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COVID-19 has not been kind to restaurants, as we know. But for Subway restaurants, the problems are much broader.
Subway is the world’s largest restaurant chain with nearly 42,000 locations, more than Starbucks or McDonald’s. But the chain is shrinking rapidly. It was already experiencing difficulties pre-pandemic and closed several thousand restaurants in North America. And a multitude of its franchisees won’t survive the pandemic.
And there are even more problems on the horizon for Subway.
Ireland’s Supreme Court ruled this month that rolls made by Subway contain too much sugar to be legally considered bread. The decision stems from an appeal by Bookfinders Ltd., a Subway franchisee in Ireland, which stated that it shouldn’t have to pay tax because many of the products it sells are "basic foods" and should benefit from a preferential rate.
In the end, the highest court in Ireland ruled that Subway sells cake, or high-sugared buns, not bread, according to that country’s laws. For the rest of us, it is indeed bread, but with a lot of sugar. Anyone who has ever visited a Subway could tell you this was obvious by the scent.
This isn’t the first time the chain has been affected by hugely negative publicity.
The CBC ordered a DNA analysis of several fast-food chicken sandwiches and concluded that Subway chicken was actually only half meat, with the rest made up of soybeans. Subway strongly refuted the allegations, claiming the CBC’s report was "absolutely false" and calling for a retraction. But an Ontario court recently agreed with the CBC.
And a few years earlier, the chain was accused of selling 11-inch sandwiches, not a full one foot, or "footlongs," as they’re called. It’s been one disaster after another for this American chain. While some will say this is fraud, others will maintain that the chain is just showing a lack of judgment. Regardless, the image of the chain has been tarnished.
The chain is trying to restore its reputation this fall through a new campaign. The sandwich giant revealed its latest marketing scheme in September with ads that will air during the National Football League season. They will feature New England Patriots coach Bill Belichick, former NFL player Deion Sanders and current players/siblings J.J., T.J. and Derek Watt.
This campaign could be vital for the company and its franchises. They have struggled to regain marketing relevance after ending the ads that included the now-infamous Jared Fogle, a convicted sex offender. The chain’s sales have been faltering for years and thousands of their restaurants have closed.
Apart from marketing and procurement gaffes, Subway’s business model is severely challenged. Its approach encourages franchisees to open thousands of cheap locations around the world, often dangerously close to existing Subway stores.
With sales falling and too many locations, many Subway franchisees are struggling to make a profit. Franchisees are still required to pay eight per cent of their sales, one of the highest percentages in the industry.
Thousands of Subway locations across Canada, the United States and elsewhere have been opened by franchisees themselves. Their market evaluations were conducted independently of the parent company. Getting a Subway franchise isn’t that expensive, either. It only costs $150,000 to $350,000 to open a Subway, making it one of the cheapest franchises in the restaurant industry. For McDonald’s, the cost is between $1.5 million and $2.5 million to open a single franchise.
The pact between the parent company and the franchisees is also quite different.
With its image problem and shaky business model, if this fall’s campaign doesn’t work for Subway, the number of franchises will drop dramatically. That could even lead to the chain disappearing completely within a few years.
Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.
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