Should You Sink Your Investment into a Subway Franchise?
With its green and yellow logo, “five-dollar foot-long” jingle, and “Eat fresh” tagline, Subway immediately rises to the top as one of the most recognizable franchises in the country. In fact, the iconic sandwich shop is one of the largest in the world, with nearly 44,000 locations world-wide, according to the Franchise Disclosure Document. Boasting strong brand recognition and penetration, Subway’s sandwiches and salads can be found in restaurants, convenience stores, airports, and ballparks, with plenty of open territories still available--making it an attractive franchise option for operators. However, it’s important to recognize that fierce competition, changes in leadership, and recent scandals have created waves among franchisees. Here’s what you should know about investing in a Subway franchise.
History of the Subway Franchise
More than 50 years ago, Dr. Peter Buck gave college freshman Fred DeLuca, the founder of Subway, the idea to open a submarine sandwich shop as a way to help pay tuition. DeLuca’s first two attempts did not immediately spell success, according to a New York Times article. Originally named Pete’s Submarines (after his friend Dr. Peter Buck), the name had to change because it did not translate well over radio advertising. However, Buck’s initial investment of $1,000 did pay off. By 1974, the two men owned and operated 16 sandwich shops in its birthplace of Connecticut under Doctor’s Associates, Inc. The name derived from the idea that DeLuca hoped to earn enough money in the sandwich business to eventually become a doctor.
Subway franchises experienced a tremendous growth trajectory throughout the 1980s and 1990s and peaked about four years ago. Subway listed more than 25,908 open locations in 2017, down from 27,129 in 2015, according to its Franchise Disclosure document. A privately held company with headquarters in Milford, Conn., and regional offices around the globe, Subway does not publicly report financial results, but Forbes said it had $17 billion in sales in 2017, when it was listed as #92 on Forbes’ List of the World’s Most Valuable Brands. Back in 2015, Forbes listed DeLuca, the former president, and his co-founder and partner, Buck, as the 259th-richest Americans, each with about $3.5 billion. Subway actually dropped off the list in 2018.
The death of Deluca in 2015 marked a turning point in the franchise’s leadership. A hands-on executive, according to The New York Times, DeLuca ran the operations for decades, personally signed company checks, traveled across the country stopping at Subway restaurants incognito to sample the food and service and talk with franchise owners and customers. The company was then led by his sister Suzanne Greco, who retired in 2018 after spending 45 years with the company, according to Business Insider. Trevor Haynes, who joined the company in 2006, currently oversees the day-to-day operations of the company as interim CEO.
Why a Subway Franchise Might Be the Right Restaurant for You
As a Subway franchisee, you are required to sell six-inch and foot-long specialty sandwiches, salads, wraps and other food items. You must also offer a breakfast menu that offers egg sandwiches, bacon, sausage, muffins, coffee and juice if you operate your franchise in the United States, according to Subway’s Franchise Disclosure Document.
In addition to a menu that broadly appeals to most people looking for a quick service meal, Subway is one of the most valuable brands in the United States, third only to McDonalds and Starbucks, according to Business Insider. It’s brand value is in the millions worldwide: $18,766 according to Statista. (Starbucks is valued at $44,503 million and KFC trails Subway at $15,131.)
Subway franchises don’t only exist in stand-alone restaurants. The chain allows franchises to operate traditional stores, but franchisees also may open locations in gas stations, rest stops, hospitals, theme parks, and business complexes. In addition, Subway allows franchisees to operate school lunch programs and provide food for community development programs—which have a different set of rules and lower entry fees. And while the company requires most restaurants to stick to a core menu, it does allow for franchisees to offer additional menu items—even alcohol, according to the Subway Franchise Disclosure Document.
Under fire for not keeping up with public trends and tastes, Subway has made recent changes to appeal to millennials via “uplifted” stores, customer loyalty programs, self-order kiosks, and relationships with food delivery services like Uber Eats, GrubHub, and Postmates, for example. The store even developed a mobile app for customers to access Express Pickup, get digital coupons, earn on purchases, scan to pay and more. The restaurant’s objective: to make it as easy as possible for customers to get food, according to a recent Forbes article.
New menu items, bright menu boards and kiosks round out Subway’s new “Fresh Forward” design, according to QSR Magazine. In addition, Subway invested more than $80 million in its Fresh Now program, which encourages customization with new sauces, toppings, and beverage options, the magazine said.
Thanks to a strong brand and familiar food, Subway franchisees can count on ample support and marketing from the corporate office. The Subway franchise has distinct specifications related to store set-up, menu, and marketing programs and regional development agents who run those programs and conduct inspections. The corporate office helps franchisees navigate:
Site selection/ grand opening
Financing, offered in-house
Equipment sales/ leasing
Regional advertising and national media
While franchisees benefit from a prescribed menu of products and services from the home office, some have experienced frustration related to pricing, store reputation, and saturation in the marketplace.
Why You Might be Cautious About Opening a Subway Franchise
Successful franchises often reach a peak before losing ground, which is exactly what started happening to Subway about three years ago. In fact, Subway closed more than 1,000 restaurants in the United States last year — way more than it originally planned, according to CNN News. Subway began closing restaurants in 2016, when it for the first time in its history had more US closures than openings. It said it plans to keep closing restaurants as it tries to become more profitable, relocating and remodeling restaurants that stay open. Subway’s downsizing trend may bottom out with some of its new initiatives, but franchisees should be cautious about buying a unit that was recently closed.
There is some discord among franchisees, as shown in a list of growing legal disputes franchisees are filing with Subway. The 700-page operations manual is difficult to adhere to, franchisees told The New York Post, and can be used against franchisees during monthly inspections for violations that can then put them in jeopardy of breaching their licensing agreements, according to sources and court filings.
In some cases, stores closed due to violations are sold to Subway’s own development agents— the very same people who direct the monthly inspections, according to sources and court filings, the article reported.
“My clients were targeted because sometimes they liked the store’s revenue and wanted the store for themselves,” Ohio lawyer Mark Shearer told The Post, echoing his statements in a recent court filing about an Ohio franchisee who was allegedly forced out by a development agent “attempting to acquire restaurants in the territory.”
The most recent Subway Franchise Disclosure Document indicates that there are 955 franchisor-initiated actions, and that Subway estimates that “the franchisees we or our affiliates filed actions against in connection with the franchise relationship constitute about 2% of the franchisees operating Subway restaurants globally.”
Emerging competition is another factor prospective Subway franchisees should be mindful of as they consider entering the crowded quick service market. After all, rival sandwich shops might not be who you should look out for: Restaurant Business reports that Chick-fil-A and delivery services, such as Grubhub, Postmates and DoorDash, are Subway’s top competitors.
“The results speak to the complexities of consumer choices and reveal again that the competitive landscape isn’t as simple as we think,” the article stated. “Customer choice can be tricky. How consumers choose a restaurant can often come down to opportunity or convenience, or whether people want to try something new, or whether there is an influential person in a particular party.”
While it has overcome problems related to reputation, scandal has tarnished Subway’s brand in recent years. Formerly popular Subway pitchman Jared Fogle is currently serving a nearly 16-year sentence on counts related to child porn and sex with minors. A CBC Marketplace investigation in 2017 found that the chicken in Subway's chicken sandwiches were roughly half meat, half soy, which Subway denied. Finally, its fresh produce has come under fire for being anything but fresh, although Subway claims it works with more than 100 family farms and suppliers in the US to help make sure its restaurants have fresh produce, according to an article in Business Insider.
Finally, some franchisees have complained about thin profit margins –which ultimately sunk the wildly successful “five-dollar foot long” sub promotion. Franchisees simply weren’t making enough money from them. “With higher rents, escalating food cost and increasing mandatory labor costs in addition to royalties and advertising fees; the five-dollar footlong sliced into those profits,” according to an article in Forbes.
How Much Does a Subway Franchise Cost?
Subway is one of the cheapest restaurant franchises to enter. Total initial investment can run between $150,000 and $328,000 for a traditional location (and $89,550 to $209,400 for a non-traditional location), assuming you lease your equipment from Subway, according to the Franchise Disclosure Document. As a comparison, McDonald's charges a franchise fee of $45,000 and startup expenses can cost up to $2.2 million, according to the McDonald’s Franchise Disclosure Document. A Subway restaurant, on average, generates $422,000 in sales annually, compared to $2.6 million in average annual revenue for McDonald's restaurants, according to QSR magazine.
Subway franchisees are required to contribute 12.5% in gross total sales each week to cover the costs of royalties (8.5%) and advertising (4.5%).
Initial franchise fee: $15,000
Reduced franchise fee for affiliates or veterans: $7,500
Satellite franchise fee: $5,000
School lunch or community development location fee: $0
Royalty: 8% of gross total sales plus 4.5 percent of gross total sales for advertising (12.5% paid weekly)
Grand opening advertising: $2,000
Location rent/ license fee: $1,000 to $6,000 per month
Net worth: $80,000-$310,000
Liquid assets: $30,000-$90,000
How Do You Become a Subway Franchisee?
There are no company-owned Subway franchises. Like the original owners, you don’t have to be a sandwich artist or have owned a restaurant to become a Subway franchisee. There are financial requirements, which include having liquid assets between $30,000 to $90,000 and a net worth between $80,000-$310,000. You must, however, participate in a two-week long training course that teaches business concepts, methods of operation, and basic management skills. The training time is spent in a classroom and on-site at a local Subway franchise for a "hands-on" experience. At the end of the two weeks, each potential franchisee must pass an exam to become a Subway franchisee.
According to Subway’s website, if you possess an entrepreneurial spirit and want to work hard, you can apply for a franchise. Steps include:
Submitting a franchise application
Meeting with a local business development agent
Reviewing the Franchise Disclosure Agreement
Conducting local research
Singing the franchise agreement
Attending a training
Securing a location
The website also lists sites for sale here: https://www.subway.com/en-US/OwnAFranchise/RestaurantsForSale
What Are Some Other Sandwich Franchise Alternatives?
If you are interested in owning a quick service franchise, but don’t believe that a Subway franchise is right for you, fortunately there are many other options available. The quick service food franchises listed below are all award-winning brands that have been rated highly in FBR franchisee satisfaction surveys.
With more than 900 restaurants in 29 states and Washington, D.C., the 30-year-old Checkers & Rally’s brand stands out thanks to its black, white and red checkered design. Milkshakes, burgers, chicken wings, and seasoned fries make up the menu, and customers can choose between eat-in, drive-through, and delivery options. Buildings could include stand-alone restaurants, converted spaces, or non-traditional locations, giving franchisees leeway to lower their real estate investments, according to the Checkers & Rally’s website. A recent Franchise Business Review survey shows it ranked among one of the best opportunities for franchising by its franchisees, citing it as “very good” for training and support, financial opportunity and general satisfaction.
Franchise requirements are as follows, according to Franchise Business Review:
Franchise fee: $30,000 per restaurant
Total estimated initial investment: $96,414 – $1,501,265*
Minimum net worth: $750,000
Minimum liquid assets: $250,000
Royalties: 4% of net sales
Total advertising requirement: 4.5% of net sales
Both candidates with prior restaurant experience and those seeking a financial investment are encouraged to apply for a franchise; all prospective franchisees must complete five weeks of training.
The chain boasts a 62% return on investment and opened 50 new restaurants in 2017. In 2018, Restaurant Business reports that franchise revenue rose 9.5%.
Learn more about franchise opportunities with Checkers & Rally’s.
2. Lennys Grill & Subs
Lennys Grill & Subs opened in Memphis in 1998, and is known for its cheesesteaks, Italian, and turkey subs. The fast-growing chain already has 100 locations, primarily in the Southeastern and South-Central United States with a plan to reach 200 locations within the next five years, according to the Galesburg Register-Mail. Its top 50% of franchise owners grossed $775,000 in sales and brought in $85,711 on average in earnings before insurance, taxes, and amortization (EBITA), according to its Franchise Disclosure Agreement. Franchise Business Review ranked it as one of its 200 Best Franchises to Buy in 2019.
Franchise requirements are as follows, according to Franchise Business Review and the Lennys Grill & Subs web site:
Franchise fee: $25,000
Total estimated initial investment: $192,844 - $431,326
Minimum net worth: $400,000
Liquid capital requirement: $75,000
New franchisees come to Memphis, Tennessee, for four weeks of training in a certified training restaurant, and one week of training at the Restaurant Support Center. Prospective franchisees are not required to have owned or operated a restaurant previously.
If you prefer pizza to sandwiches, Donatos Pizza might be the quick service restaurant franchise that most appeals to you. With growth markets in the eastern part of the United States, Donatos operates 54 company-based restaurants, which roll out products and processes before they are passed on to its 160 franchisees. Franchisees buy their dough directly from Donatos, which offers “ready-to-go” crusts—reducing customer wait times, according to the Donatos Pizza website. It also gives customers choice, thanks to “five points of distribution,” which include delivery, pick-up, drive-through window, eat-in, and catering.
Franchise requirements are as follows, according to Franchise Business Review and Donatos Pizza.
Franchise Fee: $30,000
Total estimated initial investment: $375,000 - $699,900
Minimum net worth: $1 million
Minimum liquid assets: $200,000
Commitment to three locations
Training and support include a field marketing manager, local store marketing, and a franchise business consultant who looks at profitability. Training includes a discovery day at Donatos Pizza’s home office in Columbus, Ohio.
Whether you decide to invest in Subway or another quick service restaurant, there is a lot to consider when opening food franchise. For example, Franchise Business Review reports that the time investment for a food service franchisee varies as much as your monetary investment, depending on:
• the size and capacity of the franchise concept
• the number of locations you open; and
• how long the franchisee has been in business.
In its Top Food List report, Franchise Business Review’s research shows that 37% of food franchise owners earn less than $50,000 per year, and just 16% – the “top performers” – earn more than $200,000 per year. The average annual income reported by all food and beverage operators it surveyed is $120,000 for businesses open at least two years. The report also states that its top food franchises reported average earnings 15 to 20% higher than their competitors.
Understanding all of the food franchises and concepts available, expected profitability and income, and what will be expected from you as a franchisee are major factors to consider before you invest in any franchise. You can learn more about this year's top-rated food franchises is Franchise Business Review’s Top Food List -- The Best Food Franchises to Buy in 2018 - Reviewed, Ranked, Recommended.