The North American Association of Subway Franchisees hired attorney Robert Zarco and his firm Zarco Einhorn Salkowski as general counsel to address “systematic issues” with the mega-sandwich chain franchisor.
Zarco said those issues stem from mandatory food discounting Subway has reportedly imposed on franchisees and the pressure the franchisor has allegedly put on operators to remodel stores the brand believes are key to further growth.
“What Subway is requiring franchisees to do is frankly a great concern to NAASF. The mandatory discounting and the remodels are going to drastically cut into what’s left of their profits to the point that they will not be able to stay in business. Also concerning to NAASF is Subway is not allowing the franchisees to make their own business decisions on pricing and run their businesses as independent contractors,” said Zarco, whose Miami-based firm represents several franchisee associations, including the National Owners Association, a group of McDonald’s franchisees.
NAASF Chairman Bill Mathis, whose group represents about 2,500 Subway franchisees, declined to comment, instead directing all further communication through Zarco’s law firm. Subway also did not immediately respond to a request for comment.
Attorney Robert Zarco says the North American Association of Subway Franchisees intends to start a constructive dialogue with the franchisor.
NAASF’s latest actions follow reports of Subway CEO John Chidsey informing franchisees in February that they should remodel their locations or leave the system, and then telling those who have already remodeled their stores to pressure those who haven’t to do so. During a company convention in February, Chidsey apparently argued that operators who have dated restaurants are hurting the entire system.
Adding to the ongoing drama at the company is Roark Capital’s plan to purchase Subway for a reported $10 billion last year in one of the largest franchise acquisitions in history. That deal is on hold, however, as both sides await the outcome of the Federal Trade Commission’s probe into a potential unfair monopoly for the private equity firm, which also owns Jimmy John’s and Arby’s among other brands.
In 2019, the chain offered franchisees $10,000 grants, about one-quarter of the estimated overall construction cost at the time, to remodel their shops. About half of the chain’s 20,000 U.S. locations are remodeled, company executives reportedly told franchisees during last month’s company convention.
Zarco said his law firm has no intention of filing a lawsuit against Subway at this time, but intends to start a constructive dialogue with the franchisor with the hopes of reaching an outcome “that works for both sides.”
“We’ll go as far as NAASF wants us to go with this. There is no plan right now how we want to proceed and no decisions have been made. But I will tell you that all options are on the table and available. It is my hope that Subway will agree to work with us so we can come up with a fair solution to all this,” Zarco said.
The outspoken attorney has a long history of representing disgruntled franchisee groups. He said March 15 he was flying to California the next week to negotiate on behalf of Home Instead franchisees, and acknowledged filing a lawsuit against Bojangles earlier this month on behalf of the franchisee association that claims the company stopped providing information on how it uses their marketing dollars and a second “secret” account.
Hiring Zarco signals a more aggressive stance for the NAASF in its dealings with Subway, which for its part has been pushing to increase overall profits in recent years in the wake of a nearly a decade-long string of declines in average unit volumes that fueled massive store closures. Subway’s U.S. unit count has declined by about 7,000 restaurants since peaking at 27,000 in 2014.
In an attempt to turn things around, the sandwich brand has undergone several systemwide changes, including several menu updates. Last July, the company rolled out in-store meat slicers as part of that effort, which it claimed was an $80 million investment over two years free of charge to franchisees.
The company also launched a new line of subs called the “Subway Series” with the intent to attract more digital customers and more recently added a line of snack items including foot-long churros, pretzels and chocolate chip cookies that reportedly have sold so well that franchisees are struggling to keep them in stock.
The company also made a slew of executive changes last year, including naming a new president of North America.
Despite all its unit losses and reported franchisee discontent, Subway remains one of the largest restaurant chains in the world. It landed at No. 7 on the Franchise Times Top 400 rankings with $19.1 billion in systemwide sales in 2022.
Subway said its same-store sales rose 5.9 percent in North America in 2023, continuing a run of 12 consecutive quarters of positive same-store sales globally, and positive global net restaurant growth for the first time since 2016.