320-0050-1 Coit eon) IBS Center for Management Research Subway - the World’s Largest Fast Food Chain on a Downward Spiral This case was written by K B § Kumar and Indu Perepu, IBS Hycierabad. It was compiled from published sources, and is intended 10 be used as a basis for class discussion rather than to llustrate elther effective or ineffective handling of a management situation (© 2020, 18S Center for Management Research IBS Center for Management Research (ICMR) IFHE Campus, Donthanapaly, Sankarapaily Road, Hyderabad-501 203, Telangana, INDIA. Ph: +91 9440901313 Email: casehelpdeskalbsincla.org, mtheccetreany ttre nse Sasesnrsom entre ‘nmewnes foimetcmcninorg + hioetocareer ay. 2000 a urness Seed, unbefaly & Sarre roa Usage petiieg ony with ese paramere operwise comart moqitweasecente of ‘rom 2>-Jan2020 to anageren,tughtvy Chates Koight mnpLisence Uasttuaeender a rods Cave Test an under nha use on undergmguste programme: Stat racrret320-0050-1 ICMR Pcs Subway — the World’s Largest Fast Food Chain on a Downward Spiral In 2019, the world's largest restaurant chain by number of locations, US-based Subway, which sold submarine sandwiches (popularly called Subs) and salads, found itself in deep trouble in its home country with consumers showing a preference for healthier and fresher food and competitors offerinig them varied options. This, coupled with internal squabbles with the franchisees. made the going tough for the company. The chain, with a history of more than 50 years. operated around 45,000 restaurants in 131 countries across the globe, all through franchisees. However, rapid expansion over the years resulted in oversaturation, with franchisees, especially those in the US, self-cannibalizing sales due to operating in close proximity to the Subway restaurants. This, coupled with growing competition and a slew of scandals, resulted in the closure of more than 909 outlets in the US in 2017%, and national traffic figures dropping for the fourth consecutive year. To attract customers and face the competition, ‘Subway started lowering prices. This angered franchisees as their margins were impacted. ‘The co-founder and CEO of Subway, Fred DeLuca (DeLuca), died in 2015 and his sister Suzanne Greco (Greco), who had been with the company for nearly four decades, took over. The franchisees were not happy with Greco. They said that the chain lacked innovation and that Greco ‘was failing to steer the company ahead. They called for a change in leadership, In May 2018, the privately held company announced that Greco had handed over the day to day operations to Chief business development officer Trevor Haynes (Haynes), who would act as interim CEO. Haynes had tough challenges ahead — he had to bring the beleaguered chain back to glory: address the irked franchisees: improve the quality and freshness of the mem; address the plunging sales and decreasing footfall that were leading to store closures; and above all, come out with strategies to tackle the competition, ABOUT SUBWAY ‘Subway was started as Pete’s Super Submarines in Bridgeport in the summer of 1965°. DeLuca who was then 17, borrowed USS 1,000 from a family friend, a doctor, Peter Buck’, to start a sandwich store. But the dio found success only in the early 1970s. In 1974, they started selling franchises under the name ‘Subway’. The company. which operated under a holding company called Doctor's Associates. did not own a single location, but operated all the locations through franchisees and collected 8% of the revenne as royalty. ‘Subway positioned itself as a restaurant that provided healthy and wholesome food consisting of custom-made sandwiches made of freshly baked bread, fresh vegetables, and meat. It mainly served hunch, though it was open from morning to dinner time. It experienced rapid growth in the * As of July 2018, Subway operated 25,835 restaurants open and operating in the US. compared to 26.744 atthe end of 2016 It was operated under a holding company called Doctor's Associates Each of them owned 50% in the venture, which they called a family business. As of 2018 DeLnca’s share ‘was owned by his wife and Peter Buck held 50% q 5 8 Ei sragermet taught by Charles Kright for 22-Jan 2020 to ‘Onasfraduat Caco Testhwng Licence Uasttuae eager a roa Usage petiieg ony with ese paramere operwise comart moqitweasecente of apace use on undergmguste programme: Stat racrret320-0050-1 1980s and 1990s. In 1982, it opened 100 restaurants, taking the number of total restaurants to 300. ‘The mumber grew to 500 by 1985, to 1,000 by 1987, and to 2,000 by 1988. The growth continued and in 1990 Subway had 5,000 restaurants and was touted as the disruptor that had kicked off a race to healthier food in the Quick Service Restaurant (QSR) sector by offering nutritive products It was the first restaurant with an open kitchen, where customers could choose the ingredients that went into their sandwiches, During recession’, when most of the restaurants were experiencing tough times, Subway expanded rapidly. Between 2007 and 2009, it added 2.300 locations in the US. By then. it had more than 23,000 restaurants. One of the secrets of Subway’s success during the recession was its foot-long sandwich, which was introduced in 2008. This was an idea of a franchisee in Florida, who found that when the price of certain sandwiches was lowered to US$ 5 during the weekends, traffic to his store increased. The idea was pitched to headquarters. which introduced the foot-long USS § sub along with a catchy jingle. This helped in increasing the same store sales. In 2011, Subway surpassed McDonald’s as the chain with the most number of restaurants in the world. In 2013. DeLuca was diagnosed with leukemia. He scaled back his leadership role and handed over the day to day operations of Subway to Greco. Greco had been involved in Subway since its inception and was instrumental in setting up a cooperative run by franchisees to suppiy food to ‘Subway restaurants. She was involved in new product development and had introduced the popular sweet onion teriyaki sub, breakfast menu, line of low-fat sandwiches, and toasted bread, among other things. By 2015, Subway was the most ubiquitous restaurant chain in the world with 43,495 stores in 110 countries. Its brand value was second only to that of McDonald's As of 2017, Subway had 25.835 locations in the US, while McDonald’s had 14,000 locations. According to research firm Datafiniti, Subway restaurants accounted for 18.5% of all the fast food restaurants in the US, followed by McDouald’s at 11.3%, OPERATIONS The Subway stores were much smaller than other fast food restaurants like McDonald's. The outlets occupied just around 350 sq.ft. cach, of which half was used for making the sandwiches and for storing the ingredients. The operations of Subway were simple. There was no frying. grilling, shaking, or flipping. Subway restaurants were found in locations like car dealerships appliance stores, riverboats, malls, colleges, zoos, and even places of worship. Setting up a Subway restaurant was inexpensive. Tn the US, the franchise startup fee was USS 15,000 atid the franchisee incurred an expense of about USS 250,000 to lease space, renovate it, and buy the necessary equipment and food. In contrast, a franchisee of Jimmy John’s had to pay USS 320,000, and that of McDonald’s paid anywhere between USS | million and 2 million to start off. As the opening cost was low — averaging around USS 116,000 - many small business owners became franchisees of Subway. At the same time, the royalties that Subway took were higher than those of other fast food franchises. Subway charged 8% of the revenues while McDonald’s charged 4% and Jimmy John's 6%, The average sales at Subway were the lowest among the restaurant chains. Activities like product sourcing, store design, strategy, and menu were coordinated by hheadquarters. The head office also aanged food supplier deals and coordinated national advertising. Other activites like rent, labor, uiities, maintenance, and equipment were managed by the franchisees. * UsRecession q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 ‘Subway conducted extensive surveys to look for new locations. The location and the franchisees were also determined by the development agents, who were given the responsibility of developing a region, The development agents were independent contractors, who obtained contracts from Subway to develop the brand in a particular territory. They approached local entrepreneurs in different areas and encouraged them to set up stores. These agents were given a target for new store openings and were penalized if they did not achieve the targets. The agents were also responsible for providing training. and supervising the day-to-day operations of the franchisees The agents were not paid a salary. but were given half of the franchisee fees and one-third of the royalties paid by the franchisees that they developed. Whenever a restaurant was resold they got half of the transfer fees. THE DECLINE At the end of 2006, in the US. Subway had 20,721 locations. By the end of 2011, it was operating 25.285 units, a unit growth of 22%. This was when the US economy was experiencing its worst recession in 75 years and the restaurant business across the country was suffering. Subway, in contrast, was ona growth path. In 2013, it was opening 50 stores a week. Subway started slowing down in 2014, During the year, sales declined by 3.3% to USS 11.9 Dillion fiom USS 12.3 billion the previous year, and Subway posted a drop that was tee worst among the top 25 fast food chains in the US. It also lost top position and slid to the third position in America’s best selling food chain list. The franchisees started experiencing trouble with average sales going down fiom US$ 490,000 in 2013 to USS 475,000 in 2014 and to USS 420,000 by 2016. However. Subway continied to be one of the largest restaurant chains in the US and served 2,800 sandwiches every minute, (Refer to Table I for average sales of Subway and other players in 2016). Subway continued to add stores to its existing 27,000 stores in the US (44,000 globally). In 2016 on an average, it added five stores a day. At that time, its competitors Yum! Brands" and McDonald’s had 17.500 locations and 14.000 locatious respectively. As Subway opened new restaurants. several existing ones were closed and. in the process. it ended up closing more restaurants than it had opened. By the end of 2016 it had 26,744 restaurants, a decline of 359 restaurants compared to 2015. (Refer to Table IE for the number of Subway restaurants worldwide) ‘Table I: ‘Table I: Average Store Sales Per Year ‘Number of Subway Restaurants Worldwide Restaurant | Ave. Sales (USS Million) ‘Year Number Chick-fil-A 3.99 2011 35,920 ‘MeDonald’s 2.68 2012 37,199 Panera Bread 2.67 2013, 39.767 Wendy's 161 2014 43,148 Potbelly 097 43.916 Subway 0.42 44,702 Source: Technomic 44,608 Source: Statistica Between 2011 and 2016, traffic to Subway stores fell by 25%. ‘Yum! Brands operated KFC, Taco Bell, and Pizza Hut restaurants, q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 ‘The decline in sales brought to the fore the fact that Subway was concentrating on opening new stores, and was neglecting the existing ones. Experts said that the franchising system provided the company an incentive to open stores at more locations through which it obtained franchise fees and royalties. In anticipation of earning more franchise fees, it allowed new stores to be opened in close proximity to the existing stores. This showed that the interest of the corporate was not in line with the interest of the franchisees. Mark Shearer (Shearer). an attorney who had represented several Subway franchisees in arbitrations against development agents, said. “These guys are not on the same team. This level of dysfunction has risen to the level of being flat-out evil. Franchisees said that the aggressive expansion cannibalized sales and adversely impacted the unit economies. They blamed the founders for opening stores on a large scale, not taking economies into account. According to one of the franchisees, “Fred [DeLuca] was obsessed with having the most locations. And he achieved it. Even when the unit sales were dropping and traffic started to fall, the headquarters concentrated only on opening more stores, not paying heed to the reasons behind the decline. Between 2012 and 2016, the unit count grew by 2.000 additional locations. Shearer said that the headquarters was disorganized as far as the expansion of franchisees was concerned. The decline continued and by 2017, the national sales and traffic figures dropped, with Subway registering four consecutive years of declining sales. (Refer to Table III for Subway’ sales) The dwindling sales also affected the wnit count Table I: and the same store sales, which had started falling | gates of Subway Restaurants in the US since 2012. According to Nation’s Restaurant = News Top 100 data, Subway had 27.103 ‘Year ‘USS Billion locations, which fell to 26,744 locations in 2016. 2013, 123 But Subway looked at the closures as an opportunity to strengthen the brand. Subway's 2014 19 chief development officer. Don Fertman 015 11S (Fertman), said, “We will continue to relocate = ° some shops to better locations and look for new 2016 113 sites — both traditional and non-traditional. But ‘our primary focus as a leader in the QSR industry has been to create great restaurant operations, exceptional customer service and great products that are delicious and affordable.”* Source: Satistica DISGRUNTLED FRANCHISEES ‘The franchisees complained that the headquarters kept adding new stores despite plummeting sales and footfall Some of the franchisees said that the main cause of the problems at Subway was the conflicting interests between the headquarters and the franchisees, The problems of the franchisees did not affect the owners much as they Were getting their starting fees and royalty on all the revenues ‘The development agents, pressured to meet their targets, resorted to opening new stores. without considering how that could affect the existing stores. According to a report published in Financial Post, Canada, in 1995, "(Subway’s whole system seems) almost as geared to selling franchisees as it is to selling sandwiches.”“The existing franchisees complained that many new franchisees had signed the contracts without understanding what was actually written in it Previously. on coming to know that the franchisees were facing problems, DeLuca had introduced a site review-system. Franchisees could use this system to voice their opinion about several stores being opened at the same location, The franchisees complained that the development agents acted in a high-handed manner when they used the site-teview system. They said that theit licenses were revoked and their location was taken away for minor infringement during inspection. q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 But representatives of Subway said that routine audits were carried out by the development agents, oon the franchisees to ensure higi standards of quality and cleanliness, and the franchisees were reprimanded only when breaches were found in these. Some of the franchisees said that the margins, which were about 18% in the early 1990s, were constantly being eroded due to growing competition and rising costs. The rising minimum wages were also adding to the problems of the franchisees. The wage costs had increased by $0% in a decade, while the price of a sub grew by only 20%. The fianchisces had to also bear the costs of keeping up with changing ingredients and menus. They said that the main reason for margin erosion was that the emphasis had been on low prices for several years, imespective of the growing cost of ingredients The fianchisees were many a time forced to open new units for fear of thei sales getting affected by a new franchisee moving into theit territory. “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, said. With the falling prices and increasing costs, the pressure on the franchisees only increased, and many were forced to choose between selling their stores or closing them down altogether. Some of the reports showed that up to ouc third of the Subway franchisee locations in the US could turn ‘unprofitable in 2018 and several hundred stores would close down during the year. Even selling off the stores was not a smooth exercise. According to a franchisee, to sell the stores the ‘management had to approve the buyer. In most cases, the stores had to be sold only to existing franchisees, and many of the existing owners were not willing to buy new stores. The franchisees complained that the focus on expansion had taken a toll on Subway’s ability to innovate and the company was not trying to find new sources of income. In 2010, it introduced a breakfast menu, but when this did not do well, it did not even ty to improve the menu. The franchisees said their income options were limited in the absence of innovative items. snacks and drinks The franchisees had problems with the leadership too and said that the top management failed to listen to theit concerns, especially those pertaining to discounts, quality of food, restaurants in proximity, efc. A franchisee said, “T can't name one franchisee that I know that’s currently happy With their store. My store is currently 40% down in profits this year ... We are all jumping through hoops for Subway corporate.”* THE PRODUCTS AND QUALITY Subway relied on the USSS foot-long sub to generate sales during and after the recession. As the economy improved, consumers who had thronged Subway for a low-priced meal, started to show a preference for higher quality and healthier food. In their perception, Subway remained a low-end seller of sandwiches. After it started experiencing a decline, Subway decided in 2016 to inctease the price of the foot-long to USS 6. There was a huge backlash against the decision, and customers took to social media to express their anguish. Analysts said that Subway had kept the foot-long sandwich at the same price for too many years, even after the recession. and was struggling to overcome the loss of value perception, with the customers considering other subs too expensive once the offer ended. One of the main problems that the franchisees experienced was food supply. The franchisees were forced to buy only from the suppliers that the headquarters specified. This resulted in the key ingredients not remaining fresh. For several years. Subway had been synonymous with freshness, It had positioned itself as a fresher and healthier alternative to the likes of McDonald’s and KFC But over the years, the franchisces complained that they were unable to maintain the freshness of the products due to the changes brought about by the corporate office. Earlier, the franchisees used to order local produce daily, which helped them in maintaining the freshness of the products, With 6 q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 Subway insisting that the ingredients be procured once a week ~ or twice a week if the sales were high — from designated suppliers, the freshness of key ingredients could not be maintained. The franchisees also complained that several ingredients were not fresh even when they were received, and many times, though they were sealed in vacuum bags, they were withered. The ingredients that were received in such a condition were unpalatable. But headquarters continued to maintain that it was supplying the freshest available products through its contracts with more than 100 family farms. It said that the franchisees were free to schedule orders so as to have fresh ingredients available all the time. ‘Though some franchisees wanted to get their own supplies from the local producers. they were wary about doing so. A former franchisee said that to maintain freshness he used to use fiesh ingredients obtained fiom local suppliers instead of from the distributors specified by the headquarters. However, he had lost his franchise after the practice was discovered. Another franchisee, who would previously order fresh ingredients locally said, “I have voiced my concerns for years regarding the need for daily produce deliveries into our stores... 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.”” Analysts said that for more than two decades. Subway had been concentrating on opening more locations, while maintaining its position as a healthy fast food provider. It neglected the changing demands of the millennial diners, who were spoilt for choice as far as fresh food was concerned. With growing consciousness. constimers wanted meats that had been freshly cut and food that was organic, GMO* free, and sourced in an ethical and transparent manner. Sara Bamossy. chief strategy officer at ad agency Pitch, said, “Today. people are ever more educated om nutrition, food sourcing, and ethical holistic business models, To create (at to rekindle) loyalty and sales, itis not enough to label something as ‘natural’ and it's not enough to be affordably priced."* Over the years, American consumers’ perception about fresh food had changed. while Subway remained Where it had been. Darren Tristano from industry researcher Technomic said, “The “Subway fresh’ las lost its appeal with consumers, because to them fresh has evolved to mean, something very different. More people have money to spend, and they're choosing to spend a little bit more on better concepts where they get a better product."? Franchisees complained about the lack of R&D and efforts from the headquarters to come up with new products and menus. Before becoming the CEO, Greco was heading the R&D department, but except for a few products, she had failed to come up with any path-breaking products or menus, or any new flavors and seasonings. According to onc of the franchisces, “We necd to improve our food and we need to be bold about it, We are too cautious with our flavors.” Observers said that the chain was facing consumer fatigue. A franchisee consultant said. “Eating is entertainment. People want new things. Maybe when there is too much of something. people are tumed off.""" COMPETITION Post recession, the US witnessed the emergence of restaurants offering fresh. local food Customers were spoilt for choice. They gave up the age old sandwich for a freshly made salad ot had firesh food delivered at home. While Subway focused on expansion, in the process overlooking innovation, consumers started drifting toward restaurants that provided an up-scale feel, better quality, and good food. Some of the restaurants like Shake Shack and Chipotle focused on this gap, and provided the food consumers Were looking for. (Refer to Exhibit I for Restaurant market in the US) © GMO or Genetically modified organism isa plant or animal microorganism whose genetic makeup has been modified. q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Unger graduale Cave Teseling Lcenes Us tzuz0s0B-2 Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 ea pa use on undergmguste programme: Stat racrret320-0050-1 Over the years, several chains offering sandwiches similar to those of Subway had emerged. Chains like Jimmy John’s, Jersey Mike's, Firehouse Subs, Arby's, and Potbelly grew to become formidable competitors to Subway. They came out with innovative products like Gyro sandwiches, kebab sandwiches, roasted broccoli or asparagus, Doner Kebabs, Cemita from Mexico, seafood sandwich. etc. Chains like McDonald’s and Wendy’s started offering organic drinks and healthy options like kale and black bean burgers. Subway on its part came out with new toppings like Innmmms and a creamy sriracha sauce. But this was considered to be too little too late. Chains like Chioptle and Firehouse subs were offering products similar to those of Subway, but these were fresher and healthier. Sweetgreen, a salad chain, offered food that was sourced locally and delivered fresh every day. (Refer to Exhibit I for more about Subways competitors) At the same time, more and more grocery stores were adding takeaway options and freshly prepared sandwiches were available everywhere. ‘Subway also failed to move with the times. It chose to remove artificial ingredients from the menu only after Taco Bell, McDonald's, and Panera Bread decided to do so. Similarly. it took several years to roll out a loyalty program. It also failed to introduce drive-in restaurants. which were very much in demand from on-the-mave consumers. Subway did not do much to quicken the service or increase sales either. With the competition catching up, Subway's average sales per store were the lowest in the industry. Smaller competitors who provided more choices at higher prices recorded much higher average store sales. DENT TO IMAGE Over the years, Subway’s image became severely dented as it faced several scandals that made customers skeptical about the Subway brand and the food it served. One of the major scandals involved Jared Fogle (Tared), who had been the brand ambassador of ‘Subway for more than 15 years. In 1998, Jared claimed that he had lost 245 pounds in 11 months by having only Subs twice a day. Subway saw an article about him in Men’s Health, and made an ad campaign about his experience. After this, Jared went on to become the face of the healthy- eating brigade that supported Subway and popularized the Subway diet. ‘Subway promoted Jared, and he featured in dozens of advertisements and was key to Subway's marketing efforts*. Jared also started a foundation to fight childhood obesity. The commercials featuring Jared made Subway the restaurant industry's most effective advertising brand Celebrating his fifteen years of weight loss, Subway aired a commercial during the Super Bowl. In 2013, Jared was supposed to have accounted for about half of Subway’s growth in the US. In a tum of events, in 2015, Jared was sentenced to 16 years in prison on charges of child pornography and sex crimes. Once the charges were proved, the chain cut its ties with him but it failed to find an apt replacement for him. Nor did it do much to address the crisis it found itself in, The incident impacted consumer sentiment and analysts said that it could have also impacted the sales of Subway. Aaron D. Allen, CEO of Aaron Allen & Associates, a global restaurant consulting firm, said, “It's a great example of a modern crisis communications case study where it wasn’t handled well. They still haven't really recovered from that.” They said that the attempts by Subway to tum the business around after the incident only complicated the problems. In 2018, Subway became the subject of controversy when an investigation by CBC Marketplace found that the chicken in the Subway sandwiches was half meat and half soy. At the same time, competitors like McDonald's. Wendy's, and Chipotle. were serving products where the chicken Chil sauce made from a paste of chili peppers and vinegar. * His popularity can be known by the fact that in 2005, Subway stopped commercials with Fogle, and the sales dropped by 10% in no time. Later on, he was back as the face of Subway q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 was more than 80%. Though Subway denied the allegation, the customers were unconvinced. This dented its image and the customers developed the perception that Subway was not serving real or fresh food. Previously. in 2014, Subway had been found to be using a chemical called azodicarbonamide, found in products like yoga mats and shoe rubber. in its bread. The use of this chemical, approved by the FDA and USDA as safe as a whitening agent in flour and as a dough conditioner. was widely prevalent among several companies. But its presence in Subway bread vwas particularly mentioned by a popular food blogger. Though Subway phased out the ingredient. its image took’a drubbing as the incident was reported widely in social media and the company faced a public backlash, REVIVAL PLANS In 2017. the company came up with a revitalization plan. All the stores were to follow the new fresh forward design, which Subway planned to implement across the globe. The remodeled stores had a new décor, a self-service counter, digital menu displays. ordering kiosks and overhauled menus, packaging. and uniforms. The new technology-equipped stores had facilities like location- based Wi-Fi and USB charging ports, Fertman said, “I's more than a remodel, I's a total refresh The décor package. the overall improvement of the entire dining experience. We're incorporating our digital footprint, changing how we present our vegetables and our breads, and how we present the entire experience to Subway customers." The change in the stores had a positive effect. A owner of 98 Subway restaurants and the first one to adopt the new design, said, “Since opening with our new look, We have seen our turnover rate ddtop by more than half, At the same time, our customer service comments have improved by more than 30% over the same time period.”* Greco came up with a move to terminate several development agents. This was done as she felt that with the growth in the US almost stagnating. the money paid to the agents could now go t0 headquarters. But some of the franchisees complained that headquarters was unable to manage the territories without agents. According to a former development agent who developed more than 200 restaurants, “They are taking over territories and these territories are doing worse, Nothing has increased sales. We have a stale food menu.""* Greco came up with a new loyalty program — Subway MyWay — in 2018. Customers could enroll for the program through the app, online, or in the store and obtain points for every purchase they made, For every dollar spent customers earned 4 tokens, and on obtaining 200 tokens they could get rewards worth USS 2, which could be redeemed for any menu item at Subway. They also got suprise gifts from time to time. In spite of its troubles, Subway controlled 76% of the US sub sandwich market space as of 2018, as against §2% in 2013. It remained larger than the next six competitors Arby's, Jimmy John’s, Jersey Mike's, Jason’s Deli, Firehouse Subs, and McAlister’s Deli, Between 2013 and 2015, these competitors added USS 1.5 billion sales while the sales of Subway decreased by USS 700 million This showed that these chains were taking away sales from Subway and sapping the growth opportunities LOOKING AHEAD In December 2017, headquarters came out with the idea of reintroducing the USS 5 foot-long subs, The franchisees started protesting the idea, stating that the deal would only squeeze their already thin margins further and also affect the sale of other products. According to the franchisees, the ingredients cost would be USS 2. while labor. utilities, royalty. rent, ete, would work out to another USS 2. They claimed that when the offer had been implemented a decade earlier. it had destroyed their business, Hundreds of franchisees signed a petition against the move. Stuart Frankel, a q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 Subway franchisee who invented the $5 foot-long deal in 2003, was also against the move. He said, “Once you keep pushing a low price point in the minds of the consumer, it's hard to sell sandwiches for what they're really worth." At the same time some of the franchisees felt that such discounts were necessary to increase footfall and attract consumers, especially after MeDonald’s announced the revival of its dottar ‘menu. They pointed out that customers too were demanding better deals and bargains. Observers said that in the ultra-competitive environment in which the fast food restaurants were operating. value-menus like the one foot sub were a necessity. According to Malcolm Knapp from a market research firm, “The reality in fast food now is that you need a value menu to survive. If you could live without it, would you? Sure. But the business shows you canit.”"” Observers said that the foot- ong could be a band-aid solution that Subway needed to bring customers back. ‘The franchisees. finding no way out. called for changes in the company. Some of the top franchisees said that the company was in need of a new CEO, and expressed concern regarding Greco's ability to lead the company out of trouble. They said that the existing leadership was incapable of turning the company around. A franchisee said, “She surrounds herself with people who won't necessarily challenge her.” Another franchisee opined, “She tells us like she is doing usa favor while franchisees are losing everything they own.” In April 2018, Subway announced that after the revitalization plan was implemented, it expected more franchisees to close down theit stores. It announced, “Looking out over the next decade, we anticipate having a slightly smaller, but more profitable footprint in North America and a significantly larger footprint in the test of the world,” It also announced that over 500 locations in the US would be shut down during the year. Subway on its part was in the process of “realigning markets to ensure the right Subway restaurants were in the right locations.” Subway planned to infuse USS 25 million in rebuilding the brand. According to @ company representative, “Subway is in the midst of a massive tuansformation, and change of this size takes time. Our goal is to strengthen the Subway brand in every market around the World to give Subway franchisees the greatest opportunity to successfully tow their businesses.” This meant it was introducing new products, remodeling new restaurants, and improving the operations But the challenges remained. According to a manager, “I can tell you without a doubt, Subway is dying. 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.” Many observers said that Subway had bitten off ‘more than it could chew, and just bringing back quality choices and value that had made it popular. would not be sufficient to resurrect the brand. Travis York! said, “Subway needs to get back in touch with their roots ~ freshly baked bread and ficsh ingredients assembled with care. These offerings are not only genuine, but also different ftom the competition. They can't just toss a bunch of stuff on random bread products and expect it to impress an increasingly discerning public. Meanwhile, in May 2018, Greco resigned as CEO. Trevor Haynes, Chief business development officer of Subway, was made the interim CEO. In ume 2018, Subway hired consulting firm Bain & Co. to help with transforming the brand, introducing improved products, creating a great customer experience, refining operations, making it look attractive to customers, and positioning the franchisees for success. On the whole, the operations needed to be professionalized, Deb Gabor, CEO of Sol Marketing’, said that Bain should now “leverage the positive attributes of their business ‘Travis York is CEO of creative agency GYK Antler Kate Taylor, People are Ditching Subway and Franchisees Expect a Wave of Store Closures - Here's ‘What Went Wrong, www.businessinsider.in, December 22, 2017. An agency for building brands q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 to bond more strongly with customers while leaving behind some of the executional practices that have driven their losses over the past few years."But observers said that Subway was beyond redemption. The CEO of Hill Impact, a strategic communications firm, said, “There may be no way to get its sales back to where they were, but it will be interesting to see what Bain can o."" Exhibit I: Restaurant Market in the US The fast food industry in the US would be worth USS 198.9 billion by 2020, according to estimates, These included on-premises restaurants, drive thru restaurants, off-premises restaurants, cafeterias, and buffets. By 2016, there were around 187,000 franchised quick service restaurants in the US. as against 162.000 in 2006. One in seven Americans consumed fast food every day, which was equal to 50 million consumers. Research showed that diners were choosing fast-food options more than ever As of 2015, burgers were the most consumed fast food item (42%), followed by Sandwiches (14%), Chicken (10%), Asian (10%), and Pizza & Pasta (9%). US- Revenue of Quick Service Restaurants Year Revenue (USS billion) 2002 159.2 2003 166.3 2004 173.7 2005 178.1 2006 180.8 2007 181.2 2008) 185.9 2009 185.1 2010 190.5 2011 193.1 2012 194.8 2013 196.1 2014 198.9 2015* 2 2016* 206.3 2017" 209.6 2018" 214.8 2019* 219.3 2020* 223.9 Souee: Statistica Cond. Jade Scipioni, Subway is in Trouble, looks to Consulting Firm for Help.www-foxbusiness.com, June 18, 2018 Jade Scipioni, Subway is in Trouble, looks to Consulting Firm for Help.wow-foxbusiness.com, June 18, 2018 fr eusiness Canoo. Unive) sf Sao Iocatnecavecente 0 ‘ro 2-Jan 2020 to 31-y- 2000, anageren,tughtvy Chates Koight a Sateoweta ore "eco paramias omen cota mnsLience ats a nd acu Case Q * B : rderrat Pavoage Usage petmied ony wi Prowges ris colar ped a320-0050-1 Contd Revenue in the Fast Food Restaurant Industry 2006-2015 210,000 208,000 | 200,000 | 495,000 | | 180.000 | 1es,000 | seo | 175000 | 170,000 | > po - - zoos" 2007 ' 2008 | 2008 | amo aot ama ata aoe 218 Revenue ($ millions) Sowee: IBISWorld ‘Consumer Spending in the Fast Food Industry 2006-2015 11,300 11,000 10,500 40,000 9.800 ‘Consumer Spencling ($ billions) 9,000, 9 2008 2007-2008 «200920102011 2012 «013-24, Source: IBISWorld After the recession, the restaurant market in the US became highly crowcled. According to the Department of Agriculture, USA. between 2009 and 2014, nearly 18,000 new fast food restaurants came up. This signified a growth of more than twice population growth. Experts predicted that by 2018, the restaurant industry in the US would be nearing saturation. According to Nigel Travis, CEO of Dunkin’ Donuts, US was ‘over-restauranted”. With the almost saturated situation, the fast food chains were competing for very small amount of incremental gains. While several brick and mortar retailers were shutting shop owing to the onslaught of e- commerce. in the case of food retailers, the online competition was absent. But some of them were afected by the closure of other retailers, as it had led to mall traffic dwindling. Contd. ay. 2000 a urness Seed, unbefaly & Sarre Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 -anageren, taught ny CnaresKright, rom 26-2020 to Undergraduate cave Testhng Ucenes Ucec-luasoe sa ore ea pa use on undergmguste programme: Stat racrret320-0050-1 Conia In the US there was a marked shift toward healthy and fresh food made of organic ingredients. whose origin could be traced. Even fast food retailers like McDonald’s were going for fresher and healthier options. The restaurants had broadened their menus to incInde items like soups. salads, and side items that were considered healthy. One of the challenges that these restaurants were facing was the lack of manpower. While 25 ‘years ago every quick service restaurant employed around 56 teenagers on an average. the number had dwindled to less than half by 2017. This indicated the proliferation of the number of restaurants and also decreasing workforce participation among teenagers. As the industry was in need of cheap labor to provide inexpensive food. the lack of manpower was proving to be a major challenge and a reason for higher costs. With the number of restaurants growing faster than the demand, the competition was on the rise. Compiled from various sources Exhibit 1: ‘Subway — Competitors Chipotle Mexican Grill: The fast casual restaurant chain specialized in tacos, burritos, and salads and was founded in 1993. Known for customizing its offers according to customer preferences, it offered thousands of food combinations. Chipotle was also famous for its tagline “food with integrity’, aud it ensured that all the ingredients it used were local, sustainably raised whole foods with minimum additives. The company operated all the restaurants itself. Its sales in 201 Twere USS 4.48 billion and operated at 2250 locations (2218 in the US). MeDonald’s: The burger chain competed with Subway in terms of location, After serving tuaditional burgers and high calorie food for several years, McDonald's was shifting toward healtiyy meals. It relaunched its dollar menu cheeseburgers, MeGriddles. and beverages. As of 2017. it had more than 35,000 outlets across the world (14.146 in the US). Its revennes were USS 22.8 billion in 2017. Yum! Brands: Yum! Brands, Inc operated several large quick-service restaurant chains including Taco Bell, KFC, and Pizza Hut. Taco Bell served fast food breakfast and lunch dishes including tacos, buritos, and nachos. KFC served various chicken dishes and sandwiches along with side dishes and beverages. Pizza Hut was a quick-service pizza restaurant chain. The company had over 45,084 locations in 135 countries. Revemte exceeded $5.8 billion for 2017 Starbucks: Though Starbucks was a coffee chain, over the years it had emerged as a fast food. chain by adding various food items to its menu. It started offering a breakfast menu and planned. to expand this further. In 2015, it went ahead of Subway to become the No.2 restaurant chain in. the US (based on sales). As of 2017. it operated through 27.339 stores across the world (13.930 in the US). In the year its revenue was USS 22.39 million Panera Bread Company: Founded in 1981. Panera was a fast castial restaurant chain specializing in soup, salad, sandwiches, and bakery products. Tt was popular for offering better food rather than cheaper food. Its prices were higher and it attracted customers through its 100% clean ment”, which was free fiom all artificial flavors, preservatives, sweeteners, and color. The highly tech-savvy company had mobile order and pay, and had also started web and. kiosk sales. The company had both own and franchised locations and operated from 2100 stores in the US and a few restaurants in Canada. It was acquired by JAB holdings in July 2017 Firehouse Subs: This fast castal restaurant chain was founded in 1994 in Jacksonville, Florida. In the crowded marketplace it differentiated itself through its hearty and flavorful food, service, and safety. It used the highest quality of vegetables, meat, and cheese, and offered more than 50 Complimentary hot sauces. It also operated a public safety foundation. It had 1135 fianchised restaurants in the US, Canada (16), and Puerto Rico (11). Its revenue in 2017 was USS 715 million Conta ay. 2000 a urness Seed, unbefaly & Sarre Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 -anageren, taught ny CnaresKright, rom 26-2020 to Undergraduate cave Testhng Ucenes Ucec-luasoe sa ore ea pa use on undergmguste programme: Stat racrret320-0050-1 Conta Shake Shack: Shake Shack, an American fast food restaurant chain based in New York City, was created by revered New York restaurateur Danny Meyer. It served New Yorkestyle hotdogs, hamburgers, fries, frozen custard called conerete, and the eponymous milkshake. Tt also served house beer and wine. Shake Shack was popular for antibiotic-fiee Angus beef and. buttered buns, specialty toppings like Applewood-smoked bacon, aud cherry peppers and its signature sauce Which was a blend of mayo, Ketchup, mustard, and spices. The sauce was said to provide the unique Shake Shack experience. It operated through 100 locatious in the US and 59 locations in the international markets. In cach location beverage was customized to suit the local flavors. Tn 2017, its revene was USS 358 million Sweetgreen: Founded in 2007, Sweetgreen was an American fast casual restaurant chain that served salads at USS 10. It grew popular as a farm to counter restaurant, which cautied from scratch cooking onsite. The company made salad dressings daily. using fiesh and organic ingredients. The menu in cach of the restaurants displayed the details of the suppliers. For cach. location and season it had a different menu, based on the availability of fiesh and local ingredients. It used biodegradable utensils. Customers could also make their own salads by selecting bases, ingredients, premiums, and dressings. It had 87 outlets, all in the USA Jimmy John’s: Jimny John's Franchise, LLC, an American franchised sandwich restaurant chain specializing in delivery, was founded in 1983. It differentiated itself based on wholesome ingredients such as meats without filers, real mayonnaise and olive oil. and from-the scratch preparations. It baked its own bread (several times a day), prepared meat and vegetable ingredients every day. and hand sliced them. If the bread was more than four hours old, it was considered stale. It was poptlar for its custom-made sub and club sandwiches, which were made in an average of 30 seconds. It operated through more than 2727 locations across the US. Jersey Mike's: Founded in 1956, Jersey Mike's Sub was an American submarine sandwich. It served made-to-order submarine sandwiches, and breakfast sandwiches. It also sold cold and hot subs, sides. drinks, and desserts. It was known for its franchise program. considered one of the most successfill in the US. Between 2010 and 2017, new franchisee average growth was 16%. The franchisee development program of Jetsey Mike's ensured proper training, weekly calls, and a field teamn that helped the franchisees. It operated through more than 1500 locations in the US. In 2017, its sales were USS 974.8 million. Arby's: Arby's was an American quick-service fast-food sandwich restaurant chain. As of 2017, it was the second largest sandwich chain in America after Subway and was popular for roast-beef sandwiches. The other popular products were brisket, Angus steak, cored beef, ham, bacon, turkey, and chicken sandwiches, along with salads, wraps, and fried sides. It was the first restaurant t0 introduce a lite menu in the early 1990s, It operated from 3400 locations in eight countries. In 2016, its sales Were USS 3.6 billion in the US. Potbelly: Potbelly Sandwich Shop sold submarine sandwiches and cookies. It also served salads, soups, shakes, malts, and smoothies. It was known for its fresh, high quality ingredients, freshly baked cookies, an its hospitality. Unlike the other fast food chains, Potbeliy was known, for its comfortable, quaint environment with distinctive qualities. It was also known for the live auusic played during lunch time. For the year 2017, its total revenue was US$ 112.1 million, and it operated in 413 locations. McAlister’s Del: American fast casual restaurant McAlister’s Deli was founded in 1989. Some Of the popular items on its menu were deli sandwiches, "Texas-size" spuds (baked potatoes), soups, salads, and desserts. Tt served half sandwiches and had gluten fice items, Tt operated trough 400 restaurants in 26 states in the US. Compiled from various sources q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret320-0050-1 End Notes Kate Taylor, ‘Subway is dying’: The biggest chain in the world is being torn apart by internal battles - and some franchisees say there needs to be anew CEO, www.businessinsider in, January 19, 2018 Kate Taylor, ‘Subway is dying’: The biggest chain in the world is being tom apatt by internal battles - and some franchisees say there needs to be a new CEO, www. businessinsider.in, January 19, 2018 Jonathan Maze, ‘Why Subway is shrinking’, www.nm.com, April 24, 2017 Erie Scholsser, “Fast Food Nation: The Dark Side of the Alls 2012. merican Meal,” Business & Economics, Kate Taylor, “Subway is Closing another $00 Stores,” www, businessinsider.in, April 26, 2018 Kate Taylor, ‘Subway is dying’: The biggest chain in the world is being tom apast by internal battles - and some franchisees say there needs to be anew CEO, www. businessinsider.in, January 19, 2018 Kate Taylor, Subway’s ‘mystery meat’ and 'imushy and rotten vegetables’ destroyed the Eat Fresh’ advantage it spent years building https://www.businessinsider-in, Jan 1, 2018 Kate Taylor, Subway’s ‘mystery meat’ and ‘mushy and rotten vegetables’ destroyed the Eat Fresh advantage it spent years building hitps://www.businessinsider-in, Jan 1, 2018 Drew Harwell, The rise and fall of Subway, the world’s biggest food chain, www.washingtonpost.com, May 30, 2015 Josh Kosman, “Struggling Subway is now Facing a Franchisee Revolt." htips://nypost.com, December 13,2017 Susan Berfield, Jared Isn't Subway's Only Problem, www.bloomberg.com, July 9, 2015 Lyn Mettler, “Why Subway is Closing Hundreds of Restaurants in the US." wwrw.today.com, April 27, 2018 Jonathan Maze, “Subway Unveils ‘Fresh Forward’ Redesign,” www.umn com, July 17,2017 Alaina Lancaster, “Subway to Shutter $00 US Restaurants,” www espeailynews.com, April 26, 2018 Josh Kosman, “Strugeling Subway is now Facing a Franchisee Revolt.” htips://nypost.com, December 13,2017 Kate Taylor, People are Ditching Subway and Franchisees Expect a Wave of Store Closures - here's what Went Wrong, www. businessinsider.in, December 22, 2017. Caitlin Dewey, The Dark Side of your $5 Footlong: Business Owners say it could Bankrupt them, The ‘Washington Post, December 29, 2017 Kate Taylor, ‘Subway is dying’: The Biggest Chain in the World is being Ton Apart by Internal Battles - ‘and some Franchisees say there needs to be a New CEO, www. businessinsider.in, January 19, 2018 Kate Taylor, ‘Subway is dying’: The Biggest Chain in the World is being Tom Apart by Internal Battles - ‘and some Franchisees say there needs to be a New CEO, www. businessinsider.in, January 19, 2018 °° Matthew Kazin, “Subway could close up to S00 North American Restaurants,” waw-foxbusiness.com, ‘April 26, 2018 Kate Taylor, People are Ditching Subway and Franchisees Expect a Wave of Store Closures - Here's What Went Wrong. www:businessinsider in, December 22. 2017 Kate Taylor, ‘Subway is dying’: The biggest chain in the world is being tom apatt by internal battles - and some franchisees say there needs to be a new CEO, www.businessinsider.in, January 19, 2018 1 8 q 5 8 a sragermet taught by Charles Kright for 22-Jan 2020 to Toage_ Usage petmieg ony wit Ouse paramore enervse cect hvoqheesseveive. 03 BF nge gracias Case Teothng Uctnce Uotelua 00 ra ea pa use on undergmguste programme: Stat racrret