Subway Restaurants

founded: 1965

Contact Information:

headquarters: 325 bic dr. milford, ct 06460-3059 phone: (203)877-4281 fax: (203)876-6695 toll free: (800)888-4848 url: http://www.subway.com

OVERVIEW

Subway is the world's largest sandwich chain, with more than 16,242 independently owned and operated locations in 73 countries. Its restaurants offer a variety of submarine sandwiches and salads as well as snacks and beverages. Subway is the leader in the "non-traditional branded fast food" category, meaning that it does not offer hamburgers, pizza, or fried chicken. While a substantial amount of Subway's business is in carryout orders, most of the chain's stores offer seating areas where customers can eat their sandwiches and salads. About 2,900 of the Subway outlets are smaller units operating in convenience stores, truck stops, railroad stations, college and high school campuses, military bases, airports, grocery stores, department stores, hospitals, and other locations.

COMPANY FINANCES

Subway grew rapidly during the 1990s, with the number of stores increasing from about 5,000 in 1990 to about 13,200 in 1998, second only to McDonald's. System-wide gross sales increased from about $1.1 billion to approximately $3.2 billion over the same period. As of 1998, owners DeLuca and Buck split about $320 million in annual profits. The store failure rate in 1999 was only 1 percent, down from 2 percent in earlier years. By 2000, sales had climbed to $4,720 million. In 2002, Subway finally overtook McDonald's as the largest restaurant chain in the country with 13,247 stores (148 more than McDonald's).

ANALYSTS' OPINIONS

From 1994 to 1997, Subway franchises were voted America's favorite sandwich chain according to a poll conducted by Restaurants and Institutions magazine. In the 1997 poll, more than 70 percent of U.S. restaurant customers surveyed voted for Subway as their favorite sandwich restaurant. The chain received the highest rankings overall in the sandwich category and scored top marks for value, service, cleanliness, and convenience. Subway is also a fixture on Entrepreneur magazine's "Franchise 500" list.

However, many store owners became dissatisfied with their relationship with the company, accusing Subway of damaging their sales by opening too many stores in the same area. DeLuca felt that clustering stores increases customer awareness and boosts everyone's sales. However, he did establish a site review committee, charged with preventing new stores from opening if they would reduce a neighboring store's sales by more than 10 percent.

By 2001, apparently having worked out its grievances with its franchisees, Subway was named "number one" franchise opportunity by Entrepreneur magazine. Its fare was also cited with some choice recognitions: Subway won the gold award for the sandwich category in the Restaurants and Institutions Choice in Chains Award and earned the MenuMasters Award for best menu/line extension from Nation's Restaurant News.

HISTORY

Subway traces its roots to August 1965 when Fred DeLuca, then 17 years old, opened Pete's Super Submarine, a sandwich shop in Bridgeport, Connecticut. DeLuca opened the shop on the advice of Dr. Peter Buck, a nuclear physicist and family friend who also provided a $1,000 loan for the new business. A year later the two partners opened their second unit, and soon after that a third store. The third store was highly successful and is still operating today.

Buck and DeLuca shortened the name of the operation from Pete's Subs to Subway and introduced the now familiar bright yellow Subway logo. They also began franchising the Subway concept. The first Subway franchise opened in Wallingford, Connecticut in 1974. Franchising worked well for the Subway chain and the operation began to grow rapidly.

In 1983 Subway restaurants began baking bread in their stores, a feature that would become a central part of the company's image. Baking units in Subway outlets are located behind the counter in direct view of the customers. The chain cites in-store baking as one of the key reasons for its strong growth in the 1980s and 1990s.

In 1984 the first international Subway restaurant opened in the island country of Bahrain off the coast of Saudi Arabia. In August of 1995, the Subway chain celebrated 30 years in business and opened its 11,000th restaurant, with Fred DeLuca still serving as president of the company.

By 1998, Subway opened its 2,500th non-traditional unit. The year included several significant firsts, including its first restaurants in Hong Kong, Italy, Northern Ireland, Norway, Pakistan and the United Arab Emirates. The following year, Subway opened its 14,000th store.

In 2000, the year of its 35th anniversary, Subway became the first U.S. quick-serve food chain in Tanzania. In 2001 Subway was becoming more of a global presence as it now had 15,000 restaurants worldwide.

In 2002, Subway scored a particularly significant achievement: it passed McDonald's as the largest restaurant chain in the country.

STRATEGY

Subway is exclusively a franchise operation.It does not own or operate any corporate restaurants. The Subway chain was built on the concept of franchising units to independent owner/operators who establish freestanding stores in high-traffic areas such as shopping centers and strip malls.

Simplicity of concept and a strong brand have proven to be a cornerstones of Subway's success. The operation itself doesn't require much space and very little cooking is involved, which allows it to easily fit into areas that larger restaurants are forced to avoid, and it has earned a reputation for quality, good service, convenience, and attention to hygiene. Simplicity of concept is also applied to its menu, which includes basic items like its trademark submarine sandwiches as well as salads and deli sandwiches.

Subway is also an easily identifiable commodity. Its stores are easy to recognize. When a customer sees the familiar Subway sign, he or she knows exactly what they'll get before entering the store.

INFLUENCES

Military bases are another growth area for Subway. In January 1997 the company was awarded a license agreement with the Navy Exchange Service Command (NEXCOM) to develop Subway restaurants on all qualified U.S. Navy installations around the world. The agreement was to run for five years. Subway franchisees were licensed to operate all of the sandwich shops on 26 naval installations, with 38 sites around the world and the potential of developing Subway sandwich shops in more than one hundred installations.

The Navy contract was not Subway's first experience in the military market. The first Subway sandwich shop on a military base opened in July 1989 at the Pearl Harbor Naval Station in Honolulu, Hawaii. Subway actively developed sandwich shops on military installations in the United States and abroad throughout the 1990s, and by early 1997 there were Subway restaurants operating on 17 military bases around the world.

In the early to mid-1990s, Subway restaurants targeted amusement parks as another avenue for sales growth, and the chain was expanding that effort in the late 1990s. As of 1997, 27 Subway outlets were open and operating in park and recreational facilities across North America, with more units being planned. Two successful, established units included the Museum of Natural History in New Mexico and Clyde Peeling's Reptileland in Allenwood, Pennsylvania.

CURRENT TRENDS

In the late 1990s, Subway attempted to address the trend toward low-fat eating by promoting existing sandwich products that customers could make low-fat by eliminating certain condiments and food items while continuing to offer its traditional sandwiches that were higher in fat. In a promotion launched in early 1997, Subway marketed seven of its sandwiches as low-fat alternatives by stressing their good taste. Subway's Low Fat Challenge advertised the seven sandwiches, which contained six grams of fat or less, by comparing them to competitors' burgers and tacos that contained as much as 30 grams of fat. The low-fat subs did not include cheese, oil, or mayonnaise.

To further address the trend, in 2000 Subway began promoting the story of Jared Fogle, a 425-pound man who reportedly lost 245 pounds through what he called his "Subway diet." Fogle said the diet consisted of little more than a six-inch turkey sub for lunch and a foot-long veggie sub for dinner. By further limiting his diet to a few soft drinks and a small bag of chips, his diet totaled less than 10 grams of fat and about 1,000 calories a day. Although Subway did not officially endorse this diet, no doubt for possible liability considerations, it nevertheless trumpeted Fogle's success; and Fogle attained something of a celebrity status as he appeared on national TV commercials for Subway and on programs like the "Oprah Show" and NBC's "Today."

Another trend affecting Subway in the mid to late 1990s had nothing to do with food. An increasing number of franchisees in many U.S. businesses were suing their franchisors over various disagreements and Subway was no exception. Legal problems of various types have plagued the company, which has more legal disputes registered with the Federal Trade Commission than its seven largest competitors combined.

FAST FACTS: About Subway Restaurants

Ownership: Subway Restaurants is a franchise business operated by Doctor's Associates, Inc., a private corporation owned by Fred DeLuca and Peter Buck.

Officers: Fred DeLuca, Pres., 50

Chief Competitors: Subway competes with other fast food and pizza restaurant chains, including Blimpie, Burger King, Domino's Pizza, Little Caesar's, McDonald's, Papa John's, Sbarro, Taco Bell, Tubby's, and Wendy's.

In December 1995, Doctor's Associates, Inc. (DAI), chain founders Buck and DeLuca, and the affiliated leasing company, Subway Sandwich Shop, Inc., were found guilty in federal court of breach of contract and fraud in a dispute with a landlord. DAI, Buck, and DeLuca were assessed punitive damages of $3 million each, while Subway Sandwich Shop, Inc. was assessed a $1 million judgment. The jury, after hearing from Subway's top contract lawyer Leonard Axelrod, whose nickname is "Lenny the Ax," found that DAI illegally used Subway Sandwich Shop, Inc. as a front to shield itself from liabilities.

A group of 32 Subway franchisees filed suit the following year against Subway for $100 million in damages, charging that the sandwich chain misused advertising funds. They claimed that Subway Franchisee Advertising Trust Fund members and Subway owners used the fund to pay for ads recruiting more franchisees and to evict delinquent franchisees. Franchisees contributed 2.5 percent of their sales to the fund at the time. The fee has since been raised to 3.5 percent.

Subway franchisees pay eight percent of their gross sales in royalties, the highest in the food business, where four or five percent is more common. But the high fees don't buy a corresponding amount of power. One tactic the company uses is to lease property and then sublet it to store owners. Controlling the lease means that Subway can (and does) evict the franchisee if a dispute arises.

PRODUCTS

Subway's U.S. menu consists of 7-under-6 sandwiches, select sandwiches, classic sandwiches, salads, wraps, cookies, party subs, soft drinks, and the Kids-Pak. Its regular six-inch subs are made with meat, onions, lettuce, tomatoes, pickles, green peppers, and olives on fresh baked bread. Sandwiches include the Veggie Delite, ham, roast beef, the Subway club, roasted chicken breast, turkey breast, and turkey breast and ham. Subway Classics include the Cold Cut Tri, Italian B.M.T., tuna, and the Seafood and Crab. Salads include turkey breast, the Veggie Delite, chicken breast and tuna. Wraps include Asiago Caesar, chicken, steak and cheese and turkey breast and bacon.

CORPORATE CITIZENSHIP

Doctor's Associates, Inc., the franchisor of Subway restaurants, supports a wide variety of charitable organizations on national and local levels. Some of the groups supported by DAI include The American Cancer Society, Big Brothers/Big Sisters, the Muscular Dystrophy Association, and the United Way. Owners of individual Subway franchises also provide support to the communities in which they operate.

In addition, the company has established the Micro Investment Lending Enterprise (MILE), a volunteer-run, non-profit organization that lends money to people so they can start their own businesses. DeLuca has also developed the Micro Enterprise Hall of Fame, which honors entrepreneurs who started small and raises awareness of the micro-credit movement.

GLOBAL PRESENCE

Subway pursues an aggressive international growth strategy. In 1996 the chain had 300 sandwich shops in 29 countries outside the United States and Canada. By mid-1998 that number had doubled, to 602 in 62 countries. The international growth strategy includes co-branding smaller Subway units with convenience stores in Central and South America, Europe, Australia, New Zealand, and Asia. Australia is one of Subway's largest markets, having celebrated the opening of its 100th Subway restaurant in January of 1997.

In January 2000, Subway became the first U.S. quick-serve food chain in Tanzania, and the company had plans to open stores in Poland, Finland, India, Bangladesh and Croatia. Subway's global success hinged on its providing travelers with a familiar, core menu that ensures the same quality found in the United States. However, the company often adapts the menu to the cultural or religious variations of the regions in which it operates.

CHRONOLOGY: Key Dates for Subway Restaurants

1965:

Fred DeLuca opens Pete's Super Submarine sandwich shop

1966:

Pete's Super Submarine is changed to Subway

1974:

The first Subway franchise opens

1983:

Subway restaurants begin baking their own bread in the stores

1984:

The first international Subway opens in Bahrain

1992:

Subway introduces a co-branding strategy to work with local grocery stores and college food store operations

1997:

Subway gets a licensing agreement with the Navy Exchange Service Command to develop Subway restaurants on Navy bases

2000:

Subway becomes first U.S. quick-serve food chain in Tanzania

2002:

Subway overtakes McDonald's as the largest restaurant chain in the country

By 2001 Subway had 15,000 restaurants worldwide including 100 locations in Puerto Rico, 300 in Australia, 50 in Venezuela and the United Kingdom. That same year, it opened its first restaurants in France, Oman and Croatia.

EMPLOYMENT

Subway's independently owned and operated locations each hire their own staff. As with most fast food restaurant chains, many of the positions are part time.

Some of Subway's legal problems have stemmed from its relationships with its franchisees and employees. Its 220 development agents work with potential franchisees to get new Subway locations in place. They have organized for leverage in dealing with DeLuca, who they say has broken contracts with them. The company requires that agents meet ambitious new store quotas or risk losing their territories. This puts them into conflict with franchisees, who worry about new stores cropping up nearby.

DID YOU KNOW THAT. . .

• there are nearly two million different sandwich combinations available on subway's menu?
• subway customers consume about 60 million pounds of lunch meat every year?
• subway restaurants have been featured in many motion pictures, including lethal weapon, happy gilmore, and ransom?
• subway is the world's largest sandwich chain with more than 16,242 stores in 73 countries?
• that at $10,000, subway's initial franchise fee is lower than that of burger king ($40,000), kentucky fried chicken ($25,000), mcdonald's ($45,000), taco bell ($45,00), and wendy's ($25,000)?

Subway markets itself to potential franchisees by stressing its low startup costs. It requires an initial fee of $10,000, in contrast to some competitors' requirement of nearly $50,000, and doesn't insist that franchisees have any minimum net worth. As a result, it is the franchise of choice for many immigrants, who comprise 30 to 50 percent of its owners. These franchisees are often extremely motivated, anxious to own a business, prepared to work hard, and are seeking to take part in the "American Dream." But in general they have not had experience in evaluating contracts. In fact, according to the company's own survey, only 10 percent of its franchisees even read the contracts. Some are surprised when they discover that they are expected to pay royalties. In fact, some 35 percent failed a math and English proficiency test Subway instituted in 1997.

SOURCES OF INFORMATION

Bibliography

allen, robin lee. "subway ordered to pay $10m in punitive damages to ex-landlord." nation's restaurant news, 11 december 1995.

behar, richard. "why subway is 'the biggest problem in franchising.'" fortune, 16 march 1998.

brooks, steve. "can low-fat sell? two fast-feeders give it yet one more try." restaurant business, 15 february 1997.

casper, carol. "sub sales: sandwich shops hope customers will pick up lunch at breakfast." restaurant business, 10 february 1996.

page, heather. "no sub-stitute: any way you slice it, subway comes out on top." entrepreneur, january 1996.

pollack, judann. "subway slapped with $100 million suit: franchisees claim management siphons ad funds for other uses." advertising age, 26 august 1996.

prather, michelle. "no. 1 with everything." entrepreneur, january 2002. available at http://www.entrepreneur.com.

"subway restaurants add seasonal appeal to amusement parks." pr newswire, 11 july 1997.

hoover's online. doctor's associates, inc. capsule, 15 april 2002. available at http://www.hoovers.com.

bujol, jessica. "subway outlets overtake mcdonald's."the honolulu advertiser.com, 2 february 2002. available at http://the.honoluluadvertiser.com.

"subway franchise opportunity."franchisedirect.com, 2001. available at http://www.franchisedirect.com/news/subway.htm.

"two subway restaurants are targeted by robber." chicago tribune, 4 march 1997.

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sic codes. subway's primary sic codes are:

5812 eating places

6794 patent owners and lessors

also investigate companies by their north american industry classification system codes, also known as naics codes. subway's primary naics code is:

722110 full service restaurants