Subway has ignored “cries for help” from struggling franchisees for years, but is now in danger of being “swallowed” by fast-growing rivals, thousands of people say. A lawyer representing the Subway owner warned.
Subway announced last week that CEO John Chidsey would be “retiring” at the end of the year. Five years have passed since he became the first executive outside of the founding family to lead the chain. This is despite Mr. Chissey saying in May that he intended to stay on after the company was sold to Rourke Capital for $9.5 billion.
At the same time as Subway announced its CEO's departure, it also said it was terminating its $6.99 Footlong contract one month early after admitting to franchisees that the deal was “not delivering the expected results.” (Restaurant Business Magazine) reported.
Subway's gloomy headlines were in stark contrast to recent news from much smaller competitor Jersey Mike's. The latter currently operates only 3,000 stores in the U.S., compared to Subway's 20,000 stores, which it sold to acquisition company Blackstone Group for $8 billion, a deal that Subway lost in six months. This is not far off from the previous bid.
Subway's $6.99 Footlong promotion is the latest in a series of punitive actions under Chissey against Subway franchisees, who are required to pay a royalty fee of 8% of gross revenue regardless of profit It is.
Robert Zarco, general counsel for the Subway Franchise Association of North America, which represents about half of Subway's 20,000 stores in the U.S., said Chissy has similarly encouraged franchisees to renovate their restaurants despite uncertain returns. and forcing them to pay “undisclosed” technical fees.
“If Subway continues to treat its franchisees the way it has for the past five years, ignoring their cries for help, Jersey Mike's could easily swallow the Subway brand,” Zarco said. told the Post.
“I hope that's the reason for the substitution, because it should have been,” Zarco added, referring to Chissi's departure. “Tensions are prevalent, so it would be a good move for Rourke to step in and bring a clean slate and establish better working relationships with franchisees.”
Zarco said Chissy had not made any significant claims to NAASF.
Rourke, which owns dozens of major fast-food chains including Dunkin, Arby's, Sonic, Baskin-Robbins and Buffalo Wild Wings, did not respond to requests for comment.
At a hastily convened meeting in August, Subway President Douglas Fry acknowledged that sales in many regions were down 5% to 10% since the start of the year. Meanwhile, he estimates Jersey Mike's same-store sales, meaning sales at stores open at least a year, rose 1%, people familiar with the matter told the Post.
Mr. Frye acknowledged at the time that “we're doing worse than other industries,” according to people familiar with the matter.
But franchisees say the $6.99 footlong deal stipulated by Chissy, the former Burger King CEO, only made matters worse.
“This is the first time I've ever been denied a promotion,” a franchisee who operates more than 10 Subway restaurants in the northeastern United States told the Post.
The shopkeeper was one of the lucky ones. Most Subway franchisees who signed contracts before 2021 were able to opt out of the promotion, but new franchisees were forced to sign at a loss.
“The last 20 days have been hell,” a Subway employee wrote on Reddit about Value Meals on Wednesday. “It might have worked better if upper management had actually worked in the store and understood why the owners didn't want to open any Subway stores.”
Franchisees complained that the promotion allowed a customer to order four “monster subs” containing steak, pepper, cheese and onions for less than $30. As a result, the $6.99 Footlong deal failed to improve total sales even though costs skyrocketed.
Subway will appoint Carey Walsh, president of Europe, Middle East and Asia, as interim CEO. Zarco said she is well-liked by some of the Subway franchisees who know her.
Public filings show that Subway has declined 15% in the past four years, from 23,799 stores nationwide on January 1, 2020, shortly after Chissey took the helm, to January 1, 2024. The number of stores decreased to 20,133 stores. According to people involved, the size of chain stores appears to have shrunk slightly this year.
Meanwhile, Jersey Mike's CEO Peter Cancro has become a billionaire from his Blackstone deal, making about three times more than the average Subway company, according to public filings.
“With Blackstone's acquisition of Jersey Mike's, I feel it's time to run,” said the Northeast-based Subway franchisee with more than 10 restaurants. He added that it's easy to imagine Mike's soon more than doubling the size of its U.S. restaurants to 8,000.
Peter Wallace, Blackstone's senior managing director, said on Nov. 19 that the company has “deep experience helping high-growth franchise businesses like Jersey Mike's accelerate their expansion.”
