Subway’s $6.99 footlong sandwich deal ended this week, but the issue of value meals remains a major concern for the North American Association of Subway Franchisees.
“We sent a letter to the leadership of Subway on August 14 outlining our six biggest issues, and the first thing we addressed was the discounting of food. What it’s doing is killing our bottom line as franchisees and making it very difficult to operate at a sustainable profit,” said Bill Mathis, the chairperson for the NAASF, which says it represents 10,000 of the 20,000-plus Subway restaurants in North America.
The $6.99 footlong promotion by Subway, which ran from August 26 to September 8, was the latest in a series of corporate initiatives that drew criticism from franchisees who feel their input is being ignored in favor of aggressive pricing and other troublesome strategies.
Subway, which was acquired by Roark Capital for $9 billion in April and remains the world’s largest sandwich chain, is again facing problematic store performance. After reporting some encouraging growth in 2023 following years of lagging sales and massive unit closures, indications are that the brand’s sales numbers are down again in 2024 as it battles other sandwich chains such as Jersey Mike’s and Jimmy John’s.
“We got word this summer that weekly Subway sales were down about 16 percent from the prior year,” said John Gordon, principal of Pacific Management Consulting Group, which provides analysis on chain restaurant earnings. “I’m pretty sure they got some more traffic with their promotions, but traffic and profit are two totally different things.
“What we’ve found is that discounting over a long period of time degrades the store value and brings in customers who have no loyalty to you because after they’ve taken your product, they’re going to look down the street to the next brand that offers an extreme discount,” Gordon said.
“We haven’t seen the data yet,” said Mathis, “but from what I’m hearing from franchisees that I’ve communicated with is they were not at all happy with this past promotion and they’re bracing themselves for the next one.”
Bill Mathis is the chairperson for the North American Association of Subway Franchisees, which says it represents 10,000 of the 20,000-plus Subway restaurants in North America.
Mathis said many franchisees are grappling with narrow profit margins, and that the $6.99 footlong deal on sandwiches that usually sell for $11 to $17 did not take account the impact it would have on operators already dealing with rising food and labor costs. He said his association advised franchisees not to participate in the promotion, and pointed out Subway’s new point-of-sale system allows franchisees to opt out of certain promotions like the $6.99 footlong. With a lot of other promotions, he said, franchisees do not have that choice.
Subway in a statement said it has “a responsibility to make decisions that provide the greatest benefit to the entire Subway system.”
“For the entire restaurant industry, value is more important than ever. Subway’s approach to value is thoughtful and strategic based on data to help balance consumer needs while protecting franchisee profits. All value platforms and digital promotions are tested before being rolled out nationally,” a spokesperson said.
A growing list of concerns
Value meals are one of the many issues the NAASF brought to the attention of Subway leadership. Mathis said operators are being required to pay for costly store remodels or risk losing their stores. He also said they’re being “forced” to operate what he called “dangerous and costly” in-store deli slicers, which start at $3,161, he said, “and then go higher if franchisees want to purchase additional warranty time.”
Attorney Robert Zarco of Zarco Einhorn Salkowski, hired as general counsel for the NAASF in March, said the cost of store upgrades, which have become a major source of contention with franchisees, often start at $50,000 and go as high as $100,000, depending on the size and location of a restaurant.
Attorney Robert Zarco says the North American Association of Subway Franchisees intends to start a constructive dialogue with the franchisor.
“Subway corporate suffers from what I call the OPM syndrome, meaning using other people’s money with no regard to what the impact on them will be,” Zarco said. “It’s very typical of a company that is owned by a private equity firm that only cares about the short-term benefits and is already thinking of their exit strategy.”
“Look, we’re all for remodeling stores which need to be refreshed and looking new, but it has to be done reasonably so the franchisee can still get a return on the investment,” Mathis said.
“As for the slicers, we were told they would increase foot traffic and sales, but we haven’t seen the data yet to support that. We’re spending extra labor to operate these machines that have to be handled very carefully to avoid accidents.
“It would’ve been much more efficient and at a lower cost for the meat manufacturers and producers to provide the product pre-sliced like we were doing before,” he said.
Mathis said another major issue the NAASF outlined in its letter to Subway CEO John Chidsey and his executive team last month was extended store hours the company now requires. He said franchisees are being instructed to keep their stores open 91 hours a week.
“Our suggestion in the letter was standard hours of 10 a.m. to 9 p.m. and if stores still believe they are open during unprofitable hours, then they should be able to submit a waiver.”
Next on the list is what Mathis referred to as “the fresh loc lids” problem.
“It’s a stainless steel piece that Subway attached to our sandwich units that block the views of our customers from seeing the meats,” he said. “In our view it makes no sense when we’re still known for freshness and we’re slicing meats. Our sandwich artists are being asked ‘Why are you hiding the meats?’”
Another issue vexing owners is the beverage agreement Subway signed with Pepsi in March after dropping its long-standing partnership with Coke. Zarco said the franchisor pressured franchisees to sign the new contract by threatening to terminate the franchise agreements of those who refused to do so.
“It’s just another example of Subway forcing their will on the franchisees without any regard to what they think or even works best for them,” Zarco said.
Asked what the NAASF’s next step is, Mathis deferred to Zarco.
“We have requested a sit-down meeting with the executive leadership of Subway to figure out a way we can work together and come up with a reasonable middle ground in all this,” the attorney said. “If we don’t get an appropriate response on that request, we’ll have no choice but to take legal action.”
Mathis remains optimistic the association and Subway can work together so each side benefits.
“At the end of the day we need each other to make this work,” Mathis said. “They need to recognize our association and we both need to be able to communicate openly and honestly so we can figure out how to make the business work. I do think we can make that happen.”
This story has been updated to clarify Subway’s response to Franchise Times’ request for comment.