In today’s Finshots, we dive into the 58-year journey of sandwich maker Subway.
But before we begin, if you're someone who loves to keep tabs on what's happening in the world of business and finance, then hit subscribe if you haven't already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.
In 2011, Subway became the largest fast-food chain on the planet. It had overtaken McDonald’s global store count. And it was selling $11.5 billion worth of sandwiches a year.
People thought there was no looking back…but little did they know that Subway had hit a peak.
In the past few years, the store count in the US has been slashed by 25%. Its sales have plummeted. And now it is even losing its soul — the family-owned chain is being turned over to a private equity investor. Ouch.
So what went wrong at Subway, you ask?
Well, let’s take it from the top.
It all began on one fine evening in 1965. A nuclear physicist named Dr. Peter Buck hosted a backyard barbeque party at his home in Connecticut for his family friends. And they brought along their 17-year-old son Fred DeLuca to the party too.
Now this college kid had a dilemma. He wanted to study medicine but he was strapped for cash. He didn’t make much money from his part-time job at a hardware store either. So he thought that he could borrow some ideas or even money from the successful Dr. Buck.
But that’s not what quite happened. He ended up getting $1,000 from Dr. Buck. But it wasn’t for his education. The 17-year-old and the nuclear physicist instead partnered up to launch a sandwich store — Pete’s Super Submarines. And on the first day of the store launch, they sold 312 sandwiches at less than a dollar each.
That was the humble beginning of what would become Subway’s global empire.
But mind you, it wasn’t a roaring success from the get-go. In fact, the first store struggled to turn a profit. And that’s when DeLuca supposedly did something quite outrageous. He opened up a second store. He wanted to display an illusion of success. Maybe then people would whisper about how well the restaurant was doing and flock to get their sandwich fix.
Did it work?
Well, we don’t know for sure. All we can say is that it definitely didn’t bankrupt them. And the store count gradually expanded over the next decade to about 16 stores. That was still short of his 32-store target.
And that’s when DeLuca flipped the switch on his next idea — franchising.
That way, DeLuca’s company wouldn’t have to part with large sums of money to set things up. The expansion would be quicker. And because the franchising costs weren’t too hefty, people bought into the idea. By the early 1980s, Subway had about 200 stores and by 1995, it soared to 10,000.
People queued up at the outlets because Subway was essentially a fast food brand that made sandwiches right in front of you, the way you wanted. It had fresh and healthy ingredients. It appealed to people’s ideal of being ‘healthy’. And with criticism about fast food on the rise, it even got the perfect opportunity to capture the trend. You see, in 2000, a man called Jared Fogle claimed that he’d lost over 110 kilos on a Subway diet. So Subway featured him in all their marketing campaigns. And that very year, sales spiked.
Then came the financial crisis of 2008. And while its rivals suffered, Subway boomed. By launching $5 subs. Recession marred consumers bought into it. And with increased footfalls, revenue from just the $5 footlongs crossed $3.8 billion!
Subway was on a tear.
But when the mid-2010s rolled around, the same strategies that worked wonders for the company backfired. It all came crashing down.
See, Subway’s low franchise fees and aggressive plans meant that stores mushroomed left, right, and centre. After all, a 2015 report pegged the franchise costs to be as low as $116,000. McDonald’s was 10 times higher. People felt this was the better option. Even though Subway took a higher commission from the sales.
But the flip side of this was that this low upfront cost led to too many stores clustering around each other. They began cannibalizing their own sales as a result. For instance, an average Subway store clocked just $437,000 in sales when compared to other sandwich stores that did double the numbers. So franchisees began to turn against Subway. They were unhappy with how the chain had expanded recklessly.
And it wasn’t just that. Maybe Subway realised its mistake and attempted to pull down the shutters of slow-growing stores. So, Subway appointed development agents across the country to monitor its restaurants. These folks were in charge of inspections. But franchisees complained that Subway was trying to sabotage them. It seemed to be a conflict of interest. Because some of these development agents also owned their own Subway franchises. So they’d allegedly find minor issues and file a report to headquarters. And if a franchisee racked up multiple such issues, Subway would cancel their contract. Maybe the development agents would then pick it up on their own.
Not to forget the $5 subs. While it was a marketing success, Subway got too carried away. It continued the promotion long after the economy recovered. And the franchisees weren’t making any money from it. It burnt a hole in their pockets.
The Subway franchise was losing its lustre.
And finally, there were the PR nightmares that followed too.
Remember the weight loss spokesperson Fogle? Well, he was accused of child sexual abuse. And Subway had to deal with the fallout of that. Then came the complaints that Subway didn’t actually use real tuna meat. Or that its ‘healthy’ bread in Ireland was actually a sugar factory. And even another where Subway’s foot-long sandwiches didn’t measure up to a foot.
Subway was losing face. It began to struggle. ‘Rise and fall of Subway’ articles began popping up everywhere.
And this brings us to today.
After nearly 58 years of being a family-owned business, Subway is finally looking to cede control to a private equity firm Roark Capital for around $9.6 billion.
On the face of it, you have to agree that it’s not bad at all for a business that started with just $1000, no?
But the scars of the recent past will remain for Subway. It was valued at over $12 billion just a few years ago. And even this valuation isn’t set in stone. The sandwich maker still has to prove to Roark Capital that the business is worth it. It has to improve its cash flows first over the next 2 years. And meet some other milestones. If it doesn’t, the valuation will fall further.
And it has been trying all sorts of stuff. For instance, it has rejigged its menu and it’s giving its drab-looking stores a fresh young look too. It’s even installing meat slicers in its US stores to tell people, “Look, our meat is fresh.” And there’s the marketing gimmicks as well for eyeballs. A couple of months ago, it said that anyone who legally changed their name to Subway stood a chance to win free subs for life. And they say that 10,000 people signed up!
But will all this be enough for Subway to hit the milestones needed to snag the $9.6 billion deal?
We’ll have to wait and see.
Stop Paying Your Medical Bills From Your Pocket!
2/3rd of all medical bills in India are paid out of pocket. And it’s wiping out your savings:
You can’t expect to grow your investment if you can’t protect your savings. Even if you start with ₹1 Lakh and compound it by 10% every year, a trip to the hospital can wipe out your gains and your principal in a few days.
Medical inflation is growing at over 10% in India: While healthcare procedures have generally become more accessible, a stay at the hospital can set you back quite a bit, simply because the rooms are now expensive.
No tax benefits: When you’re paying for medical procedures out of pocket, you don’t get to have tax benefits. However, if you have insurance, you can protect your savings, avail of tax benefits and beat medical inflation all at the same time.
So get yourself a comprehensive medical insurance plan right now before you start your investment journey.
But who can you trust with buying a health plan?
Well, the gentleman who left the above review spoke to our team at Ditto. With Ditto, you get access to:
1) Spam-free advice guarantee
2) 100% free consultation from the industry's top insurance experts
3) 24/7 assistance when filing a claim from our support team
You too can talk to Ditto's advisors now, by clicking the link here