Subway: The Sandwich That Conquered the World

• By AllBusiness.com
• On 8:00 am EDT, Monday August 17, 2009

By Carrie Brenner

Subway, the No. 1 franchise in the 2009 AllBusiness AllStars ranking, is one of the largest franchises in the world, with locations in close to 90 countries and annual sales in the billions. But the hugely popular sandwich store has very humble origins. In the summer of 1965, recent high school graduate Fred DeLuca was desperately trying to think of way to raise money for his college tuition. At the time DeLuca worked in a hardware store, but his meager wages wouldn't have come close to covering the steep costs of college. Family friend Peter Buck approached the young DeLuca with an intriguing proposal: They could start a submarine sandwich shop together. All DeLuca needed to do was rent a store space, buy the ingredients, and start selling subs over the counter. With Buck's initial $1,000 investment, the two men quickly opened their first store in Bridgeport, Connecticut.

More than 40 years later, DeLuca is still hard at work expanding the brand and chasing new goals. "He's changed the franchise from what could have been a tired sandwich store into something that's quite vibrant today," says Michael H. Seid, co-author of Franchising for Dummies and managing director of Michael H. Seid & Associates, a franchise advisory firm. Seid says that in the last few years, Subway's focus on proteins, its expanded menu options -- customers can now choose from 11 types of bread -- and its clear marketing message have contributed to the company's amazing growth.

Most recently, Subway has seen success with its "Five Dollar Footlong" campaign. But the idea didn't come from headquarters -- it was a franchisee in Florida who first came up with the concept. "[The franchisee] hung a banner outside and Fred DeLuca drove by the store, saw the banner and said, 'Wow, what a great idea!'" explains Don Fertman, Subway's director of development. "We're the second largest franchise in the world in terms of numbers of locations; we're still entrepreneurial in that a franchise owner can come up with an idea that can be implemented across the whole chain."

Former franchisee Mark Leonard, now a franchise advisor and author of 7 Steps to Buying a Profit-Making Franchise, had a different experience when he owned three Subway locations in the San Francisco Bay Area. He found that there was little room for creativity or flexibility as a franchisee, citing the fact that the company even sets a specific angle at which the bread must be cut. Leonard concedes that Subway franchisees have been successful by following the rules established by the franchisor, but feels that "somebody who is entrepreneurial should probably look at something else."

According to DeLuca, "Right now we're doing extremely well. The added value of offering $5 footlongs has increased consumer traffic. Our job is to build sales at the unit level and that's done that." Subway's Five Dollar promotion is possible because of the company's low food costs. Subway has the power to buy goods on a very large scale and uses an independent purchasing cooperative run by franchisees, which means the savings are passed down to franchise owners.

The Five Dollar campaign is a good example of how Subway was able to turn the crumbling economy into an opportunity. Says Fertman, "If anything, our stores are doing better now than they were a year ago." Subway has also been able to renegotiate rents and continues to work with its lenders and financing partners to extend credit to its franchisees.

"With the proper management, even in troubled economic times companies can survive very well," says Seid. He adds that the sandwich market is very competitive right now, but that doesn't mean there isn't room for several contenders. Other popular sandwich franchises include Firehouse Subs and Jimmy John's Gourmet Sandwich Shops.

Those interested in buying a Subway franchise should look at all their options and research the opportunity thoroughly before signing on. Leonard, who spent a lot of money to build out his first location in San Francisco, advises that those new to the system only buy an existing location with a proven track record.

Subway will certainly be increasing its number of franchisees as it goes after its latest goal. The sandwich franchise expects to have at least 35,000 stores by 2010. "I think the ultimate goal is to expand to every single country," says Fertman.

When asked about the future, DeLuca says, "I still don't think I can go as far as I want, but I have a big vision of what's possible."

See the full list of AllBusiness AllStar Franchises for 2009.
Visit the Subway profile in our Franchise Directory.

Carrie Brenner is a writer and editor based in Southern California.

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