What Happened to Subway? Lessons from a Fast-Food Giant’s Decline
Founded in 1965 by Fred DeLuca and Peter Buck, Subway grew from a single sandwich shop in Bridgeport, Connecticut, to the world’s largest fast-food chain by number of locations. However, the brand has seen a dramatic decline in recent years. What went wrong? This article delves into Subway’s expansion and innovation, the challenges that brought growth to a halt, and their how their attempted recovery is progressing.
The Rise: A Story of Expansion and Innovation
Subway's growth story is truly impressive. In 1965, Fred DeLuca opened the first Subway shop with the help of a loan from family friend Dr. Peter Buck. During the 1980s and 1990s, Subway gained recognition for its emphasis on healthier choices in contrast to the usual fast food fare, catering to the increasing emphasis on nutrition among consumers. The brand's emphasis on using fresh ingredients, offering customizable sandwiches, and providing a value-oriented menu appealed to a wide range of people, including those who prioritize their health and those on a tight budget.
Ownership and Control
Subway was under the control of Fred DeLuca and Peter Buck for the majority of its history. DeLuca played a crucial role in Subway's ambitious expansion strategy, with Buck offering valuable financial backing and support. The duo maintained control over the company, resisting pressures to go public, which enabled them to pursue growth without the scrutiny of Wall Street. Nevertheless, being privately owned masked strategic blunders due to the lack of transparency.
Peak and Market Saturation
By the early 2000s, Subway had become the largest QSR chain by number of locations globally, surpassing even McDonald’s. To continue their rapid expansion, though, the company would benefit primarily from two different ad campaigns: Jared Fogle and the $5 footlong. Jared Fogle quickly became a highly publicized college kid who claimed to have lost over 200 pounds by eating Subway sandwiches. Subway leaned into their new spokesman and his oversized pants for a few years, in line with one of their core brand messages of healthy food. This campaign was front and center until Subway’s focus shifted to the $5 footlong in 2008.
Stuart Frankel, a Subway franchisee in Miami, started his own $5 footlong campaign in 2003. Within the first two weeks of this campaign, his sales lept from $14k to $23k per week. Many other franchisees, witnessing Frankel’s success, followed suit with great success for a number of years. It wasn’t until March of 2008 that executives from Subway decided to debut the $5 footlong as a national campaign. It couldn’t have come at a better time for Subway, too, as later in 2008 the food service industry would see a significant shift towards value. This promotion fueled growth until it was quietly phased out in 2012.
Between 2006 and 2013, Subway added thousands of locations every year, accumulating over 27,000 U.S. locations by 2013. They had attracted many franchise owners with the company’s widespread success and their low relative entry cost, many of whom had little to no prior business experience. In the 13 years since the beginning of the 21st century, Subway experienced over 170% growth in top line revenue.
Data: QSR, news reports
Note: Some figures are estimates, as Subway is a privately-held company. Sales figures adjusted to 2023 dollars using the Consumer Price Index.
The Decline: A Perfect Storm of Challenges
Market Saturation and Cannibalization
This aggressive expansion, however, came at a cost. New U.S. Subway stores placed too close to existing franchises were cannibalizing sales. One Subway store’s success came at the expense of another’s, diluting the brand’s market presence and profitability. Average Unit Volume (AUV) rose with the location count through 2013 then saw a steep drop-off that it has yet to recover from.
Despite a falling AUV in 2014, almost 800 new stores were built that year. However, a year later, stores began closing en masse starting a 10-year series of negative unit count growth. While oversaturation wasn’t the only reason for the downturn, the brand’s overly ambitious growth strategy had backfired.
Changing Consumer Preferences
Around 2013-2014, there was a significant shift in consumer preferences back towards fresher, healthier, and more transparent food options. Brands like Chipotle and Panera Bread capitalized on this trend, offering customizable, high-quality menu items with a strong emphasis on sourcing and sustainability. Subway, who had been heavily marketing their value proposition through $5 footlongs, didn't adapt well to this shift despite its “Eat Fresh” slogan. The brand’s reliance on cheaper, processed ingredients allowed it to capitalize when its customers were trading down after the 2008 financial crisis, but left it flatfooted when the markets shifted towards healthier options. Subway’s failure to innovate here left it lagging behind competitors who were better aligned with the evolving tastes of consumers.
Leadership Challenges and Strategic Missteps
Fred DeLuca was diagnosed with leukemia in 2013. In his absence, the company faced a leadership vacuum. His sister, Suzanne Greco, filled in as acting president in 2015, but the transition was anything but seamless. Greco took over a struggling company experiencing a downturn in sales, growing discontent among franchisees, and a tarnished brand reputation.
Although effective leadership played a vital role in Subway's success, DeLuca's centralized approach led to a lack of clarity in the company's direction during his absence. The leadership team faced challenges in maintaining a cohesive vision for the brand, resulting in misguided strategies. Subway's attempts to revitalize its brand with initiatives such as the "Fresh Forward" store redesign and updates to its menu came about too late and were insufficient. The company's inability to tackle the core problems of quality control, relationships with franchisees, and brand perception overshadowed its efforts to innovate with new ingredients and digital platforms.
Internal Conflicts and Franchisee Dissatisfaction
The relationship between Subway’s corporate leadership and its franchisees became increasingly strained during this period. Franchisees, who were already struggling with declining AUVs and increased competition, felt that the company was not providing the necessary support. The aggressive expansion strategy, coupled with rising operational costs, led to a wave of store closures. Franchisees accused the corporate leadership of being out of touch with the realities on the ground, leading to widespread discontent and a lack of cohesion within the brand.
Attempts at Revival: A Struggle to Adapt
Fresh Forward and Menu Innovations
In response to declining sales and customer dissatisfaction, Subway launched the “Fresh Forward” initiative in 2017, a comprehensive store redesign aimed at modernizing the brand’s image. The initiative included updated decor, new digital menu boards, and revamped food displays designed to highlight freshness. Additionally, Subway introduced new ingredients and menu items in an effort to reinvigorate its offerings.
However, inconsistent execution and a lack of clear differentiation from rivals hindered these efforts. While some remodeled stores saw a slight uptick in sales, the overall impact was minimal. The brand’s core issues—overexpansion, inconsistent quality, and a tarnished image—remained largely unaddressed.
Digital Transformation and Technology Adoption
Subway also sought to update its operations by embracing digital transformation. The company launched online ordering, a mobile application, and a loyalty program to attract tech-savvy customers. Although these initiatives were important moves forward, they ultimately fell short of addressing the underlying challenges faced by Subway. Rival companies such as McDonald's had already built robust digital platforms, putting Subway at a disadvantage as it tried to keep up in a fast-changing environment.
The Impact of Private Ownership
Throughout its journey, Subway remained privately held, which allowed the company to pursue aggressive growth strategies without public scrutiny. However, this lack of transparency also meant that the company’s challenges were often obscured from public view until they reached a crisis point. Fred DeLuca’s centralized control over the company’s direction, while effective during the growth phase, may have contributed to a lack of adaptability in the face of new market realities. After DeLuca’s death, the absence of a strong, visionary leader left the company vulnerable to strategic missteps and internal conflicts.
Acquisition by Roark Capital and Future Prospects
Roark Capital, a private equity company with experience managing and reviving struggling restaurant brands, acquired Subway in April 2024. The sale signaled a significant change for Subway, which had been under the DeLuca and Buck families' control since its inception. Roark Capital’s acquisition has brought a new set of challenges and opportunities as the firm begins to implement its strategy for turning the brand around.
Under Roark’s direction, Subway has focused on consolidating its operations, improving franchisee relations, and investing in innovation. However, the path to recovery is fraught with challenges. Subway must contend with a competitive landscape, a fragmented brand image, and a franchise network that has endured years of decline.
Lessons to Learn from Subway’s Journey
Subway’s journey from an industry leader to a struggling brand offers valuable insights for businesses across industries. While the specifics of Subway’s challenges are unique, the underlying issues that led to its decline are common across many businesses. Here are the key lessons that can be drawn from Subway’s story, particularly in relation to brand experience:
Balance Growth with Sustainability
Subway’s bold expansion strategy, though initially successful, ultimately led to market saturation and a long-term negative impact on brand integrity. Especially in a franchised brand with many inexperienced operators, scaling too fast without building the necessary support and infrastructure doesn’t have a good outcome. It’s crucial to prioritize quality over quantity, ensuring that each new location or product addition enhances the brand rather than dilutes it.
Adapt to Evolving Customer Needs
Subway’s initial success was built on its appeal as a fresh and healthy fast-food alternative. However, as consumer preferences shifted towards more transparent, sustainably sourced, and higher-quality food options, Subway struggled to keep up. Sustainable growth doesn’t happen without intentional alignment with customers preferences. A customer’s satisfaction is highly dependent on their preconceived expectations, and when their experience doesn’t meet their expectations, their expectations get lowered. Further, if their expectations become too low, they won’t be dissatisfied because they won’t be your customer anymore. Regularly gathering and acting on customer feedback is essential to staying relevant in a dynamic market.
Strong Leadership Requires Team Alignment
Fred DeLuca’s leadership was instrumental in Subway’s rise, but the leadership vacuum following his illness and death exposed the brand’s vulnerability. Leadership transitions, especially in privately held companies, can significantly alter a brand's trajectory. Strong, adaptable leadership is crucial for guiding a company through periods of change and adversity. Leaders must be able to inspire, innovate, and make tough decisions that align with the long-term vision of the brand they lead. Moreover, it’s crucial that the leadership team as a whole is aligned with this vision, ensuring that the company can weather challenges even in the absence of a singular visionary leader.
Consistency is Key to Brand Loyalty
One of Subway’s significant challenges was maintaining consistent quality across its vast network of franchises. Inconsistent service quality and product standards across Subway locations led to customer dissatisfaction, eroding trust in the brand. This highlights the importance of maintaining strict quality control and ensuring that every customer interaction reflects the brand’s values and standards. Consistency in product and service quality is essential to building and maintaining customer loyalty.
Innovation Must Align with Brand Identity
While Subway did attempt to innovate with new menu items and digital platforms, these efforts were not enough to counteract the brand’s declining relevance. The lesson here is that innovation is vital, but it must be purposeful and aligned with the brand’s core identity. For instance, Subway's attempt to revitalize store appearance in 2017 didn’t embody their guiding principles, and left customers relatively unimpressed. Successful brands innovate in ways that reinforce their unique value proposition and exceed customer expectations.
Support and Empower Your Franchisees
The growing tensions between Subway’s corporate leadership and its franchisees illustrate the importance of maintaining strong, supportive relationships with franchise partners. Franchisees are the frontline representatives of the brand, and their success is directly tied to the brand’s overall performance. Your franchisees should be among your largest advocates. Brands must prioritize clear communication, provide adequate support, and involve franchisees in decision-making processes to ensure that they are motivated and aligned with the company’s goals.
Final Thought
The decline of Subway highlights the critical importance of adaptability, strong leadership, and a profound awareness of customer preferences in successfully navigating challenges within the retail landscape. As Subway advances under new ownership with Roark Capital, its ability to learn from these past mistakes will determine whether it can regain its past prominence or continue to face challenges in an increasingly competitive market. For other businesses, the insights gained from Subway’s journey are clear: growth must be sustainable, customer preferences must be carefully observed, and brand integrity must be fiercely protected.
These lessons underscore that success in business is not just about rapid growth or market dominance—it’s about creating a brand experience that consistently meets and exceeds customer expectations.
References
Crockett, Zachary. “The Rise and Demise of Subway’s $5 Footlong Promotion.” The Hustle, February 28, 2021. https://thehustle.co/the-rise-and-demise-of-subways-5-footlong-promotion.
McFadden, Robert D. “Fred DeLuca, Hands-on Co-Founder of Subway Sandwich Chain, Dies at 67.” The New York Times, September 16, 2015. https://www.nytimes.com/2015/09/16/business/fred-deluca-co-founder-of-subway-sandwich-chain-dies-at-67.html.
Subway. “The Subway Story,” 2024. https://www.subway.com/en-us/aboutus/history.
QSR Magazine. “Quick-Service and Fast Casual Restaurant News and Information - QSR Magazine - QSR Magazine,” May 31, 2024. https://www.qsrmagazine.com/.
U.S. Bureau of Labor Statistics. “CPI Inflation Calculator.” Accessed August 30, 2024. https://www.bls.gov/data/inflation_calculator.htm.
