Executive Insights | November 2011 | By Daniel P. Smith

The Subway Effect

In his own words, Subway’s chief development officer Don Fertman explains how the sandwich company’s business model has grown into a global economic force.

Don Fertman is chief development officer of Subway.
Bookmark/Share this post with:
Email this story Email this story
Printer-friendly versionPrinter-friendly version

When Don Fertman joined Subway in 1981, the company stood as little more than an ambitious regional player. Thoughts of the brand filling the corporate heavyweight shoes it does today seemed remote and distant.

But times have changed.

For the last three decades, Fertman, Subway’s chief development officer, has been an active player in spearheading the company’s rocket-paced rise. His perspective is one few in the industry can possibly share. He heads development for the biggest quick serve in the world, one that now has an ever-expanding array of 35,000 stores spread across 100 countries.

Fertman’s position is unusual, his enthusiasm high, and the story he shares shows the widespread possibilities restaurant brands can deliver.

From an airport in South Africa to a riverboat in Germany, a high school in Detroit to a crane at the top of the World Trade Center construction site in New York City, Subway restaurants are seemingly everywhere.

Last July, in fact, the Connecticut-based sandwich giant opened its 8,000th nontraditional location, a milestone few could have foreseen two decades ago when Subway claimed but 5,000 units and nontraditional locations were viewed as an experiment more than a realistic vehicle for growth.

Fertman only sees more possibilities.

In his own words, the veteran Subway leader details how the sandwich chain’s franchise-only system, nontraditional units, and focused business model lend a hearty push to local industries, as well as the global economy.

When I started in 1981, Subway had 166 stores. In those days, when you would say, “Subway,” someone would respond, “You mean the underground in New York?” After we started moving into franchising, the brand spread and reached a certain critical mass. These days, when you say, “Subway,” someone says, “I just ate there.” Subway’s now a part of the world’s consciousness and business climate.

Our average Subway store generates 8–10 jobs, which means there are about 350,000 jobs in our Subway restaurants alone. We then have 1,200 positions at our headquarters and regional offices. Combine that with our partners—the vendors who supply us goods, the farmers and meat manufacturers, food processing, and the equipment providers, and you begin to see that Subway cuts a wide swath.

You then add in that 35,000 stores have 35,000 landlords, and each store has provided work to local contractors and builders, and it’s clear that Subway’s a far-reaching brand that goes from Detroit to New Delhi.

As we’ve gone into 98 countries, we now have about one store for every 200,000 people in the world. That’s how people become aware of the brand. You reach a certain threshold and critical mass, and at that point sandwiches become a part of the culture and there’s a strong economic impact that grows from that.

This summer, we had our annual convention in San Francisco with nearly 4,500 people in attendance from all over the world. During the course of that forum, I got to speak with people—sandwich artists, franchisees, developers, vendors, suppliers, and various members across the Subway team. All of them were talking about their respective jobs at Subway. As I spoke with each individual, I got a deeper sense of how each person contributes to this greater whole and just how many lives Subway touches.

In our general session, Subway president and cofounder Fred DeLuca gave an address and recounted Subway history from our start in 1965 with one store to where we are today. With that, you could just see the growth, you could see the impact, the number of people that individually and collectively have been impacted by Subway and benefited from the brand’s growth around the world.

I can’t say making a global economic impact was ever our goal or a part of our plan. It’s really about being the best possible business for the largest number of franchise owners and winning more loyal customers around the world.

We set high goals and have achieved some amazing results—none of which would have been possible without a wonderful team of franchisees and their dedicated employees working on the frontlines, as well as our local developers and all of the other folks that make this happen worldwide.

We never take our eyes off this particular ball: Keep the costs down and the profitability up. As a result, we’ve been able to offer a business opportunity to a lot of folks over the years who had an entrepreneurial spirit but may not have been able to afford to get into business for themselves.

At our annual convention, I ran into one man I sold a franchise to way back in the early ’80s. He purchased his franchise by selling his Corvette. Then he financed the opening of his store on a bunch of credit cards. Now, I wouldn’t recommend his route as a good one in terms of financing, but this was somebody who was determined and believed in the concept. He and his wife now have 18 Subway restaurants and are building two more.

Those were a lot of the early Subway entrepreneurs: people who scratched together whatever they had, took their life savings, and put it into this dream, this opportunity.

To some degree, we’re still seeing that today in a lot of the new countries we’re entering. People recognize the potential Subway has and have started to build their own dream. As a result, the chain builds and a greater economic impact takes root.

We take an optimistic outlook. An ongoing story in Subway folklore, but a very real one, is when DeLuca announced in 1982 that we would have 5,000 stores by 1994 at a time when we had less than 200 stores and only McDonald’s had gotten anywhere near that mark.

At that time, he had the vision, but it took many of us a while to catch up. We reached the 5,000-store mark by 1990 and hit 10,000 stores by 1994. With that, we all saw what the possibilities were.

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.