the wild ride continues

Even at 25,000 stores, SUBWAY co-founder Fred DeLuca says there is plenty of room for the business to grow.

By Jay Gordon, Editorial Director

Fred DeLuca never intended to be a one-store wonder. “From the beginning we had a goal to open 32 stores in 10 years,” says DeLuca of the partnership he began with Dr. Peter Buck in 1965 in order to pay his college tuition. That little project has grown into North America’s largest restaurant chain—and has helped pay thousands of college tuitions.

The partners’ ambitious goal was part of the catalyst that got them into franchising. “After eight years we had 16 stores and we knew we couldn’t get to 32 doing what we were doing,” says DeLuca, leaning forward on a couch in his Milford, Conn. office. “But we always thought that franchising was for people with big buildings, like McDonald’s.”

DeLuca had a friend who was unhappy in his job and happened to live close to a restaurant. He asked him if he wanted to be the company’s first franchisee and even offered to finance the deal. “He told me his job was lousy, but at least it was a sure thing,” DeLuca says. That initial setback put franchising on the back burner for exactly four months—until the day his friend called back to say that his company was closing and ask whether the franchise offer was still on the table.

Even with his first franchise in place, Deluca still missed his first objective; he didn’t open his 32nd store until year 11. It just might be the last time SUBWAY missed a growth target. Today the chain has over 25,000 restaurants, long ago eclipsing other fast food franchisors with “big buildings.” Last year alone SUBWAY opened 2,400 new restaurants—a rate of one every 4 hours or so.

The convenience store channel has played a significant role in that growth, hosting more than 3,200 of SUBWAY’s 5,700 “nontraditional” locations. C-store retailers have been attracted to SUBWAY for many of the same reasons other franchisees have—relatively low investment, flexible space requirements and strong support. But DeLuca says there’s another reason franchisees are drawn to the SUBWAY business model—delegation.

“A lot of [franchisors] try to manage everything,” he says. “A lot of our success comes through delegation.” Many franchisors have mechanisms they use to get input from franchisees, he adds, but few have taken the concept as far as SUBWAY, where franchisees have direct input into decision-making on key operational issues, including:

  • Advertising. “Advertising is very important to franchisees,” DeLuca says. “It’s an inexact science, so we asked franchisees if they wanted to do their own advertising and we created a Franchisee Advertising Fund that is managed by franchisees.”
  • Purchasing. “We never made money on the food anyway,” DeLuca says, “so we established an independent purchasing co-op, which took away some of the points of contention franchisees had.”
  • Site selection. “How do you find that location in Peoria?” DeLuca asks. “If only the people at headquarters are smart enough to do that, then you are very limited in your potential to grow.” SUBWAY asks franchisees to help with identifying sites, and it works. “Franchisees help find over half the new stores we open,” says DeLuca.

The SUBWAY model has proved uniquely appealing to franchisees. In 2006—for the 14th time in 18 years—SUBWAY was named the No. 1 franchise opportunity in Entrepreneur Magazine’s Franchise 500 list.

Coloring outside the lines
The same entrepreneurial spirit that caused DeLuca to open a chain of sub shops in the first place helped propel SUBWAY into a new growth arena—convenience stores. DeLuca began getting questions about opening SUBWAY restaurants in c-stores in the late 1980s, “and my answer was always no.”

Then, in 1992, DeLuca attended a franchisee advertising fund meeting in Portland, Ore., and a local development agent asked him to go along on store rides before the meeting. The development agent took him to visit several c-store locations with SUBWAYs—a clear violation of the company’s policy. But DeLuca was impressed enough to want to know more, and then he met the owner of the c-store chain that was hosting his restaurants—Chris Girard, CEO of Plaid Pantries Inc.

“He spent an hour educating me about the c-store business,” says DeLuca. “What I learned is that it’s hard. He told me that the stores with SUBWAYs were making [more] money, the investment was low, it’s an efficient use of space and the inside sales increased more than we expected.”

DeLuca began thinking hard about the c-store channel. “C-stores are a commodity business—everybody sells the same stuff,” he concluded. “They need a differentiator. Branded food could become that differentiator. SUBWAY could be the c-store’s secret weapon.”

Girard also told DeLuca about Dick Meyer, a well-known c-store industry consultant who became SUBWAY’s secret weapon—educating the chain about the c-store channel and introducing its c-store team to prospective partners.

The experience taught DeLuca to encourage more “free thinking” among SUBWAY’s staff. “If it wasn’t for our development agent doing what he wasn’t supposed to do, I might not have put the pieces together [on the c-store opportunity],” he says. “The c-store environment isn’t right for every branded offer, but it has been good for us.” Elizabeth Rolfe, SUBWAY’s director of new business development, says she has seen a dramatic shift in the way c-store retailers approach the SUBWAY offer. “In the beginning they would give us their poor-performing locations in the hope we could ‘save’ them. But then they’d hide us away in the back of the store, with little signage and no seating,” she says. Today, the channel is positioning the brand much more prominently. “They’re running it as a separate business now; it’s no longer just a piece of what they do,” Rolfe says.

On the menu: more dayparts
SUBWAY’s recent growth has been propelled by two events that took place in 2000. The first was the introduction of a line of new breads and sauces that offered the opportunity for some timely menu engineering. The second was hiring Jared Fogle as a spokesperson for the chain. Jared showed that average people could actually lose weight by eating a steady diet of SUBWAY sandwiches. “You could see that it invigorated the consumer,” DeLuca says. “Our requests for franchise information shot up.”

SUBWAY is already working on an encore. Now that it’s using toaster ovens to toast subs (“The toaster oven has, in effect, doubled our menu,” DeLuca says), the chain is looking at new ways to leverage that technology in other dayparts. SUBWAY’s breakfast program—the development of which was spurred by the c-store channel, but has been slower to catch on with traditional franchisees—is getting a lot of attention now.

“It is surprising to us that when we open for breakfast the thing we sell the most of is subs,” DeLuca says. “Over half of our breakfast sales are sub sandwiches. We tell our franchisees not to worry about breakfast; just open early and sell subs. People are looking for lunch items in the morning and the points of access for lunch food in the morning are very few.”

Even with more than 25,000 units— including nearly 20,000 in the U.S.—DeLuca believes SUBWAY still has plenty of room to grow here. One of the company’s key benchmarks—cents per consumer—currently stands at 40′. DeLuca wants to see that climb to $1 by 2011.

“We’ll open another 8,000 stores here in the next five years,” DeLuca says. “Right now we are at a density of one store for every 15,000 people. About 30% of our development agent territories are already past the one for every 12,000 people mark, and they still do very well.” >

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