Even as outlets grow, Subway faces decline in sales

Subway is by far the biggest worldwide fast-food chain in terms of number of outlets, including this one in Kolkata, India. But the company has been struggling, with sales declining in 2014.
Subway is by far the biggest worldwide fast-food chain in terms of number of outlets, including this one in Kolkata, India. But the company has been struggling, with sales declining in 2014. Bloomberg News

With 43,945 sandwich shops in 110 countries, Subway has become the world’s most ubiquitous restaurant chain, posting armies of “sandwich artists” in more American outposts than McDonald’s and Starbucks combined.

Yet at the dawn of its 50th birthday, all is not well in the land of Jared and jingles about $5 footlongs. Subway’s U.S. sales last year declined 3 percent, or $400 million, falling faster than any other of America’s top 25 food chains.

Subway ascended over the last several decades on the back of broad American tastes, offering a healthy alternative for eaters leery of fast food, and at prices that made it attractive.

But rivals like Chipotle Mexican Grill and Firehouse Subs are beating Subway at the game it helped create, offering seemingly fresher, healthier, build-your-own meals.

Diners increasingly say they want to know their meat has been cut fresh, not peeled off waxed paper; their meal heated by steamer, not microwave.

That’s led to what analysts say is one of the sub empire’s biggest threats yet: What Americans see as healthy has evolved. Subway hasn’t.

Milford, Conn.-based Subway’s problems run close to those of fellow food king McDonald’s, the sagging-sales chain now launching a turnaround because of “challenging industry dynamics” and changing tastes.

But in some ways, Subway’s money-making challenges look even sharper than those of the Golden Arches. The average Subway sold $437,000 worth of subs, sodas and cookies last year, the smallest haul in half a decade, and about a fifth as much as the typical Mickey D’s, which pulls in $2.4 million per store.

Subway, which is privately run and closely held, would not comment. Tricia Hetherington, the company’s director of research and development, said in a statement, “We’ll continue to evolve our reasonably priced, fresh, customizable sandwiches and salads to better meet our customers tastes and needs.”

Subway debuted as Pete’s Super Submarines in Bridgeport, Conn., in the summer of 1965, when a Brooklyn-born 17-year-old named Fred DeLuca borrowed $1,000 from a family friend, a doctor named Peter Buck. DeLuca, an aspiring doctor who is now worth $2.6 billion, hoped slinging sandwiches would help him pay his way through medical school.

Still owned by Doctor’s Associates, the founders’ holding company, Subway has opened inside hundreds of U.S. colleges, malls, military bases and other, less-predictable locations: a car showroom in California, a Goodwill thrift store in South Carolina, a church in Buffalo.

The franchise model is enticing for small-business owners because opening a new Subway can cost as little as $116,000, company estimates show – a tenth as much as opening a McDonald’s.

But some franchisees aren’t happy once their Subways are up and running. Franchise Grade, a franchisee polling and review service, ranked Subway number 468 in its latest report; Firehouse Subs and Jersey Mike’s Subs were numbers 107 and 108, respectively.

Analysts have pointed to discounted prices for existing franchises, some of which can be bought for the price of a car, as a sign that some owners want out. And as sandwich sales have shrunk, the pressure on franchisees has increased.

“We would love to be in a position where we could pay workers more,” Keith Miller, a franchise owner in California and head of the Coalition of Franchisee Associations, said during a conference call with reporters last month to discuss the frustrations of franchisees of Subway and other chains.

Franchisees have trouble boosting wages, Miller said, because they are under “extreme pressure” to keep the profits pumping amid sliding sales and the cost of keeping up with changing ingredients and menus.

Cost pressures on franchise owners have little direct effect at Subway headquarters. Franchisees have to pay the corporate office a $15,000 start-up franchise fee, plus a 12 percent weekly cut of all revenue, no matter how well the business is doing.

Subway has attempted to keep pace with changing food trends, offering toppings such as hummus and a creamy sriracha sauce to win back health-conscious customers. But analysts say they have often been too little, too late in a world where fast-casual rivals are better at marketing their quality.

“We’re in a new environment – the Chipotle environment … the fast-casual environment – with a new type of rhetoric, quality and marketability,” said Andrew Alvarez, a food analyst with IBISWorld. In comparison, “Subway’s platform, its presentation almost looks primordial.”