SUBWAY: TO FRANCHISE OR NOT TO FRANCHISE?

MMD September 19, 2014 0
SUBWAY: TO FRANCHISE OR NOT TO FRANCHISE?

You can’t throw a rock and not hit a Subway if you happen to be any place that’s inhabited by human beings. There are over 42,000 of them. Let me break that down further so you can truly understand the magnitude of that number. Starbucks has about half as many stores, Starbucks, whose spread was akin to a pandemic, only has half as many stores. Even the big daddy of fast food chains, McDonald’s, has nearly 10,000 less restaurants. This must mean that Subway is a great franchise and a good investment for any entrepreneur, right? Eh, not entirely the case. There is a $15,000 franchise fee as well as 12.5% a week. You also have to buy all of your food from “approved vendors”. All in, you could be looking at $300,000 and that pesky 12.5% for as long as you own it.

Now that we have the start-up costs out of the way, let’s touch on other areas of the business. Those 42,000 stores are not so much a result of massive success but rather just Subway’s business model of throwing everything at the wall at seeing what sticks, quickly tossing what doesn’t work and likely keeping what works as a corporate store. This willy nilly approach takes away from the integrity of the brand. It’s irresponsible. See, corporate doesn’t care because if a store closes down they still made money. Subway also has what are called development agents. These are people who own Subway franchises and have partnered up with the corporate to serve as a point person for other potential franchisees. The problem here is that these guys want to open stores and that’s it. They will likely have no issue with having one guy open a big, expensive store in a very high traffic area and then opening another one up a block and a half away. This business model is actually quite ridiculous and obviously self serving.

Another issue is product and let’s not forget that product is whole the business at the end of the day. Product is what makes or breaks a business. Subway’s product, while edible, is way too easy to beat. It’s grade D meat similar to the cold cuts you would find in Lunchables or something similar. Any, and I mean any, local deli will beat the pants off of Subway in terms of quality. Then, of course, there’s the price. They can advertise $5 foot longs until the cows come home but a custom sandwich at Subway is pricey. You could easily spend eight bucks on a sandwich. Again, a local deli will give you twice the food, twice the quality, and at the same price as Subway even in a place like New York City, as major metropolitan of an area as you can get.

In terms of earnings, a franchisee is looking at about a 20% profit. If it’s a busy store you’re looking at about 70-80k a year. Now, I’m not sneezing at 70-80k but for that kind of money I’d much rather work 9-5 with weekends off plus medical benefits. I’m not sure how other entrepreneurs feel but to me owning your own business is about making as much money as possible independently, not grinding out an average salary with corporate involvement. I personally know deli owners who pull down well into six figures and the only money they give up is to the IRS. Yes, the Subway name guarantees some recognition but it’s not a guarantee that people will walk through your door. It’s not McDonald’s which is worth every penny of the 7 figure start-up costs. You could put a McDonald’s next to an igloo in Alaska and still bring home a hundred and a half a year but Subway is far from McDonald’s.

You could be a multi-store owner but to me the risk seems way too high to have so many eggs in one basket. If you’re a first time business owner and this is the type of business you want to open then consider opening your own sandwich shop. I think you’ll be better off and you’ll be independent. I don’t see much of a future for Subway. Their products sure aren’t enough of a draw. They’ve obviously peaked and they can keep on opening stores but just as many will close, that’s not growth. At best, they’ll stay exactly where they are. But somewhere there’s a sandwich shop owner with a better product sitting in a lawyer’s office with a bunch of investors. All it takes is some stiff competition and it could be curtains for Subway. The decline would be slow but sure. It may have already started.

Article By: Jon DaBove

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