Executive Insights | November 2011 | By Daniel P. Smith

The Subway Effect

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Don Fertman is chief development officer of Subway.
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When DeLuca set his first high goal, he aimed to have 32 stores in the first 10 years of operation. Another chain, Mike’s, had 32 stores, and there was the thought that if they could do it, we could do it. By 1974, nine years in, Subway had only reached 17 stores. Only half way there, he realized he couldn’t do it by himself. He needed to get other people involved. He sold a franchise to a fraternity buddy named Brian Dixon. That began our franchising process.

When we saw how well franchising worked, we understood that our business model is predicated on owner-operators. People in the stores with their sleeves rolled up … making sandwiches one at a time, interacting with customers, and building the business in the community. That was our best avenue for growth.

Through the process of having company stores periodically, we’ve seen time and again that those stores never run as well as the franchised stores because the company-owned outlets don’t get the attention and hands-on benefit of an entrepreneur whose livelihood depends on that store.

We’re absentee owners. That’s why we’ve stayed glued to that franchise model. It gives a lot more people opportunity and those people are dedicated to their individual stores. That’s what keeps the Subway motor running.

We’re 100 percent franchised, and as a result of that the dollars stay local and the impact is on a local basis. That all translates into the global growth we’ve seen.

In our early days of international development outside of North America, we would go virtually anywhere someone was interested—sort of the “If you build it, they will come” philosophy. Someone would come to us with the idea of opening in Tanzania, and we’d open in Tanzania even though the long-term impact of Subway in an economy like that might be small, perhaps—only open five or six or seven stores ultimately. We’ve since become more sophisticated.

We’ve put together a proprietary model to look at a market and determine its potential impact. We better understand the scope of potential growth we can have in a country by analyzing certain factors, such as GDP, fast food development, business models in that country, understanding of franchising as a concept, and a number of other elements. That’s enabled us to go into countries where we can have a large number of restaurants, where we can accelerate our development, and where we can have an impact on the economy that much more quickly.

We start making inroads, build brand presence and awareness, and get people to be involved in Subway at various levels. That spurs the economic impact.

Being the first chain to reach 35,000 stores puts us in a unusual position. What we’ve found is that new store development tends to be self-regulating. As the franchisees build the business and build the brand awareness, then there is more interest in building additional units and finding opportunities to fill in the white spaces. … If the business is not building, if the profitability isn’t there, then development slows or stops.

The trick is to handle each market separately, which is why our system of local developers works so well. The developers and the franchisees know their markets a lot better than we do looking at a map at headquarters. Ultimately, they realize when the opportunities are present and when they are no longer there. It’s an ongoing process.

The nontraditional expansion started with the idea of a franchisee, which is sometimes where the best ideas originate. The concept was to put a restaurant in a convenience store simply to reach more customers. It sounded like an odd idea to combine food with a place that sold gasoline and snacks; the two just didn’t seem to go together, so we passed.

But this franchisee was persistent. He got it done and proved it could be a successful, profitable marriage.

Once we saw that potential, it opened the door. What was amazing to us was just how many opportunities were available: the precious real estate occupied by so many convenience stores; the gasoline stations on all the key corners; and just how low the cost of entry was. We could go into an existing facility, bring in equipment, and do a little build out and have a profitable venue on a street corner that we didn’t have access to previously.

The early strategy with the nontraditional units was to use convenience stores to build our customer base, especially in small towns where that store might have been the only game in town, but now it’s evolved along with the whole nontraditional concept. Anywhere people eat, we want to be.

Today, when we work with our C-store or petroleum partners, they’re almost building out mini shopping centers with locations featuring separate entrances and more accessibility and parking. In other cases, we’re going into small towns, maybe starting with a convenience store. As the town grows, we then have opportunity to enter more traditional locations.

Nontraditional outlets reach new customers. When we put a nontraditional outlet in Walmart, for example, we reach a lot of folks who weren’t necessarily Subway customers before. With the 1,600 Walmart locations we’ve opened, we’ve given people the chance to trip over us before they may visit a competitor.

Some of our nontraditional locations have built business to four or five times our average unit volume, but it’s a symbiotic relationship.

The locations in the airports or transportation hubs of various countries expose us to new customers. They provide an introduction to the brand and an awareness and acceptance of both the product as well as the business opportunity in both developed and emerging markets. One feeds off the other and our nontraditional development has exposed the brand in such a way that it’s raised our worldwide profile.

With the nontraditional locations, with their high-profile spots and visibility, with the additional brand awareness they bring to the table, it allows us to build our brand and expose the business opportunity. We expose sandwiches to the customers and help people really understand that Subway is available. It’s as great a product as it is a business opportunity.

When we’ve got a location that’s going up and up and up, floor by floor, at the site of the World Trade Center with the new building they’re constructing there, it shows people that the possibilities are truly endless.

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