Bad Policies, Bad Press, and Bad Luck Led to Subway’s Downward Spiral
”Last Week Tonight” with John Oliver recently devoted time to the Subway franchise system. Oliver gave a scathing review of Subway’s failures over the past two decades, and after watching it several times, there was very little defense I could offer.
However, I did take issue with one line. He said, “lots of the problems that you see tonight exist in some form with all franchises.” That is painting quite the broad brush and is also not true. There are many amazing franchise systems out there that do all the right things.
With due diligence and professional advice, potential franchise owners can identify red flags and better understand what they are getting into before they sign on the dotted line.
Following is a breakdown of Subway’s failures that led to controversy, record closures, and a broken franchise system.
Subway’s Franchise Territories
The biggest complaint from Subway franchise owners — and one of its most controversial bad policies — has to do with territory. Franchise owners don’t receive a designated territory. Even worse, Subway’s Franchise Disclosure Document (FDD) stipulates “we and our affiliates have unlimited rights to compete with you.” What does that mean? Basically, Subway franchisees can be inundated with competition from fellow franchisees.
For example, Oliver told the audience that the studio where “Last Week Tonight” is filmed has ten Subway locations within a one-mile radius. That is problematic on many levels but isn’t a secret. Items 8 and 12 of the FDD provide all the information about territory. Potential investors could have read it and known. Franchisors may define territory by miles, income, population, or a combination. It will restrict owners from marketing outside of their given locations.
Subway’s Royalty Fees and Agreement Terms
Subway appears to have lost its way many years ago with bad policies and bad press. They charge a royalty fee of 8% in addition to an ad fund fee of 4.5%, making their fees the highest in QSR franchising. It’s simply bad policy. But there’s more. They created a non-disparagement clause that does not allow Subway to be ridiculed. Their franchise agreement lasts 20 years while most franchises have 10-year agreement terms. Nypost.com reported that “Subway took 718 actions against franchisees last year, mostly through arbitration, and is generally involved in hundreds more disputes with U.S. franchisees each year than all of its major competitors combined.”
Although this information is shocking, it’s not a secret. This information must be disclosed in Item 3 of the FDD — Litigation History. Potential franchise owners can find out the ”dirt” on a franchise system with some due diligence and counsel from a franchise attorney and/or franchise consultant.
Item 19 is the most popular section of an FDD. This, as well as Item 21, provides financial performance representations as well as financial statements and is updated annually. This is the first step in understanding the potential earnings for a franchise system. Subway does not provide any of this information which is yet another bad policy.
So how do potential franchisees understand their earning potential if there’s no Item 19 or 21? I always suggest that candidates ask direct questions to current franchise owners about their finances during the validation process. This can aid in creating a strong pro forma for their own business. Items 5 and 7 report your anticipated day-to-day expenses. So plugging that in along with expected revenues can provide a clear picture of a business plan and sales goals/objectives.
I advise candidates to always look at the middle numbers for revenue and plug in the highest range for expenses, and if that spits out revenue that they can live with, then they should be good to go. Never focus on the top earners alone since everyone cannot be at the top. It can be your goal, but it could take several years to achieve it. Additionally, don’t forget your friend ”Google.” A quick search on the internet showed several websites that break down what an average Subway owner can expect to make.
Business ownership in and of itself presents many unknowns. As a franchise consultant, one of the most important topics I discuss with my candidates is risk tolerance. The assessment that I require measures their risk aversion. This information helps to ascertain if they should invest in an emerging franchise (very young and not well established) or a legacy brand. There are pros and cons to both types of franchises.
Subway is more than a legacy brand — it’s an empire franchise with thousands of locations and owners worldwide. Empire franchises do not typically work with franchise consultants since they have little availability and international brand recognition.
There are circumstances (both good and bad) around mammoth-sized empire franchises like Subway that simply come with the territory. For example, on the positive side, empire systems have a built-in following from the get-go and provide a huge support network. Their established processes leave little room for costly mistakes that could set a business tumbling backward. On the other hand, empire franchises are extremely expensive, have limited territory availability, and could be over-saturated in the marketplace. They may have been repeatedly bought and sold by private equity firms and that can result in management issues and create fissures in the entire system.
Emerging franchises have plusses and minuses, too. They have open territory and are great for those with an entrepreneurial spirit. Early investors in an emerging franchise system will have more input, especially if they have some business expertise. There also may be room for contract negotiations. But there are downsides, too. Emerging franchises are not well known and may be working out some kinks in their process. If an emerging brand does not have strong management, the system could be shaky from the start.
Subway’s Food Quality
There has been negative social media and bad press about Subway’s food quality. Questions about how they define both tuna and bread have plagued the franchise. But can a franchise system completely control its food quality? This can be difficult but not impossible. Items 8 and 12 of the FDD outline supplier restrictions so that all franchise owners in the system use the same ingredients and use specific vendors so that everyone has the same experience, whether they are in Boise or Spokane.
Subway Spokesperson Jared Fogle
Controversy and bad press can impact an entire franchise system. In the case of Subway, it initially had a very successful campaign with spokesman Jared Fogle. He became known for his weight loss of more than 200 pounds thanks to his daily habit of eating at Subway. He was featured in more than 300 commercials and traveled around the country doing speaking engagements as the official Subway spokesperson. But it all backfired.
In 2015, Fogle was sentenced to 15 years for receiving pornography and having sexual relations with a minor. This was harmful to the Subway brand and consequently its owners. Item 18 of the FDD discloses if the company has any famous spokespeople attached to the franchise. Of course, what happened with Fogle was simply bad luck.
Many franchises have famous spokespeople and it’s usually a good thing. Last year, Clean Juice brought Tim Tebow on board as their National Brand Ambassador. Clean Juice was an emerging franchise just a few years ago and now has close to 200 locations. The right alignment with a public spokesperson can propel a franchise system which is a benefit to the system and helps secure brand awareness faster.
Can Subway’s Failures be Reversed?
More than 1,000 Subway locations shut down in 2021. To counter several years of record store closures, Subway engaged in an expensive ad campaign featuring several athletes such as Tom Brady, Steph Curry, Meg Rapinoe and Serena Williams. These efforts may have helped increase sales, but the damage was already done.
Remarkably, people continue to invest in Subway because of its familiarity and probably do so without counsel. To hear them complain that they did not know what they invested in is hard to comprehend since this information is quite public. It is a simple matter of due diligence and getting advice from a franchise professional.
To lump all franchises together and say that they are all problematic is the same as saying that all late-night talk show hosts are not funny and we know that is not true — just look at John Oliver!
“Pigs get fed, hogs get slaughtered” —Mark Cuban