Franchising can be an effective way for entrepreneurs to establish their businesses, allowing individuals or small companies to build revenue and income with the assistance of the brand owner. Yet another version exists too, in which large, multi-unit operators enter into extensive franchise agreements and run potentially hundreds of stores. These latter types of franchisees are what Subway would prefer to run its stores, but it is struggling to find takers for this offer. What causes such rejection?

Currently, Subway’s franchises are mostly held by small operators, many of which are family owners. But the chain also has closed thousands of stores in the past decade, citing low margins and insufficient revenues earned from those locations. For the small, independent operators, which lack any economy of scale, the franchise agreement might enable them to scrape by, but it does not leave enough extra for Subway to receive the greater profits it would prefer to obtain from each store.

Larger franchisee corporations are a different story. They have vast experience and operational sophistication, and because they own so many stores, they enjoy substantial economies of scale. But these sophisticated and cautious investors appear unwilling to purchase Subway franchises, due to the low margins achieved in each store. Although Subway, which is privately owned, does not disclose sales data, some experts estimate that its annual sales volumes are less than half those of its sandwich competitors like Jersey Mike’s. Furthermore, many of the existing stores (currently run by the small franchisees) require updating and new equipment, which means that new owners would need to invest substantial funds, beyond the cost of buying in to the franchise agreement.

Subway disputes such claims in the promotional material it offers potential franchisees. For example, it notes 12 percent comparable sales growth and strong unit volume. It also continues to enjoy strong brand recognition as a relatively healthy alternative to other fast food options.

But the gap between higher sales volume and lower revenue suggests a potential pricing issue. Subway has long touted its low price offerings, but rising prices for sandwich ingredients likely mean that the “$5 Footlong” is no longer sufficiently profitable. Raising prices might be necessary, though it is unlikely to appeal to consumers who expect a value option.

Another pertinent issue involves predictions of Subway’s impending plans. Some observers believe the chain is planning on selling to private equity investors, which may be why it is so actively seeking secure and well-financed franchisees to join its system now. If investors can be confident that the individual stores are being run professionally and efficiently by a large franchisee conglomerate, they may be more willing to pay a higher price to buy the brand. But for franchisees, such future uncertainty is deeply unappealing, because they do not know what the implications of the sale would be for their agreements.

Thus the chain appears to be facing an impasse for some of its most critical stakeholders, including brand owners, franchise operators, and consumers. Who is likely to be the first to find a way to break it?

 

Discussion Questions

1. Answer the question that ends this abstract: Who can break the impasse related to Subway’s desire for more sophisticated franchisees, those franchisees’ unwillingness to invest, and consumers’ price and quality demands? How might they do so?
2. How should Subway respond to this situation? Consider, for example, whether it should raise or waive franchisee fees, raise or maintain retail prices, close or open more stores, and so on.

Sources: Hilary Russ, “Subway Struggles to Get Big New Franchises to Buy its US Sandwich Shops,” Reuters, June 6, 2023; Josh Kosman, “Subway Clamps Down on Franchisees as Fast-Food Giant Eyes $8B Sale: Sources,” New York Post, February 26, 2023