Franchising, retail, business
Subway is in crisis.
National sales and traffic figures dropped in 2017, according to multiple people with knowledge of the situation, marking the chain's fourth consecutive year of declining sales.
The sandwich chain's US store count fell by 909, losing almost three times as many locations as the year before. One franchisee estimated that up to one-third of Subway's locations could be unprofitable, citing internal conversations and national sales numbers.
As trends change, Subway struggles to attract customers as a compelling healthy option — especially after scandals surrounding the chain's former spokesman Jared Fogle.
However, conversations with more than 30 current and former franchisees, employees, and others with knowledge of Subway's current predicament revealed problems that went beyond larger restaurant-industry trends.
According to insiders, the factors driving customers away from the chain are deeply tied to internal conflicts within the company. With disagreements between corporate headquarters and franchisees, franchisees say they're stuck bearing the brunt of the damage.
As a result, franchisees are calling for major changes at the company. Three franchisees from different US regions told Business Insider they thought the company needed new leadership — specifically, a new CEO.
"I have sadly watched my peers close their doors only to see Subway resell their investment to others with no benefit to them," one franchisee told Business Insider. "It is inevitable that I will do the same in the near future."
She continued: "I wish we had an advocate. This was my retirement, and now, well, it's over."
The search for a turnaround
Business Insider spoke with more than a dozen current and former franchisees, as well as people who had worked in Subway stores and corporate offices, regarding issues at the chain.
Many spoke on the condition of anonymity, as the company does not allow franchise owners or workers to speak with the media. As locations close and many franchisees find themselves in conflict with corporate, many expressed concerns that the company's leadership team wasn't capable of turning the chain around.
In April of last year, Subway made a major hire when it appointed Karlin Linhardt, a former McDonald's executive, to be the chain's vice president of marketing in North America. Linhardt had already been working with the company on the brand's transformation as a senior consultant for the firm Accenture. At the time, he was seen as critical to improving Subway's damaged reputation.
Subway needed the reputation boost.
In 2015, the chain cut ties with Fogle after the spokesman was arrested on charges related to paying for sex with minors and possessing child pornography. Customers became increasingly skeptical of food quality after scandals like a social-media campaign that was launched against a chemical used in Subway's bread. In general, when people thought "fresh" food, they had a growing number of fast-casual options to replace Subway.
Linhardt was not, ultimately, the savior the chain needed. The executive was out at the company less than a year later, parting ways with Subway in mid-December.
"Karlin has tendered his resignation and Subway accepted it," a representative said at the time. "We wish him well in his future endeavors. Our focus remains on Subway's brand transformation and our North America marketing team will continue their innovative work."
Trouble at the top
The New York Post, which broke the news of Linhardt's departure, reported that he had been driven out in a franchisee revolt over a revamped $5 footlong deal. More than 400 franchisees signed a petition protesting a new $4.99 deal that had been Linhardt's brainchild.
Subway confirmed to Business Insider that some franchisees refused to offer the deal when the national promotion kicked off this month.
Others with knowledge of the situation, however, told Business Insider that Linhardt was pushed out of the company by other executives with conflicting strategies for Subway's future. In these franchisees' view, the issue was not one specific deal — or franchisees' response to it — but that certain executives just wanted Linhardt out.
One franchisee upset by Linhardt's departure said the executive "probably did more than most of the executives have done [in decades] in two years."
Linhardt had led Subway's search for a new creative agency for the Americas, announcing in early December that the company had picked Dentsu Aegis Network. Over the summer, he led a campaign of having Subway partner with music festivals to persuade younger customers to "reconsider" how they see the brand.
Linhardt, however, was making an aggressive push to make significant changes at the company in a manner that was at odds with what executives — specifically its CEO, Suzanne Greco — wanted.
Subway's new "Fresh Forward" design has been touted by executives, but not yet embraced by franchisees. Courtesy of Subway
Most of the menu innovation under Greco's leadership had emphasized health and updating recipes to remove artificial ingredients. Linhardt, though, pushed hard for Subway to advertise more options, even if they weren't exactly healthy, such as the chain's limited-time Reuben sandwich, which was reintroduced in November.
While some franchisees rejected the new $4.99 deal, most critical franchisees who spoke with Business Insider said their biggest issue with Subway was not just that specific promotion but a multiyear emphasis on low prices even as ingredient costs increased.
Because Subway is 100% franchised, corporate offices arrange food-supplier deals and coordinate national advertising. If Subway's marketing efforts fail to drive sales or force franchisees to rely on unprofitable items to drive traffic, locations can quickly start losing money.
Nevertheless, both franchisees who supported the $4.99 deal and others who opposed it expressed frustration with Subway's executives, all the way up to Greco. Multiple franchisees said there were major concerns regarding Greco's ability to lead the company.
"She surrounds herself with people who won't necessarily challenge her," one franchisee said. According to him, based on discussion among other franchisees and franchisee groups, the "vast majority" of franchisees believed Greco needed to be replaced.
The younger sister of Fred DeLuca, the chain's cofounder and longtime CEO who died in 2015, Greco started working in Subway locations in her teens and joined the chain's corporate staff immediately after college. She has worked at Subway ever since, primarily in research and development — an area where some franchisees feel Subway has fallen short over the years.
"A lot people in the industry feels that Suzanne is not qualified to be the CEO of the company," another franchisee said. "She tells us like she is doing us a favor while franchisees are losing everything they own."
"Franchisees in my market are hurting," a third said. "I think there is going to be some major change, I'm just not sure who will go."
Calls to replace Greco, however, are complicated by the fact that Subway is a private company — with half of it owned by her family, as ownership is split evenly between DeLuca's widow, Elizabeth, and his cofounder Peter Buck.
Dysfunction that has turned 'flat-out evil'
Subway insiders pointed to conflicting interests between franchisees and corporate headquarters — as well as executives' unwillingness to address problems this created — as the crux of the company's struggles.
Subway headquarters grew store count for years, despite plummeting traffic.
Traffic fell by 25% from 2011 to 2016, according to a memo obtained by the New York Post. At the same time, Subway continued to open hundreds of stores every year until 2016, when store count dropped. Subway has 25,835 shops open and operating in the US, according to a representative.
Franchisees say executives failed to provide promised support or listen to franchisee concerns on issues such as intense discounts cutting into profits, subpar food quality, and other factors they believe drove customers away.
"I can't name one franchisee that I know that's currently happy with their store," a franchisee from a Southern state said. "My store is currently 40% down in profits this year ... We are all jumping through hoops for Subway corporate."
"These guys are not on the same team," Mark Shearer, an attorney who has represented several Subway franchisees in arbitrations against Subway and the chain's regional development agents, told Business Insider.
Shearer has represented and advised roughly 20 franchisees over the past few years. In his view, DeLuca's ambitions as CEO helped create a structure that took advantage of franchisees for corporate offices' benefits.
"This level of dysfunction has risen to the level of being flat-out evil," Shearer said.
Opposition to corporate, such as by complaining about too many stores opening nearby, can result in what Shearer calls "Mafia-style" revenge techniques. He said development agents tasked with inspecting locations would sometimes pick up on minor infractions as justification to revoke the franchisee's license and take away the location.
"When I meet with a new client, that person is always in a state of extreme fear," Shearer said. "They fear reprisal for telling their stories."
A Subway representative said this was "absolutely not true," calling franchisees the "backbone of our business."
"As part of our franchise agreement, every restaurant is regularly inspected to ensure they are meeting our high standards, including food quality and cleanliness, to ensure we deliver the best customer experience and maintain the integrity of our business," the representative said.
Too big to survive
One issue that many said was representative of a disconnect between headquarters and franchised locations is the chain's massive size.
"I believe that Subway was more interested in the opening of stores," a former corporate employee said. "That is where they made the most money — the franchise fee."
DeLuca "made his money from the franchise fee," the person said, adding: "The more stores he opened, the more dollars he made."
Many other franchisees agreed that opening stores was a top priority for corporate — and that Subway had gone too far in its quest to become the biggest chain in the world. Even franchise owners who said they personally had positive sales figures suggested certain stores needed to close to revitalize the brand.
"I saw the handwriting on the wall with the focus being on opening as many units as possible, even if it angered franchisees," Scott Godwin, who owned three Subway locations in Virginia until the early 1990s, told Business Insider.
"I feel their concerns 10 years ago was just opening up locations," a franchisee with two locations said. The person said DeLuca "was obsessed with having the most locations, and he achieved it."
Subway's franchised model means that the company's corporate offices don't operate any of the chain's restaurants. This structure gives the company an incentive to open more locations to increase franchisee fees and royalties.
According to Subway's chief development officer, Don Fertman, the chain conducts "extensive site reviews when needed using a proprietary mapping system and demographic data to determine the best locations" for new restaurants.
"Our focus is on market realignment in North America," Fertman said in an email. "We want to make sure we have the right locations with the right franchisees in every market. We will continue to help relocate restaurants to better locations as demographics change and look for new sites primarily in non-traditional venues to ensure we are convenient to our customers."
This isn't the first time Subway has been accused of cannibalizing sales by opening too many locations.
"Now we faced accusations that Subway would sell a franchise to any old hick, to folks who couldn't read English," DeLuca wrote in Inc. Magazine in 2013. "Reporters started suggesting that franchisees couldn't make a living operating our stores. We had all these people complaining to the Federal Trade Commission."
DeLuca said the problem was solved by creating a "site-review system" and allowing franchisees who opposed stores opening in the area to voice their concerns. DeLuca was found to have leukemia in 2013, and he handed over the chain's day-to-day operations to Greco two years later.
Yet critics say Subway's cannibalization issues are far from over. Shearer said he was "shocked" by how disorganized Subway's headquarters were when it came to expansion during arbitration for a franchisee who said Subway opened up a location nearby that drew customers away from his shop.
"It's like throwing darts at a dartboard and saying, 'We're going to open up locations there today,'" he said.
Conflicting interests
The aggressive expansion just represents one way in which Subway's corporate interests may not always line up with franchisees' concerns.
It isn't uncommon for a restaurant chain's franchisees to protest certain plans by corporate, especially ones that cut into profit margins in the short term. But with hundreds of locations now closing, Subway franchisees' complaints are backed with evidence.
Franchisees' basic argument is that food and labor costs are going up while profits and traffic are falling.
Franchisees are allowed to use food only from designated suppliers, with most locations getting just one or two shipments of produce a week.
"This in unacceptable," one franchisee said. "I want to pay more for a better-tasting lettuce, and I have been shut down. Today's consumer is extremely sensitive to preservatives and desire cleaner labels."
Franchisees say being restricted to buying from Subway's suppliers and offering national promotions makes it difficult to turn a profit. Subway, they say, needs to make some major adjustments. And they say changes aren't coming fast enough.
Among the gripes: Subway has failed to roll out a long-anticipated loyalty program. Locations have failed to add drive-thrus or other changes designed to boost sales or speed up service. And while rivals including Arby's have executed comebacks recently by adding creative menu options like gyros, Subway's menu has remained mostly unchanged aside from efforts to remove artificial ingredients.
The perceived lack of research and development is an especially enraging point for some franchisees because Greco led the department before becoming CEO.
"Our leadership team is fully focused on transformation of the brand," a Subway representative said.
'Subway is dying'
Subway has made substantial investments in tech in recent years, including establishing a digital team in 2016 and launching a new app in 2015. Last year, Subway introduced a new Fresh Forward design — though some franchisees have been reluctant to make the financial investment in the redesign.
"Our goal is to strengthen the Subway brand in each market to ensure that Subway franchisees have the greatest opportunity to successfully grow their businesses," a Subway representative said.
Not every franchisee is unhappy with the system.
"When we took over our Subway several years ago it was faltering in sales. We have since almost quadrupled those sales," said one franchisee who believes better management could improve struggling locations. "We did it by being super involved with the community, by being super outgoing, by being super organized, by being super friendly, by being super generous … you get the idea."
But some franchisees and people with experience in Subway's corporate offices still say Subway needs to make some major changes and resolve conflicts with franchisees if it wants to survive.
"I can tell you without a doubt, Subway is dying," a manager said. "Business has plummeted over the past few years, the product has dropped in quality, and the overall mood between owners and staff has dropped, but the pushback between owners and corporate offices has increased immensely."
And for franchisees who can't manage the turnaround, it's difficult to find a way out.
"If we want to sell our stores, Subway corporate must approve the buyer," the franchisee from a Southern state said, adding: "They only approve existing franchisees to purchase stores. Existing store owners don't want more stores, so we are stuck."
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- Kate Taylor
Fonte:http://www.businessinsider.com/subway-franchise-owners-say-leadership-threatens-surival-2018-1?IR=T
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