Subway's Meteoric Rise and the Untold Story of How it Dethroned McDonald's

What is something about the largest fast food chain that you probably can't find on the internet? Well, if you're thinking about McDonald's, you would be wrong. The largest fast food chain is actually Subway with approximately 40,000 restaurants throughout the world.

But why are there 40,000 units? Obviously it makes sense that the more units you have the more money you can make, but McDonald's locations are much more profitable on a per unit basis than Subway is.

Why is there this disconnect?

How did Subway grow from selling about 300 sandwiches per day to almost 10 million today?

There are a lot of lessons in that growth and in the Subway story. The company was founded in 1965 by Fred DeLuca with an investment by a doctor named Peter Buck. The first day they sold about 300 sandwiches. The concept, which we all know now, is to see the food made in front of you with fresh meats, fresh produce, made your way on a variety of different breads.

It seems commonplace now, but at the time it was a novel concept.

For many restaurateurs. When starting a new chain, the goal is to franchise and grow. Fred DeLuca's goals were very ambitious. In the franchise world, many people talk about a franchise's territory and how far from the doors that territory goes. At Subway, your territory ends right at your location’s front door. There could be a Subway on one corner, and another franchisee could open up right across the street.

Fast forward to today and you can definitely tell that there are areas where Subway is oversaturated. My personal opinion is that a big reason for that is the approach that Subway took toward development. There is one key theme that persists throughout the Subway franchise that is relevant in terms of the approach that different types of business owners take.

Looking back to the development goals and strategy that Fred DeLuca employed, it was really about minimizing upfront costs and maximizing unit growth at all costs. On the surface, this sounds good because lower upfront costs mean that more people can become a franchisee, as opposed to more expensive chains like McDonald's.

But this has led to some maybe unexpected impacts. For example, Subway has a few characteristics that don't exist in other chains. First, it is quite common for Subway franchisees to not optimize the location of their restaurant based off of foot traffic, accessibility, etc. A lot of these folks, with the goal of minimizing their upfront costs, would pick real estate that was quite frankly the cheapest. It was the lowest risk, the lowest monthly rent, lowest tenant improvement fees, etc.

That's great in terms of getting your store counts up, but in the long term you're going to have locations that are subpar in terms of real estate and, instead of having $500,000 in unit sales, perhaps if that store had moved a few blocks away could have been a $1 million revenue store.

There are a few different areas in which Fred's desire to grow actually hurt the chain in terms of total revenues because of, in this case, real estate selection. The other example is how the franchise base is constituted. Subway has a vast number of franchisees. There are far more franchisees in the Subway system than in systems like McDonald's, Burger King, etc. The average in the US is between one and two units per franchisee, which is very low. Why is that? The whole concept around starting a Subway restaurant was almost like buying a job. Subway ownership has been a stable source of income for a lot of families — which is great — but what you find is less sophistication with franchisees that own one to two units, as opposed to franchisees that own 10, 20, 30, or 40 units and are able to run them together like a true business.

In larger systems, you do see a higher level of sophistication in management practices people sharing, etc. It's just a different type of approach and it's a different mindset whenever you are running 10 stores as opposed to one or two.

Then of course, when talking about Subway, the elephant in the room is Jared. Whenever a brand is attached very closely to one specific person or personality they can enjoy a great amount of goodwill from that affiliation, but they can also suffer a great deal of harm.

Jared was the classic story of both. It was such a great story because he lost all that weight, but it turned into a tragic story once we all learned about what type of person he was. That's the risk you run whenever you attach your business to one specific person or personality. There are parallels at other companies and how they use athletes as branding ambassadors. Hopefully they won't get into the Jared situation again, but if one of those athletes falls into disfavor for whatever reason it could harm the brand.

For example, Tiger Woods. There was a period where a lot of advertisers weren't too keen on putting him front and center. You've seen a lot of stories as of late where brands are ending their affiliation with their ambassadors because of something they do on social media or some story that pops up after Jared.

The next big event in the history of Subway was the death of Fred DeLuca in 2015. After he died, the brand went through a very tough transition at the top. First, his sister took over. Looking at the performance of the brand as a whole, that certainly wasn't a period of great success.

After one sister took over, it was rumored that another sister was going to take over. What was lesser known at the time was that Fred's widow actually had the right to come in, take control of the company due to what was provided for in the will. She stepped in, installed professional management, and the company's now really doing quite well. The CEO she hired is named John Chidsey who previously led a turnaround at Burger King. From the outside, it appears as though the playbook he used at Burger King is largely being used at Subway.

They've done a lot of great things and the brand is on an upward trajectory. They've refreshed the stores, they have totally revamped the menu and updated the underlying proteins, produce and breads. They've kicked off additional marketing campaigns and we’re now seeing month after month of record sales gains and store performance for the brand.

It's really a positive story in the end.