehouse, Potbelly, and Jersey Mike’s, and fast-casual chains like Panera, were offering seemingly fresher and healthier options. And they started stealing market share.

Taylor: They were competing against people who bring in fresh produce every day. A lot of Subway locations only bring in fresh produce once or twice a week.

Narrator: On top of that, fast-food chains that had been around as long as Subway were coming up with healthy alternatives of their own and getting creative with new menus.

Taylor: More and more fast-food chains really want to have that innovation pipeline where they’re bringing something out new almost every month. Fast-food places are looking for ways to bring in new customers, drive traffic, and Subway has not tried to do that in the same way other places have.

Narrator: But other fast-food chains weren’t the only competition for Subway franchises. With Subway’s franchising model making it so easy to open locations, stores inevitably started opening up around the corner from each other in lucrative markets. Take downtown Manhattan, for example. Within a 15-minute walk in less than half a square mile, there are 10 Subway locations. And these locations in close proximity began cannibalizing each others’ sales.

Libava: The Subway franchise agreement, the contract, it says they can open anywhere. There is no protected territory. So franchisees really have no say-so in where the other franchisees are going to open. It’s a problem.

Narrator: And Subway corporate wasn’t stopping it, because the company benefited from a high number of locations. More locations meant more franchising fees and high royalties to Subway corporate, which diminished the effect of falling sales from a single location.

Taylor: When franchisees’ sales are kind of slipping, as long as they’re staying open, it doesn’t necessarily hurt Subway as much as it would some other chains. If everyone’s kind of, like, chugging along, like, opening new locations, then they can kind of keep on keeping on, and it’s not gonna be the end of the world for the corporate office.

Franchise owners, on the other hand, took the hit. In 2012, each Subway franchise generated an average of $482,000 a year. Four years later, that number had slipped to $422,000 a year. For comparison, the average annual revenue of a McDonald’s franchise in 2016 was $2.6 million.

And to make matters worse, Subway would lose the face of its company. In 2015, the man who had embodied Subway’s "eat fresh" mission was charged with possession of child pornography and having sex with minors. Subway cut ties with Fogle, and he was sentenced to 15 1/2 years in federal prison.

Taylor: And the Jared Fogle thing kind of basically went from a huge positive to huge liability. Like, the worst things possible that your brand could be associated with.

Narrator: All of these things created the perfect storm for Subway. And soon, locations started to close. In 2016, Subway closed 359 stores in the US. It was the first year the chain closed more locations than it opened. In 2017, that number was over 800, and by the end of 2018, over 1,000 locations had closed.

With all these sour ingredients, it’s hard to imagine Subway could bounce back. But the chain is certainly trying. In 2017, Subway launched its Fresh Forward program, starting with remodeled stores. The revamped locations featured new menu boards, WiFi, USB ports, updated furniture, and music.

Libava: I will give Subway credit. They’re doing something interesting. They are offering grants where, if a franchisee applies and everything’s in line, they can get up to $10,000 towards remodeling.

Narrator: By the end of 2020, over 10,000 locations will have this new restaurant design. But Subway says food is its next priority, and it’s backing it up with an $80 million investment in updated menu items. Subway’s partnered with the media company Tastemade to develop hundreds of new menu ideas, like the Green Goddess Tuna Melt and the Southern Style French Dip. In 2018, the chain introduced its cheesy garlic bread, its most successful promotion in the last five years. And in 2019, a line of ciabatta sandwiches and Halo Top milkshakes hit stores.

Van Popering: Historically, Subway would evaluate about six or seven new menu items per month, but we’ve set up a process and invested in capabilities where we’re literally testing at least 100 new menu items every month.

Narrator: As for whether or not all these menu items and revamped designs will stop shuttering stores and dropping business, only time will tell.

Taylor: They need to figure out who they want their customer to be. I think it’s really an uphill battle for them. But if they kind of go back to the basics, think about what people want, ask people what they want and think about it a little bit more innovation, that’s kind of going to be a good start for them.