In terms of fast food restaurant franchises, Subway had always seemed to be the franchise of choice. In fact, Subway’s profitable franchise model is what got many potential franchise owners to invest, leading to Subway’s boom in the United States and the rest of the world.
But in the past years, the number of new Subway franchises appears to be dwindling. This late into the game, how profitable is opening a Subway franchise? And are the profits worth the cost, or is it much more practical to look into other options? Here’s what you need to know.
Before it was one of the fastest-growing franchises in the world, Subway began as a restaurant called “Pete’s Super Submarines” in Bridgeport, Connecticut. In 1965, founder Fred DeLuca borrowed $1,000 from co-founder Peter Buck as capital to build the restaurant, which was only supposed to pay for DeLuca’s medical school tuition and Buck’s doctorate. Three years later, it was renamed “Subway.”
Their restaurant was a financial success and would go on to open franchises throughout the United States. Two decades later, the first Subway outside North America opened in Bahrain in 1984. Surprisingly, it exceeded the number of McDonald’s worldwide, with 33,749 branches – over a thousand more stores than McDonald’s.
In terms of franchising, Subway has consistently been one of the top growing franchises in the world. They saw a setback in 2016 when hundreds of US stores experienced a net loss that resulted in a few hundred stores closing down., and this continued to 2017. As of 2020, there are over 41,500 Subways worldwide, all of them independently owned.
Costs of Opening a Subway Franchise
Arguably, the reason for Subway’s fast growth and appeal to potential franchise owners is its low-cost high-return model.
Let’s look at McDonald’s franchising costs. On top of the $45,000 franchisor fee, a franchiser will have to spend at least one million dollars on all the franchising costs. Not all small business owners have that kind of money on hand or have the means to get a business loan that large.
In comparison, Subway franchises are much more affordable to the average small business owners in the United States. Their licensing fee is at $15,000, much cheaper than other popular food brands like McDonald’s.
The total cost of opening a Subway is estimated at $150,000 to $300,000. In terms of franchising, that’s the cost of a less popular restaurant franchise. Yet, Subway’s popularity rivals the big names of the fast-food industry yet keeps its franchising costs low.
How to Open a Subway Franchise
Like any business, you should start by doing thorough research on Subway, the profitability of franchises in your area, and available areas where you can set up your franchise. If you’re feeling a little lost, consult with a franchise consultant or contact Subway’s franchising team to ask for more information.
Not all franchise applicants are approved for a Subway franchise. At minimum, an approved Subway franchise must have:
- A good location to establish the franchise (subject to approval);
- Detailed market research and business proposal;
- A net worth of at least $80,000;
- Liquid cash requirement from $30,000 to $90,000.
Once a franchisee applicant has this, they must sign a licensing agreement, which gives the franchisee the right to use Subway’s operational procedures, trademarked property, and branding. This means that the franchisee is allowed to advertise their Subway franchise as long as it fits in with the Subway brand. The franchisee will also benefit from the marketing Subway’s corporate does for all franchisees.
Why Not Subway?
Over the years, however, Subway franchises have begun to decline. With thousands of stores closing since 2016, potential franchisees are wary about hopping on the Subway as a form of investment. So, clearly, profiting from a Subway franchise may not be as easy as it seems.
Based on Business Insider’s research, Subway is at a decline. From 2012 to 2017, Subway saw a 25% fall in business. This is due to the thousands of franchises all over the world that are closing down due to the lack of sales.
Subway saw a two-billion dollar boom in the ‘90s and early ‘00s. During this time, Subway’s marketing focused on how it was the healthiest fast-food option in the market. But by the recession in the late ‘00s, consumers were more concerned about prices than healthy options, so Subway had to re-center its advertisements and highlight the value in their sandwiches for just $5.
This rebrand helped them pull through the recession. But by 2014, the novelty had run its course and Subway began failing in sales. Since then, thousands of franchises had had to close down due to the financial failure over the years.
Arguably, Subway invented the “open kitchen” style that its known for. Unlike other fast food restaurants like McDonald’s, you can see the fresh ingredients put into your sandwich and see to it that the Subway staff are making it according to your directions. This has allowed Subway to gain the “healthy” fast food advantage in an industry where health is a hard-to-reach advantage.
But in the advent of technology and innovation inventing a style does not mean you will always stay on top of your competition – especially if your competition knows how to innovate.
In the past, Subway was in a league of its own as restaurants like McDonald’s, Arby’s, and White Castle had a different model. Then, Quiznos, Jimmy John’s, Firehouse, Potbelly, Jersey Mike’s, and Panera came along and innovated on Subway’s open kitchen model.
As a result, these restaurants took away market shares that originally went exclusively to Subway. Subway could not then claim to provide the healthiest and freshest ingredients when other businesses could claim they could bring produce in daily.
It also didn’t help that less healthy fast-food restaurants like McDonald’s and Wendy’s were also innovating and creating menu items like salad, parfaits, fruits, and other “healthier” options. These also ate away at Subway’s market share even more.
Subway, on the other hand, has remained stagnant in the last few years. It’s the same model, the same sandwiches, and not much else for people to choose Subway over any other fast food restaurant.
Subway’s low-cost franchising that has once been attractive to franchisees is now the reason many are suffering. With its model making it relatively easier to franchise compared to other fast food franchises, it’s much easier to oversaturate a certain area with Subway franchises.
Thus, franchisees will be competing with other franchisees for a market share in a specific area. Think of it this way: if you franchise a Subway in a good location in your area, you could be making a thousand dollars a day in sales. But because of how easy it is to establish a Subway franchise, two more can open in your area. This could cut down your sales to a third because now consumers have more options on which Subway to go to.
Unlike other fast food franchises that are picky about an applicant’s location relative to their existing franchises, Subway’s franchise contract does not protect existing franchises. So, if you do decide to franchise a Subway, there’s no guarantee that you’ll be the only Subway franchise within that area.
The high competition from other franchises and other Subway franchise owners hurts franchise owners more than it will hurt Subway itself.
In 2012, prior to Subway’s decline, the average Subway franchise generated $482,000 in revenue. By 2016, that had dropped to $422,500. These numbers have to do with the fact that more Subways are opening but are not earning as much thanks to the increased competition.
High Royalties & Cost of Business
While Subway is much more accessible to franchise than other fast food restaurants, it eats up a much larger portion of their franchisees’ gross sales. Subway’s royalty fees are at 8%, which is twice of what McDonald’s charges its franchisees at 4%. It’s a small number, but for small business owners it can mean significant thousands of dollars that could be the difference between profitability and loss.
Aside from royalties, Subway franchisees are also required to pay another 4.5% of their gross sales to Subway as part of the ad fund fee. This goes to the advertising Subway Corporate makes that benefits all franchises.
So, in total, even after the Subway is established, franchisees will have to shoulder 8.5 percent total of their gross sales back to Subway.
Should I Still Franchise a Subway?
That is not to say that Subway franchises were not successful. These drawbacks are simply to show that franchising Subway isn’t as profitable or as easy as the company may make it out to be. So, don’t get too hasty calling Subway to apply as a franchisee until you know for sure what you’re getting into.
Your best course of action is to develop a business model, invest in market research, and look at the area you plan to open a Subway in. The ideal location is a place with no Subway franchises in the area and little to no similar fast food restaurant competitors in a high-traffic location. If you’re not totally sure, hire a consultant to help guide you through this decision.