That’s a Lot of Sandwich Restaurants

Has Subway taken the Sub way too far? 

In the middle of California, along the Interstate 5 and surrounded by the pungent smell of death from the nearby Harris Ranch (which can contain up to 120,000 cattle at a time for perspective), lies a gas station, and more relevantly, a Subway. Throughout the U.S, this seems to be a common image. Chances are, if you’ve taken a roadtrip in the U.S, you’ve seen something along these lines plenty of times, and maybe even noted just how common Subways are. And even if you’ve never taken a roadtrip in the U.S, it’s still likely you’ve taken notice.

While this frequency isn’t exclusive to Subway, with franchises like Starbucks or McDonald’s having many U.S locations, Subway has the most by a significant margin. In the U.S alone, Subway has around 20,000 locations, beating Starbucks, which has the second most, at around 5000 less locations.

A 2016 U.S map of Subway locations. (Photograph: Business Insider)

Why does Subway have so many locations, and why do they have so many more U.S locations than their competitors?

Subway has a lead in U.S franchises for a multitude of factors, all mostly stemming from how their business model operates. A major facet of their business is just how easy it is to open a subway franchise, especially in comparison to other fast food chains. Fast food chains have startup costs you need to fill, both in a paid amount and in a required amount of liquid assets.

For example, McDonald’s franchises have a startup fee of 45,000 dollars and a requirement of at least 500,000 dollars in liquid assets to start a franchise. In Subway’s case, the barrier for entry is significantly lower, with a startup fee of 15,000 dollars and a requirement of 100,000 dollars in liquid assets.

Due to the significantly lower financial requirements needed to open a Subway franchise, rapid expansion and amassing a high location count came as a result. Subway’s cost of entry also leads to the franchisees largely being immigrant families and individuals, as opposed to a chain like McDonald’s where many franchises are operated by investment firms. 

Subway’s business model also takes a significantly larger cut of the profit of a given franchise compared to other chains, with an 8% royalty on gross sales compared to most other franchises 4 or 5% cuts. With the high amount of locations and the high cut taken from each one, especially considering the deals and promotions they push onto the franchises, Subway is able to profit off of rapid (and sometimes reckless) expansion.

Subway’s business model of rapid expansion and cheap-to-open restaurants also allows them to exert more control over their franchisees. Particularly, with an agreement that puts the franchisees essentially at their mercy, Subway forces them to make any menu changes or redesigns on their own dime and pushes them into promotions, even if those changes or promotions lose the store money. 

The agreement the franchisees sign on to doesn’t even allow them to sue Subway themselves, with the Franchisees instead being forced into arbitration, a system which Subway appears to use far too often . The sheer amount of arbitrations Subway might initiate represents that tumultuous relationship between it and its franchisees, with Subway initiating 702 arbitration actions against U.S franchisees in 2017 compared to other chains like McDonald’s or Dunkin’ Donuts’ 1 or 2.

Subway is able to initiate so many arbitration actions against its franchisees due to a 700-plus page franchise operations manual, making it essentially impossible for a franchisee to be in full compliance with it.

A major part of the reason Subway sends so many stores into arbitration is due to the abuse of power via business development agents. Subway’s BDA’s hold control over the franchises in a certain region, recruiting new franchisees and approving buyers for stores. They also send field consultants out to inspect stores in a monthly review. Their abuse of power stems out of the fact that many of them are franchisees themselves, creating a conflict of interest. That means they both manage and compete with other stores, and get their own locations inspected by people they hire.

These business development agents are able to take over profitable stores and shut down their competitors through manipulating the inspections they manage, in part leading to the massive amount of arbitration actions subway takes.

In a June 2019 report for The New York Times, field consultant Rebecca Husler described herself as a “hit man” for the Business Development Agent that employed her, saying “we’re ruining these people.” Business development agent, Chirayu Patel, told his field consultants to fail franchisees he wanted to fail, but for the stores he owned, he told them not to report violations at his stores and to email him about them instead. It’s also mentioned that records show Mr. Patel later went on to own multiple of the stores he failed.

Chirayu Patel. (Photograph: New York Post)

Subway consistently exerts control over its franchisees by forcing them to either open another franchise next to their own or suffer the consequences of one opened by another franchisee, leaving a lose-lose scenario for the franchisees. 

Even when Subway franchises in close proximity aren’t forced, due to Subway’s business model pushing rapid expansion and less quality control when it comes to actual locations, these locations opening right next to each other and halving each other’s profits is nowhere near as uncommon as it should be. 

The lack of quality control makes sense when put into the perspective of how this practice affects Subway corporate, as they still receive 8% royalty fees from close-by franchises as well as their 15,000 dollar franchise fee, putting the financial burden of the situation on the franchisees who are left with no control over the situation.

While Subway’s expansion driven business model has allowed them to rise fairly quickly to the top of the fast food franchises with the most U.S locations, their business practices and several other hits they’ve taken to their business have created a significant loss in locations over time. Subway’s peak in U.S locations was in 2015, with 27,129 locations. After that, 2016 became the first year that Subway lost more stores than it gained.

Another Subway bites the dust. (Photograph: WNBF)

Their massive losses demonstrate the effects of Subway’s over-expansion, Subway’s arbitration actions and closing in stores in part being an effort to optimize Subway’s footprint. Subway has continued to shed locations since 2016, the image of success not being enough to maintain a business growing too much and too fast.

At the same time, more recently, it’s become clear that Subway’s decline has begun to slow in the midst of a sale to private equity firm Roark Capital, and attempts to modernize and refresh the menu by the new CEO. With a new push to open more restaurants internationally, for the first time since 2016, Subway opened more stores than it closed last year. Perhaps this new attempt at expansion for the chain can start to help improve on its past mistakes and can remove the exploitation of the people that its business relies on.