Subway cut its sandwich chain in the U.S. by 443 stores last year, but experts say the unexpected decline could continue as the chain’s California locations face minimum wage hikes. Pointed out.
The fast-food giant will close a total of 733 stores in the U.S. in 2023, while adding 396 and reacquiring 79, according to a regulatory filing late last week. The net number of U.S. restaurants fell to 20,133 from 20,576 in the same period last year, according to the filing.
That’s worse than CEO John Chissey predicted at the Yahoo Conference in November, just weeks before the end of the calendar year. Subway said it expects to close 300 to 400 stores in the United States. Meanwhile, the company added 200 to 300 stores in other parts of the country, resulting in a net loss of only 100 stores.
“In the worst case scenario, we will be stranded in the United States,” Chissey said.
Instead, Subway’s store count peaked at 27,000 stores in 2015 and will continue to shrink for the eighth consecutive year in 2023. He has overcome many hardships, including the sex scandal involving former pitcher Jared Fogle and a lawsuit over fake tuna and its long-legged submarine. Just an inch short — Subway is currently operating its fewest stores since 2005.
The threat of further closures continues into 2024, said John Gordon, a restaurant analyst at Pacific Management Consultants Group. The main reason is California’s rising labor costs.
At the beginning of 2017, there were 2,719 Subways in California. That number has plummeted to 1,934 as of Dec. 31, but Subway still operates the most stores in the state after Starbucks. On April 1, the state’s minimum wage increased from $16 to $20 an hour.
According to people involved, the subway’s profit margins are tight, with personnel costs accounting for about 28% of subway operating costs. So raising the minimum wage could wipe out profits for many Golden State business owners who have few ways to increase profits.
“Once their leases expire, more people will decide to close,” said one California franchisee, who explained that Subways typically leases space with a five-year option. “Why would we choose to stay open if we were just going to pass by?”
After learning in the fall that the minimum wage would be raised, Subway stores began raising prices, some by as much as 7% to 10%.
“Many of us started adjusting our prices in November to allow for targeted and incremental increases,” the franchisee said.
In the six months leading up to California’s new $20 an hour minimum wage law, fast food prices across California rose 7%. According to a study by analytics firm Datassential.
Other fast food chains in California are also taking their own measures.
For example, Scott Rodrick, a McDonald’s franchisee who owns 18 restaurants in California, is trying to offset the impact of the state’s $20-an-hour fast-food minimum wage by shortening store hours and changing the menu. He said he is considering raising prices and postponing renovations. Harshraj Ghai, the operator of Burger King, which operates 140 stores, said it would cut staff hours and accelerate the rollout of self-service kiosks to reduce labor costs.
Area managers of California Metro, known as the development agency, have formed a task force to help local franchisees survive, officials said.
Some Subway franchisees are seeking permission to reduce their operating hours from the required 91 hours a week (13 hours a day). According to officials, most of Subway’s business comes from lunch, about a third from dinner, and very little in the morning and late at night.
Another way Subway can help reduce costs for operators is by offering fewer promotional deals to MVP members in California, franchisees said.
On the positive side, a Subway spokesperson noted that the company’s overseas growth offset last year’s decline in its U.S. footprint, sparking positive global growth for the company for the first time since 2016. Last year’s closures marked a slowdown from the year before, when Subway closed 995 U.S. locations. In 2021, he closed 1,505 businesses.
“In the U.S., we use a strategic, data-driven approach to optimize our store footprint to ensure restaurants are placed in the right location, image and format,” the spokesperson said. “This includes opening new stores, relocating restaurants to maximize guest visitation, and closing stores as necessary.”
Some experts aren’t convinced the company has turned a corner.
“They are still bleeding profusely,” Gordon told the Post. “Subway remains a problematic brand in the U.S.”
Meanwhile, Starbucks has 16,352 stores in the United States, closing in on the second-largest chain in the U.S., while McDonald’s ranks third in the country with 13,449 stores.
According to the latest data, 3.6% of U.S. subways will close in 2023. This number is still well above the fast food industry average of 2.6% to 2.8%. said Jeff Leffler, CEO of Franchise Grade, a consulting firm that analyzes chains for carriers.
“It looks like they’re starting to correct the ship’s course. The ship is stabilizing,” Loeffler told the Post. “But we still have higher turnover than our competitors. There is still a calculated risk in opening a subway.”
Subway, which provides limited financial information in its annual public filings, said in a February press release: North American same-store sales to increase 5.9% in 2023. The parent company, which doesn’t have any stores, announced last week that sales rose more than 10% to $972 million.
Still, 40% of that increase came from donations and discounts from vendors who supply products to franchisees, according to the filing.
Rourke Capital, the private equity firm that owns Dunkin’ Brands, Arby’s and Jimmy John’s, agreed in August to buy Subway for up to $9.6 billion. The U.S. Federal Trade Commission is investigating the merger, and people close to the situation said regulators could block the merger because Rourke would gain too much of a dominant position in the fast-food sandwich industry. There are concerns.
Subway franchisees choose their own menu prices. The parent company will reduce the franchisee’s royalties by 8%, regardless of whether they are making a profit or not.
