Subway Finds A New Way To Squeeze Franchisees

As the eighth largest fast food chain in America, Subway is well known for a few things: its $5 footlong deal, whose 15-year history has been fraught with controversy, and its massive footprint. The sandwich chain has more than 20,000 U.S. locations, many of which are owned by franchisees that have the freedom to accept or reject certain promotions from Subway corporate. Until now, that is.

Business Insider reports that a leaked memo from Subway's corporate headquarters to franchise owners states that beginning December 28, "all restaurants will be required to honor all digital programs and promotions, including loyalty rewards and digital discounts." The memo also notes "loyalty incentive programs designed to attract new loyalty members are mandatory and will not be reimbursed by Subway." For franchisees operating on razor-thin margins, this could be one more method of chipping away at their earning potential.

In the past, even when Subway was most fervently promoting deals like the $5 footlong (which debuted in 2008), individual franchisees could decide whether their shop would choose to partake in it. When corporate brought back the deal in 2018, many franchisees complained the slim profit margins on this promotion could lead to the permanent closure of some locations.

Flash forward to 2020, when Subway corporate tried once more to push a less than profitable promotion on franchisees in the form of a Buy One Get One deal on footlong sandwiches when customers ordered online or through the app. This was done in an attempt to boost Subway's digital sales, but the brand clearly stated that no additional compensation would be provided to franchises to cover the cost of the free footlong—that would fall to the franchisees themselves. Later that same year, Subway attempted to make the $5 footlong deal work again by offering franchise owners $700 in monthly rebates, but as the latter group pointed out, this was not enough to offset the costs of the deal.

Despite this long history of objections to various money-losing promotions, Subway recently told Restaurant Business that 90% of its operators accept digital deals. However, two franchisees also told RB they believe that 90% figure is too high; many operators, they explained, "cherry pick" the deals they accept in their stores.

In addition to pushing unprofitable promotions, in recent years Subway has also raised operating fees and added language to its 20-year franchise agreements that force restaurants to remain open 364 days a year. If a given location closes its doors more than once in a calendar year, it risks being taken over by Subway corporate.

Subway is currently in the midst of being sold to Roark Capital for $9.95 billion. However, the sale is under scrutiny from the FTC, as Roark owns other major sandwich chains such as Jimmy John's, which raises concerns about a potential monopoly in the sandwich industry.