Subway finds itself in a somewhat unique growth position.
Among three biggest restaurant players in the U.S. in terms of footprint—Subway, McDonald's, and Starbucks—the sandwich chain is the only one with a bigger domestic footprint than international. Meaning, the brand is confident in its whitespace beyond the U.S.'s borders, to the tune of eight master franchise and development agreements in the past year for nearly 5,000 future restaurant commitments. That's across Asia Pacific, Europe, the Middle East, Africa, India, Latin America, and the Caribbean regions. The brand believes there's potential to double its international footprint. Subway has more than 37,000 stores worldwide, including roughly 21,000 in the U.S.
In the U.S. and in some international markets like the U.K., Subway is pursuing multi-unit and multi-brand operators as opposed to the single-unit franchisees that make up most of the system today. In other geographies, the brand relies on master franchisees with better expertise in a particular region.
QSR recently spoke with Subway's Asia Pacific president Eric Foo; Europe, Middle East, and Africa president Mike Kehoe; and Latin America and the Caribbean president Jorge Rodriguez to get a better sense of how pipelines are growing across the globe.
What’s Subway’s current growth strategy in each region? What areas are you targeting and what are the whitespace opportunities?
Foo: With over 3,300 restaurants across 15 markets, the Asia Pacific region continues to be a huge opportunity of growth for Subway. As part of the brand’s multi-year transformation journey, our goal is to expand the footprint in the region to over 6,000 locations within the next five years.
We have started this effort in Malaysia and Thailand by signing master franchise agreements and in Indonesia with a country development agreement. Additionally, we are continuing to evaluate under-tapped markets, such as Indochina (Cambodia, Laos, Myanmar, and Vietnam), for future growth.
These agreements have already proven to be valuable in helping expand the presence of the Subway brand in each country. For example, in Indonesia, a brand-new market for Subway, we’ve been able to open 28 locations in the past nine months and have seen consistently strong AUVs across all the locations. The country developer, a major player in the Indonesian F&B market serving brands such as Starbucks and Krispy Kreme, has brought their extensive knowledge of the market and already established infrastructure to help us quickly grow and ensure we’re opening Subway’s in the right locations and format. Because of this initial success, landlords in the region see the benefit of having a Subway on their property and are now approaching us to build restaurants in their shopping center or mall.
Kehoe: Given the geographic, cultural and economic differences across the 50 EMEA countries in which we operate, our development strategy varies across the region. Overall, we see significant growth opportunities in our existing markets, and we will utilize various go-to-market strategies to capture the growth.
Similar to the other regions, we have recently partnered with several well-established, sophisticated operators to help us expand our presence in the region. Over the last year, we have signed master franchise agreements in the United Arab Emirates, India, Saudi Arabia, and Kuwait. Our agreement in India, which will bring more than 2,000 new restaurants to India, Sri Lanka, and Bangladesh over the next 10 years, is our largest ever master franchise agreement and one of the largest in quick-service restaurant history. In Kuwait, our new franchisee has opened 18 new restaurants in the first six months of the year.
Looking ahead, we see a lot of opportunity to expand our operations in Europe, in countries such as Spain, Poland, and Italy. Growth in these countries will be determined by finding the right master franchisees.
Rodriguez: Latin America and the Caribbean islands continue to present a significant growth opportunity for our brand—well beyond our current portfolio of 3,800 restaurants across more than 30 countries.
Similar to other regions, we are joining forces with experienced and well-capitalized multi-unit owners and master franchisees to meet or exceed our goal of opening 900 new restaurants in our region over the next five years, increasing our current LAC footprint by more than 25 percent. LAC is a diverse and culturally rich market and, as we move forward, we are evaluating prospective new partners with local expertise—partners who typically operate other major retail or quick-service restaurant brands and have a track record of successfully running and growing brands in the region.
An example of this strategy is our recently announced master franchise agreement with a leading Brazil-based multi-brand restaurant operator, who will accelerate our expansion in one of the company’s largest markets. This agreement is the first of its kind for Subway in Latin America and marks the first step in our ambitious growth plan for the region, setting the tone for similar agreements in other countries to increase our footprint and improve the customer experience.
How does franchise development in this part of the world compare to the U.S.? What are the biggest differences?
In the U.S., we are strategically focused on the quality of our restaurants through optimizing our footprint, broadening our franchisee profile, and focusing on remodels to drive profitability for franchisees to prepare for future growth.
Internationally, we are seeing a significant demand for Subway and are aggressively pursuing opportunities to expand our footprint. In addition to partnering with well-established and well-capitalized operators across the regions who are committed to expanding Subway’s presence, we are also leveraging their local expertise to help us navigate cultural and regulatory differences so that we can grow quickly and efficiently.
Our development team’s understanding of cultural differences and experience in international franchise development has also helped us recruit new operators into our system. For example, in LAC, we know that potential operators value that Subway is a family-owned brand and deals are made by building genuine, familial-like relationships over a long period of time.
What characteristics do you look for in new franchisees? Are you focusing more so on multi-unit operators or single-unit franchisees? How big are the deals typically? i.e. 5-unit agreements, 12-unit agreements? Larger, smaller?
Internationally, we are looking to attract well-resourced, multi-unit franchisees that can help ensure we remain competitive for years to come and, ultimately, drive continued profitability systemwide. These partners have a proven, successful track record, strong organizational infrastructure and shared values with Subway.
In some markets, such as Brazil, Indonesia, and India, this is done through a master franchise agreement or a country development agreement, while in other well-penetrated markets, such as the U.K., we are strategically focused on the quality of our existing restaurants, looking to optimize our footprint and recruit more multi-unit franchisees, including corporate partners operating nontraditional venues. The scale of each agreement is tailored to the specific market.
To find the best partner to help expand our footprint in a market, ahead of signing each master franchise agreement or multi-unit deal, our development team conducts due diligence, which includes an evaluation of industry experience, leadership skills, cultural fit, and financial health. The team then works closely with the partner to determine opportunities for growth in the coming years.
How are the real estate opportunities in this part of the world? Are there a lot of second-generation opportunities?
Real estate opportunities vary based on the country and region. In certain areas, we are seeing increased competition for real estate, resulting in the need for us to be even more strategic in our site selection and use of space in the restaurants.
To help us evaluate real estate opportunities and ensure our restaurants are in the right image, right location, and right format we leverage the local knowledge of our teams and franchisees, as well as advanced market planning tools. For example, across all of the regions, we are seeing an increased demand for drive-thrus and, as a result, are looking for real estate opportunities with drive-thru capability.
By using both qualitative and quantitative data, we’re able to identify opportunities in a particular area or region and make smarter decisions about what location and format would help maximize profitability.
In the U.S., operators are now opting for smaller spaces because of lower costs and the rise of off-premises. Are you seeing the same trends in the regions?
Foo: Subway’s flexible footprint is especially beneficial in the Asia Pacific region where we have 15 markets with distinct cultures and ordering preferences. During the pandemic, when many economies were on lockdown, concepts, such as grab-and-go models, vending machines, express kiosks and drive-thrus continued to drive business to our locations.
When opening new locations, we work with franchisees to look at the market and determine the best size and format for their restaurant. For example, in Thailand, restaurant formats tend to be smaller, as guests often opt for third-party delivery vs. dining in. While in South Korea, guests like the experience of dining in, so restaurants are larger with more tables for guests to enjoy their meal.
Kehoe: As rent prices increase across the region, we are seeing more smaller format locations, especially in cities, such as the U.K., where space is limited and convenience is a priority for guests. We’ve also seen off-premises increase significantly across EMEA and are adjusting our format to meet increasing digital demand. However, we strongly believe that post COVID-19, guests want great experiences as well, so we are also working hard to improve our dining area for a better on-premises experience.
Working with master franchisees in the region has allowed us to pilot innovative new formats. In Kuwait for instance, the master franchisee has opened 10 ghost kitchens. This is a relatively new concept for EMEA, allowing us to serve the growing demand for delivery and a seamless off-premises experience. To date, we’ve found that the ghost kitchen, complements our existing locations, allowing us to deliver to the guest faster and offer expanded hours.
Rodriguez: In LAC, Subway’s flexible format allows us to accommodate the varied guest preferences across the region and experiment with a mix of both small and larger traditional restaurants as well as non-traditional concepts.
In less urban areas, Subway is often a destination for families wanting to dine in, so we’re developing larger format restaurants. While in large cities, such as São Paulo, guests are looking for a quick, convenient option, so we’re experimenting more with grab and go, third-party delivery, and curbside options.
Across the region, we have seen an increase in digital and online orders and are focused on bringing third-party delivery, curbside and drive-thrus to more of our locations using our learnings from other markets. For example, in Puerto Rico, half of our restaurants now include drive-thrus, which have been successful in driving traffic to the locations, and, in Mexico and other countries, the team is piloting unattended retail.
Are there as many supply chain issues in the regions as there are in the U.S.?
Globally, we are seeing industrywide supply chain challenges; however, Subway is faring well and the challenges continue to steadily improve and stabilize.
Across all the regions, we collaborate with IPC, the member-owned, managed and governed supply chain cooperative of Subway franchisees, to minimize disruptions to our franchisees’ restaurants. Our priority is to ensure our franchisees have the products they need to keep their businesses open and profitable. We are fortunate to have long-standing, strong relationships with our supply chain partners, and are able to work alongside them to address any supply issues and find alternatives for our guests to enjoy.