In an endeavor to transform its ownership model, Subway is actively seeking substantial franchisees in the United States. However, the global sandwich chain is encountering difficulties in persuading investors to come on board, mainly due to underwhelming restaurant profits and the existence of antiquated stores.
Two advisors have revealed that multiple multi-unit operators, who fit Subway’s criteria of being sophisticated and financially robust franchisees, considered the prospect of joining the chain by acquiring batches of restaurants. However, upon observing the meager profits generated, these operators chose to withdraw from the opportunity.
Lawyer Justin Klein and consultant John Gordon said their clients were deterred by low margins and the prospect of making necessary renovations.
In an effort to depart from its current reliance on small franchisees, many of whom operate just one or two shops and often struggle to sustain themselves, Subway announced its intentions to transition its business model. The company has shut down numerous U.S. locations since 2016.
In April, Subway organized its inaugural gathering exclusively for multi-unit owners, convening over 15 franchisees in Miami who were actively exploring avenues for expansion within the company.
During that same month, Subway made an announcement regarding five fresh agreements with multi-unit operators, involving the consolidation and transfer of over 230 existing restaurants. Interestingly, only two of these agreements entailed new owners entering the chain for the first time.
In a statement, Subway said, “There is strong interest in growth opportunities with Subway from multi-unit operators. All five multi-unit owner agreements were significant investments that demonstrate the confidence that both existing and new operators have in our brand and future.”
However, despite these developments, there are still concerns among certain major operators regarding Subway’s store-level profit margins. An undisclosed source, familiar with the chain’s unit economics and the criteria considered by prominent multi-unit franchisees seeking expansion, expressed this apprehension. Due to the confidential nature of the information, the source preferred to remain anonymous.
The average annual sales volume for Subway’s U.S. restaurants has not been disclosed by the company. However, industry experts and insiders estimate the figure to be less than $500,000, positioning it as one of the lowest in the industry.
According to QSR Magazine, Jersey Mike’s and Firehouse Subs, both competitors of Subway in the sandwich shop industry, generate annual sales volumes exceeding $1.1 million and $900,000 respectively. It is worth noting that Firehouse Subs is owned by Restaurant Brands International Inc.
Subway told Reuters that in May, it “achieved its highest weekly average unit volume in the U.S. since 2010,” but declined to disclose the dollar amount.
Unattractive:
At the International Franchise Expo in New York, Subway showcased its booth, featuring green, yellow, and white flyers highlighting the brand’s impressive over 12 percent comparable sales growth. The promotional material also outlined the desired characteristics Subway seeks in multi-unit operators, which include strong leadership, shared values, and a minimum net worth of $150,000 per location.
However, the feeling of attraction may not be mutual.
Klein, the franchise attorney, said that since 2022, his firm examined three multi-unit Subway deals on behalf of clients interested in investing in the chain for the first time. All three walked away, even as the firm did “a very healthy amount of restaurant M&A,” he said.
There are various reasons contributing to the lack of mutual attraction. These include concerns regarding the potential outcome if the company is acquired by private equity firms, potentially valuing it at $10 billion. Additionally, there are stores with limited value and others that require significant investments for equipment upgrades and renovations, further adding to the uncertainties.
“We couldn’t close any Subway deal. We’d love to, though,” Klein said. “Subway’s a solid brand, and for the right investor it’s a great opportunity.”
Consultant Gordon had discussions with a fast-food operator who was presented with an opportunity to oversee all Subway locations in Nevada and New Mexico. However, the operator eventually turned down the offer due to the narrow profit margins and the requirement to renovate the outdated stores, as explained by Gordon.
Franchise Times magazine’s ranking of the 100 largest multi-unit U.S. restaurant franchisees by revenue in 2022 revealed an interesting trend: none of these top franchisees had Subway in their portfolio. Instead, these leading franchisees owned numerous outlets of other popular chains, such as Wendy’s, Pizza Hut and Taco Bell (owned by Yum Brands), Burger King (owned by Restaurant Brands), Applebee’s (owned by Dine Brands), and various other brands.
“When we see more of those operators entering (Subway) for the first time, to me that’s a signal that the brand is on a different path,” said consultant Alicia Miller, Managing Director of advisory firm Catalyst Insight Group.
