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Fred DeLuca, the legendary founder of Subway and visionary for the franchise business model, died last Monday at the age of 67 after a battle with leukemia.
DeLuca founded Subway when he was only 17 years old and built it into the biggest restaurant company in the world by number of locations. Subway celebrated its 50th anniversary last month, shortly after DeLuca transitioned company leadership to his sister, Suzanne Greco, who was named president.
In the January/February 1998 issue of QSR—the publication’s third overall—DeLuca sat down with then-editor Lea Davis Paul to discuss the sandwich chain’s innovative growth strategy. At the time, Subway had 13,000 locations globally; today, it has more than 44,000. The interview offered a close-up look at the inner workings of Subway’s franchise system, which has been credited with the brand’s phenomenal growth.
The Q&A with DeLuca, below, is presented without edits to showcase Subway’s brand position and strategy at the time of the interview, which was conducted in late 1997.
These days, many of the real growth opportunities in this industry seem to be going to the established multiunit operators. Could you do today what you did as a 17-year-old?
I didn’t approach it with a whole lot of strategy. My thought was to open up a few stores and make some money to pay my way through college. It wasn’t anything like what you see today, the global company with 13,000 stores.
But I think someone could start out today in the same way I did. All I did was open a small store that worked in a given neighborhood, develop some systems, and draw up a plan for expansion that eventually evolved into franchising. That process can very much work today.
When you decided to franchise your young business, did you know what you were getting into?
I didn’t give it enough thought, didn’t even think about it being easy or hard. And the expansion plans weren’t that enormous. When we started, we set a goal of 32 stores in 10 years. After eight years, we had 16 company-owned stores. The question was, How can we get to our goal? We saw Kentucky Fried Chicken growing in our area at that time and knew they were franchised, so I thought maybe we’d franchise to help us get to the goal of 32. We weren’t thinking worldwide or country-wide or even statewide. We were thinking a few people would join us as franchisees and essentially run stores they owned. The thought process wasn’t much more complicated than that. Once we got that foundation down—some franchise owners who could make a living for themselves in the local neighborhood—it enabled us to move out from our home base.
How did those early experiences shape the franchising model you use today?
I think our early operations experience shaped the franchising. Ours were small stores with low investments, simple operations, no cooking, and strong control systems. Those foundations made the stores work, and that’s what enabled us to do the early franchising—it shaped what we taught our new franchisees. The next phase, as we started getting a little larger, was codifying the system. Then we had to develop skills to expand to other markets.
Early on, we came up with a program we call development agents. We kind of invented the program; a lot of companies do something similar now. The basic idea is that if we’re going to have locations far from headquarters, how do we provide local assistance to people? We thought the right approach was to locate someone there who would have a higher level of responsibility and work with people on the local level. The development agent does what is most successfully done in the field; meanwhile, at headquarters, we do what is most successfully done in the central location. That structure has been very helpful and helped us grow in the United States and Canada.
What about when you began international expansion?
We developed a new kind of structure with a small but very critical addition. As we started to go to different countries, the distance wasn’t the factor so much as the cultural differences—new laws, different ways of getting food products. It wasn’t easy for our first franchisees to establish themselves, and there was a lack of understanding at headquarters about the local needs and practicalities. So we added a new kind of employee internationally. They go out and work with the development people, international franchisees, and local markets and act as a go-between for headquarters and the location. They translate requests and get reconciliation.
That structure has helped us open a lot of doors internationally. Two years ago, we might have been in 20 or 25 countries; today, we’re in 62. We’ve planted new seeds in a lot of places, in a pattern similar to our growth in the United States during our franchise expansion days.
Subway has enjoyed phenomenal growth.
Yes, we only crossed the 1,000-store mark in 1987 and today we’ve got 13,000, so we’ve added 12,000 stores in the past decade. It’s been quite rapid growth, fueled by existing franchisees. People sometimes ask me how we could add so many stores, and the answer is because every year 60 percent of our growth comes through existing franchisees. Nowadays, it’s probably as high as 75 or 80 percent.
You’ve named McDonald’s as a role model for growth. What might you want to do differently, in view of their recent challenges?
I think the best thing McDonald’s has done for us is that they’ve gone in new markets and trained people to be regular users of branded food in chain restaurants. That’s opened the door for other chain restaurants like Subway to come in with a different offering. In terms of McDonald’s recent difficulties, I think you have to break out the international and domestic markets. Internationally, I think they’re making a lot of progress; it’s here that they’ve had some difficulties with same-store sales.
But I don’t think these same-store sales have as much to do with growth as they do with changing consumer attributes and the resulting consumer ratings for their food. Today, people are more conscious of nutrition, and I will trace that to a specific event. I saw it happening when they began putting nutrition labels on cans that you and I can read and understand. That now is translating to what people eat outside their homes. Intuitively, they know the kinds of foods served at McDonald’s are not consonant with the nutrition they like to eat, and I think that is creating some difficulty for the chain. There are also quality issues. Over the past couple of years, Burger King has made a lot of market-share gains. The nutrition in their food is probably similar. But I think that Burger King gets a higher attribute rating for many of their products, and their marketing has fueled that. I suspect that McDonald’s will find a solution, and I don’t pretend to have the solution, either.