Should I invest in a Subway Franchise?…We hear that question A LOT! And no wonder why, it is one of the most widely known food franchise brands out there.
Subway was founded in 1965 by Fred de Luca and the concept was franchised in 1974. Currently they have 25,835 locations in the US, plus 18,317 locations in 98 countries! Yes, this has been a very successful business for Fred de Luca, even though as you will see in this article, the system is showing very concerning signs of an incoming crash (for example, over the past 2 years, hundreds of stores closed each year). Even though the corporation has been successful, that doesn’t mean that for you, the aspiring franchisee, this would be a great business as well.
Think about it…just like in any other market, when an investment opportunity is way too known and everybody is going for it, typically it is saturated or about to crash or decline. In the stock market, for example, when a stock becomes very popular and everyone is buying it, that’s when you are about to reach the peak and see a crash, or a correction. The late buyers typically will end up buying it at quite an expensive price as compared to the early investors, and will profit little to nothing from the investment, many of them actually might lose money. On the other side, when you get to know of an emerging company early enough, and make an investment in the early stages, your ability to profit from it can be much higher!
We work with 500 franchise companies, many of them being food franchises, and when we compare Subway to other emerging and more modern concepts, there are many reasons for us to advice our clients to stay way from a Subway Franchise.
Here are our 10 reasons why we don’t think you should invest in a Subway Franchise:
- Undesirable Lifestyle: many of the people we talk to want to become a business owner in order to achieve a better lifestyle, have more personal time, and ability to dedicate more to their families. Well, becoming a Subway owner can bring the exact opposite. If you are planning to own a single-unit of a Subway franchise, unless you spend your time running the business, you will make very little money out of it. So you will need to be involved, and that means actively managing a business operation that is open 7 days a week, for long hours…not very appealing…
- One of the highest royalties charged in the food industry: Subway charges 8% royalty fees of their franchisees!! That’s one of the highest royalties charged in the food franchise industry! McDonald’s for example, charges 4%, and most other food franchises will range between 4 and 6%. When you take into account that 8% is being charged out of your gross revenues, it can be very significant! Also, with the products being priced at U$5.00 or so to the customer, how much net profit is left???
- Super high marketing fee: Subway charges, in addition to 8% royalty fee, a 4.5% marketing fee. That again is charged on top of your gross revenue. So you are leaving 12.5% to Subway off the bat, and that’s not yet even discounting all the other costs you will incur (cost of goods, rent costs, employees, licenses, taxes, and more).
- Overly saturated system: with over 25,000 locations spread across the US, that means that a customer walks 2-3 blocks in a metropolitan area, to find another Subway location. For you, the franchise owner, that’s not very nice, huh! You are basically competing with all other Subway franchises in the neighborhood. There are way too many…As a means of comparison, McDonalds, which is another quite saturated system, has ~ 14,000 locations in the US
- The system is showing signs of decline – stores are closing: As we mentioned before, when something becomes too popular, it is usually already achieving its peak and potentially prone to a decline or correction. Seems like this might be happening to Subway, as it has closed 909 stores in 2017, and over 800 stores in 2016!!! According to a Business Insider article, franchisees are saying that hundreds of stores are also threatened to close and that up to one-third of the entire system in the US could be unprofitable!
- The system is showing signs of decline – per unit sales are declining: In 2016, the average gross revenue per store was U$422.5K. As compared to 4 years before, average sales per unit were U$482,000. That’s a decline of U$60,000 per store. It has been reported, in 2017, that location traffic has fallen over 25% during the past 5 years. For an inexperienced business investor, looking at the gross revenues number, it may still sound appealing, but first, you don’t want to invest in a system with declining revenues (as this is a bad sign), but also, when you consider all your costs (super high fees, rent, employment costs, cost of goods, taxes, etc), and on top of that the fact the product cost is super cheap, with very low gross margins, how much really is left for the owner…hum…no wonder why so many stores have been closing, huh!?
- Consumer habits are changing, and Subway is not keeping up to new demands: this applies to all the mature fast-food concepts out there. The new generation of consumers are much more informed on the true nutritional value of products, and are coming with many new food habits and demands. More and more you see people looking for healthier food choices, with fresh and organic ingredients, and demands such as Vegan menu, gluten free, lactose free, etc. All restaurants with a healthy appeal, or farm-to-table concepts, tend to be always packed and very successful. Keep in mind that when you sign up for a franchise, you sign an agreement of 5 or 10 years term, and you should think about what should happen to consumer habits and market trends over this time frame and how this could impact your business. When it comes to businesses such as Subway, McDonald’s or Pizza Hut, this is an area of concern!
- Unhappy franchisees: Just google it and you will find a lot of information about franchisees who are struggling and extremely unhappy with their Subway franchise! The reasons are very diverse, from the low margins mentioned before in this article, to the aggressive expansion of the system (creating competition among franchisees), questionable marketing tactics that squeeze owner profits, and so on.
- Marketing practices that are squeezing franchisees profits: In December, 2017, it was reported that roughly 400 franchisees were protesting the chain’s plan to bring back the U$5 footlong deal! The reason is that this, as well as other very aggressive promos over the past 5 years, has left no profit for the franchisees, and is one of the reasons why so many outlets have been closing, specially in 2017! Interestingly, in 2017, the Subway’s head of North American marketing, Karlin Linhardt, has resigned from the company.
- Quality has been declining: in the past, Subway would allow its franchisees to order ingredients from local produce, but over the past years, Subway changed its policies, and franchisees need to use their supplies, which are delivered once or twice a week. That means that many ingredients are just not as fresh. Combined with a growing trend of consumers demanding better quality and fresh ingredients, this is a recipe for disaster.
We hope this article helped educate you on the reasons why a Subway franchise may not be the best investment in current times. It is very common to see inexperienced business investors always looking for the popular brands as the options they will want to consider. It is very important to do proper due diligence and look closely at what will happen in the market over the next 5-10 years, understand consumer habits that are changing, new demands, and look closely at signs that the well known franchise system may be facing problems over the medium to long term.
Emerging brands in general are more modern brands that have already captured the new consumer trends, and modeled a business that will capitalize on that. Many of these brands are backed up by very experienced franchise development companies that have been very successful with older franchise concepts and are aware of the market changes in the horizon. Many of these businesses present a ton of opportunities and potential to profit much more than a Subway franchise!
Contact us to discuss which franchises will best fit your profile and help you achieve your dream life!