This is a shortened version of an interview that appears in the May 2002 issue of QSR. To get the full QSR interview delivered to your door twelve times per year, subscribe to QSR.

Thriving on Steady Growth
By Frederick Burger

When 2001 came to an end, the Subway sandwich chain had plenty to boast about. As of December 31, the chain included 13,247 domestic stores, some 148 more than McDonald�s, making Subway the world�s largest quick-service food operation�in terms of units.

Fred DeLuca, Subway co-founder/co-owner and president, launched the privately held chain in 1965 in Bridgeport, Connecticut, with his partner Peter Buck. Today Subway has more than 16,000 stores in seventy-four countries and is the largest submarine-sandwich franchise in the world. DeLuca expects revenues to be about $5.5 billion this year

There are several reasons why Subway surpassed McDonald�s in 2001 to become the hottest quick-serve chain on the market: the poor showing of hamburger chains across the board; Subway�s lower start-up costs; and the much publicized weight loss of one former Indiana University student named Jared. QSR caught up with DeLuca in late February to discuss it all�his business, its menu and the future.

To what do you attribute the continued attraction of Subway as a franchise operation?

DeLuca: The stores we do open tend to stay open. The closing rate is very, very low. So our franchisees tend to have a great enthusiasm for expanding. In fact, every year the ratio of stores built by existing franchisees is something close to 70 percent.

Everyone�s seen these ads about people who eat at Subway and lose a lot of weight. Was the promotion an accident or was it part of your business plan.

DeLuca: No, it wasn�t calculated at all. In fact, all the marketing people were firmly convinced that consumers were not interested in food that was low fat. We kind of stumbled on it in two ways.

One of the local franchisees in Houston, Texas, made a little ad campaign, which basically called attention to the fact that we had seven sandwiches that were under six grams of fat. They did a couple of TV commercials that ran in Houston, and sales really jumped up quite a bit. That was kind of interesting. We put this on printed material, �7 under 6.� We devised a little logo for it.

Then, the second time we stumbled on this was when this kid Jared (Fogle) was going to school at Indiana University. He weighed like over four hundred pounds and he couldn�t lose the weight. One day he sees this �7 under 6� promotion and starts looking at the calories, and he thought, �I like Subway. I could go on this diet.� So he invents a diet for himself. We weren�t promoting a diet. He says, �If I eat this, this, and this, I�ll be all set.� He gets so focused, in eleven months he lost 245 pounds.

Jared gets written up in his local college newspaper, and that was picked up by Men�s Health magazine. So the local market in Chicago said, �You know, we should do an ad on this.� The national people never bought into it until they saw that it was interesting to consumers.

How has the menu changed in the last five years? Has it changed at all?

DeLuca: The key things that have changed in the past several years you wouldn�t really see by looking at the menu board because the menu board itself has a list of sandwiches. There�s a ham sandwich and a club sandwich etc. So the listings are essentially the same. What�s changed are the components.

On Business: �Keep the business simple, provide good support, and also provide good control systems. That�s the foundations for it.�

We�ve made improvements to the basic dough that we use. We�ve made substantial improvements to several of the meats. We came out with a line of gourmet breads. We have special toppings on breads to make the bread line more interesting. And we�ve introduced a set of proprietary, really excellent tasting sauces. I think, basically, that�s the set of improvements.

Can you trace the improved quality of the food directly to increased sales?

DeLuca: We did a whole bunch of changes two years ago, in early 2000. All those food changes were made in the first seven months of 2000. Also at the same time, that�s when the Jared advertising broke. So both things happened simultaneously. Our sales are now up 30 percent for same-store sales over two years ago. So we know it�s those two factors. We just can�t tell how much of each one it is.

You�re the only quick-service chain that I know if that�s promoting health as a selling point for its food.

DeLuca: I think that�s because in order for someone to sell you on something they have to have a credible pitch. So if I tell you that you can go to Subway and get healthy food, I think we have a chance of convincing you. Whereas if a burger chain says the same thing to you, it�s more of a stretch.

Why do you think you�re growing faster than McDonald�s in terms of units?

DeLuca: I think primarily it�s because of the business model. For them to put a store in, it�s very costly and they have a very high break-even point. For us, putting a store in is not very expensive, and the break-even point is pretty low. When we open these stores, we have customers. There�s still quite a bit of demand for our product that�s unfulfilled.

Do you see any limit to your growth in the foreseeable future or do you expect it continue at the same pace indefinitely?

DeLuca: I think for the next couple of years, we�ll add a thousand stores per year, but as we approach 17,000 stores in the United States in four or five years, I think we may see a slowdown in some areas. That may be looking four years down the road.

Going back to the menu, tell me about the new breads.

DeLuca: Actually, we began baking breads in our stores back in 1983. Then, in 2000 we began to get into varieties of breads. Now stores offer five breads: white, wheat, and three seasoned breads. I think that�s going to change in the summer when we offer a sixth bread.

On Expansion: ��you have to be where the customers want the food, when they want the food.�

Do you envision or have you discussed any potential pitfalls in marketing based on nutrition?

DeLuca: First of all, there�s another part to our marketing plan that�s maybe not as obvious. We have the Jared component going, and then we have also a fellow who does marketing for us who�s identified in commercials as Jim. Jim�s selling basically �fresh and tastes good.� So when we do our commercials, it will either be Jared or Jim. We think if we do just the low fat, it�s not the right way to do it because we�re just talking to a portion of the overall audience.

The people who are not interested in low-fat might be concerned that the food doesn�t taste as good. There are a lot of people who think there�s a correlation between low-fat and bad tasting. We don�t want people who don�t know us that well, more like casual users, to get the wrong impression.

You�ve mentioned the growth in same-store sales. Can you elaborate?

DeLuca: It�s something like this: Back two years ago, the average store might have been doing something like $270,000 a year (in gross sales). Now it�s more like $350,000 a year.

What do you expect to see happen with the company in terms of its growth?

DeLuca: I am pretty confident in the next two years we�ll add 1,000 stores a year. I don�t know if we�ll continue at a 1,000 new stores a year clip for a while or if we�ll see some kind of change.

As a private company, y�all don�t release many financial figures, but there have been some published reports of sales figures.

DeLuca: We�ll be over $5 billion this year. I�d say $5.5 billion in sales this year. That�s pretty good for starting with one store.

What has been the hardest business decision you�ve had to make in the last year or two?

DeLuca: In the last couple of years, all the steps that we�ve taken have seemed to be pretty easy steps, for a couple of reasons.

First of all, starting about three or four years ago, we started relying pretty heavily on researching things before we made changes. And the second thing we did was rely on our systems advisory council. So all the big groups in the organization get together with us at the company three times a year. We go over all of the research that�s been done and what changes we�re proposing to make. We debate everything.

QSR subscribers: get the answers to these questions and more in your May issue!! Where do you see the company now in terms of its development? How successful can a franchisee be with just one or two stores? Has increasing the quality of your meats also increased prices? Health, food, and exercise is not a new concept. Why do you think that�s a sellable marketing tool at this stage? Would it have been the same attraction ten years ago? How important is it to Subway to have passed McDonald�s? What does that mean to you business-wise? Was there a period when you generally were not as convenient as you needed to be? What is it, compared to McDonald�s, that makes Subway a less expensive operation? Want full coverage of every QSR interview? Subscribe now!