Data Intelligence

Subway’s Declining Sales Lead to Franchisee Policy Changes

Subway, the once iconic five-dollar-foot-long brand, has been the darling of franchisees looking for a sure road to restaurant success for 54 years. Not only did stores come with a world-renowned name, the $15,000 initial fee made for an easy entry. Now, for some entrepreneurs, it has become their worst nightmare.

The largest fast-food company in the world is hemorrhaging and taking down some of their long-time franchisees in the process. Three years ago, in 2016, the company saw more stores close than open for the first time in their history. In 2018, 1,108 stores closed, which amounted to more than double what the sandwich-chain had forecasted. Subway’s numbers are at their lowest since 2011, according to Restaurant Business.

What Happened?

In a nutshell: declining sales. First came increasing competition from the likes of Jimmy John’s, Potbelly, Quiznos, and Panera. Then, in 2015, a public-relations crisis erupted when Jared Fogle, their spokesman that lost 245 pounds in a year by eating Subway sandwiches, was convicted of sexual offenses against minors.

In addition, their expansion strategy seemed to be a race for numbers—how many stores can we open in a year? QSR Magazine reported on the amazing numbers: 4,456 restaurants opened from 2010 to 2015. The 27,103 units in the U.S. equaled more than Pizza Hut, Burger King, Wendy’s, and Taco Bell’s combined. It’s a strategy, however, that left their franchisees competing against each other and, since 2015, more than 2,000 stores have closed their doors.

Internal Conflict

In the summer of 2019, the New York Times reported that some Subway regional development agents, many franchise owners themselves, had been intentionally derailing successful units since 2016 in an attempt to take over their stores. Inspectors were instructed to find violations, as minor as single light fixtures that needed a bulb, smudged windows, or poorly chopped vegetables, and then, when enough infractions mounted, Subway had the right to take over the business.

According to their 600-page Franchise Agreement, they can revise their rules “at any time…under any condition and to any extent.” That’s reassuring.

This may be part of the reason that Subway had over 700 litigations or actions against their franchisees in 2017, mostly through arbitration, an astounding number when compared with only one by McDonald’s and none by Pizza Hut, Burger King, or Wendy’s.

Now, in an attempt to slow the closures, Subway has instituted a new store-closure policy by enforcing their 20-year franchisee agreements for the very first time. Previously, stores closed after their five-year lease expired without any issues with corporate. Now, franchisees are required to fill out a one-page questionnaire that includes questions such as what steps they’ve taken to make their locations viable and what local marketing they’ve done to help increase sales. The purpose, according to Subway, is to help struggling franchisees find someone else to run their stores.

Subway’s golden ticket out of their rapid decline may just be there “Fresh Forward” plan which focuses on new décor as well as digital menuboards and a remote order pick-up area. The 465 locations produced gross profit improvements of 11 percent in 2018 and an 18 percent hike in sales and traffic in those stores with Fresh Forward designs at relocated restaurants.

As important as their new direction will be their ability to target their growth based on data analysis including spatial analytics, geographic relationships, and customer demographics.

May this be a lesson for those restaurateurs looking to expand in a tight market. Fortunately, if words such as demographics and competitor analysis leave you with a blank stare and one more checkmark on a to-do list that is nowhere near being done, there are those businesses that specialize in helping restaurant brands expand in a low-risk, high-reward fashion.

Acutely came on the scene just a few years ago. Created by experts in the restaurant industry who saw a need for data-driven science when determining expansion plans for those in the restaurant and entertainment industries, they hired data scientist to find a way to turn raw data, mined from a restaurant’s POS and CRM systems, into actionable insights that can take the guess work out of expansion strategies. Using predictive analytics, they are able to project sales with 85 percent accuracy before their clients invest in another location. According to Mat Focht, CEO, “By utilizing predictive analytics, we are able to mitigate as much risk as we possibly can for these restaurant owners, while at the same time maximizing their return.”

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