Subway Faces Crisis: 25% Customer Decline Sparks Franchisee Discontent as Turnaround Efforts Begin

Various media reports have highlighted franchisees’ discontent with Subway’s current situation, with Business Insider’s latest report suggesting that many operators feel the company requires a new CEO.

All these reports portray a restaurant chain in crisis, as Subway has seen a 25% decrease in foot traffic since 2012, coupled with franchisees rebelling against the company. Without a reversal of its declining sales trend, Subway could potentially face the closure of numerous locations.

This scenario is reminiscent of past instances where sandwich chains like Quiznos and Blimpie suffered from substantial declines in their number of outlets, partly due to Subway’s competitive edge. From dominating the market to facing its own decline, Subway’s current predicament is the culmination of a series of decisions made over the years, combined with some unfortunate circumstances and evolving consumer preferences.

Expansion Issues

About ten years ago, Subway was dominating the competition with its $5 Footlong deal and an image of health promoted by Jared’s commercials. The founder, Fred DeLuca, even mentioned the possibility of having 100,000 global locations for Subway.

By the end of 2006, the chain had 20,721 locations, and by the end of 2011, it had grown to 25,285 units, showing a 22% growth. This growth occurred during a severe recession period, impacting the restaurant industry’s sales negatively.

Franchisees felt pressured to open new locations to prevent others from taking their potential spots. Despite a decrease in foot traffic, the expansion continued. From 2012 to 2016, Subway added nearly 2,000 new locations, growing by over 7%.

In 2016, Subway closed down 355 locations, and an additional 900 locations were reported to have shut down the following year. Despite this, Subway still holds the record for having the most restaurant locations in the U.S by a large margin.

Marketing Advantages Lost

Subway’s substantial growth was largely due to successful marketing campaigns such as Jared and the $5 Footlong, both of which the company lost over time.

The 2015 arrest of Jared Fogle on child sex charges had a significant impact on Subway, as Fogle had been instrumental in promoting the chain’s healthy image. This event led to a decline in sales and foot traffic, affecting Subway’s value perception negatively.

Additionally, discontinuing the $5 Footlong offer further contributed to this decline. Just like McDonald’s struggled after revamping its Dollar Menu, Subway faced challenges in maintaining its value perception post this offer.

Subway’s franchisees, with their modest unit volumes and rising labor costs, are unhappy with the new $4.99 offer. The company has been struggling to come up with effective marketing strategies to overcome these challenges, exacerbated by its extensive number of locations.

The downfall of breakfast at Subway

Do you recall when Subway made a push into the breakfast market back in 2010?

The company heavily promoted the launch of breakfast items that year, but unfortunately, it did not result in increased sales.

Breakfast is a challenging meal to crack into as it is a routine part of people’s day. Competing against established players like McDonald’s, Starbucks, and Dunkin’ Donuts requires significant time and effort to change consumer habits and attract them to Subway.

Subway’s struggle to find additional revenue streams for its franchisees has been a hindrance as the chain expanded. In contrast, other large chains like McDonald’s and Starbucks have successfully broadened their offerings throughout the day.

Rising competition

While Subway has faced a decline, other sandwich chains have experienced growth.

In 2016, Subway’s domestic sales dropped by $200 million, according to Technomic’s Top 500 Chain Restaurant Report.

Meanwhile, competitors like Jimmy John’s, Jersey Mike’s, Firehouse Subs, and Potbelly collectively grew by $540 million, with Arby’s also seeing a $200 million increase.

The market has evolved significantly over the past decade, with new players emerging and changing the landscape. Subway’s dominance from the past has shifted, especially with the emergence of stronger rivals like Jimmy John’s.

Internal challenges

The relationship between sales troubles and internal conflicts is a complex issue for Subway.

Media reports, including articles by Restaurant Business, have highlighted the strife among franchisees, with some calling for new leadership within the company.

Dr. Peter Buck, a co-founder and majority owner of Subway, has suggested exploring premium sandwich concepts to revitalize the brand.

These internal challenges have hindered Subway’s progress towards its objectives.

Potential for recovery

There is still hope for Subway to bounce back.

Arby’s faced similar challenges in the past but managed to turn things around by focusing on improving same-store sales after being acquired by Roark Capital.

Similarly, KFC took drastic measures, investing significantly in the brand, which led to a successful period of same-store sales growth after a history of terminating franchisees.

After experiencing significant declines, both chains were able to bounce back and regain their footing. This gives Subway a reason to be optimistic, especially since its main shareholders are set to inject $25 million into the business.

Subway is facing a multifaceted challenge with an excessive number of locations, pricing issues, low sales volumes per unit, and disgruntled franchisees. However, a few consecutive quarters of increased sales can address most of these problems. Ultimately, sales have the power to resolve a multitude of issues within the company.