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Subway offers franchisees a difficult choice: higher prices or a new “draconian” deal. The deal allows Subway to control hours, requires participation in deals, and bans criticism. If franchisees do not want to sign, their royalties rise to 10%, whereas they were already high at 8%. See more stories on the Insider business page.
Subway is forcing franchisees to choose between higher fees and a new “draconian” deal, creating yet another conflict within the struggling chain.
In recent weeks, insiders have been creating a buzz about a new deal Subway presented to franchisees upon renewal. The deal is significantly stricter than the previous one, giving Subway control over hours of operation, requiring franchisees to participate in menu promotions and banning negative comments about the company “in any forum.”
A Subway representative told Insider the deal was “competitive and comparable to other franchise deals” in the restaurant business. John Gordon, an expert in the restaurant industry, said “no one in their right mind” would sign Subway’s new “draconian” deal.
Subway franchisees have another option if they don’t want to sign the new agreement, but it’s financially onerous.
Franchisees can stick to their original terms if they pay a 10% royalty. Subway franchisees pay businesses 8% of gross sales each week, which is already higher than industry competitors such as McDonald’s and Jimmy John’s. Gordon said Subway will be the only restaurant franchise to have a 10% royalty. A rate so high that it would immediately stand out as a thumbs-up with potential franchisees, he added.
The Subway representative said the option to stay on the old deal in exchange for 10% royalty was included in the previous franchise deal, introduced in 2001.
“The franchises are desperate, livid, angry, frantic,” a West Coast franchisee for more than two decades told Insider.
Hundreds of Subway branches have closed in recent years. The new deal will make it even harder to make a profit, said the west coast franchisee, who has discouraged new franchisees from buying stores.
“The changes to the new franchise agreement are just far-fetched, and I don’t think a franchisee 20 years ago could have even considered the sweeping changes they are making now,” said another veteran operator who has wished to remain anonymous.
Insider spoke to five Subway franchisees about the new deal. Although their identities are known to Insider, they were granted anonymity to avoid professional repercussions, especially in light of the proposed deal, which some say would ban even criticism of Subway in private franchise forums.
“It’s just silly that they have a clause like that,” said one operator. “There will always be disagreements, but to say that we are completely cut off from our First Amendment free speech rights is absurd.”
(Of course, the First Amendment does not prohibit individuals, businesses, and employers from restricting speech.)
Subway’s new agreement revises existing conditions
Ron Gardner, an attorney for the North American Subway Franchisees Association, described some of the new terms in a document sent to franchisees in mid-May reviewed by Insider.
In the document, Gardner said it was the “first major overhaul of the Subway franchise agreement in over 20 years” and that franchisees wishing to sign new agreements or renew agreements will be asked to sign these new terms. .
The document and franchisees who spoke to Insider said the changes include:
The company can control hours of operation, which franchisees say is of particular concern as they struggle to hire and retain enough workers to stay open. Franchisees “may not make any derogatory or negative comments about Subway in any forum or in any medium,” Gardner said. Franchisees are required to participate in rewards programs and marketing promotions (some of which, like the $ 5 Footlong, have been a point of contention among franchisees). Everything in stores bearing the Subway name, such as furniture, signs and decorations, will remain the property of Subway when the franchisee leaves the business. Subway may require franchisees to “invest and put in digital initiatives of new technology “at their own expense, says the document. Subway can terminate a franchise agreement if a store is closed for two days within a 12 month period. If a franchisee leaves the system before their contract expires, Subway can ask them to pay up to three years of “future lost royalties”.
One of the former metro operators Insider spoke to said the proposal to give franchisees the choice of paying 10% higher royalties or agreeing to new franchise terms was first introduced. times 20 years ago. The Subway representative confirmed this, saying that “the first franchise agreements containing this provision came into effect in 2001, so with a term of 20 years, they now expire and this provision is being implemented for the first time.” .
So when the 8% to 10% increase was touted as an alternative to a new franchise renewal contract, it came as no surprise. But franchisees said they were blinded by the level of control demanded by Subway in the new deal.
The veteran franchisee has been particularly upset with a provision requiring franchisees to comply with national menu promotions, large discounts that kill revenue and profits. Operators often do not participate in these promotions in order to be able to stay afloat. Last year, some franchisees even filed complaints with the Federal Trade Commission in response to a “$ 5 when you buy two” deal, Restaurant Business reported.
This operator called the new terms “price fixing”.
Metro franchisees fear being ousted
Some franchisees fear they will be forced to leave the business. Artur Widak / NurPhoto via Getty Images
Some franchisees said the new deal was part of a larger plan to force operators, especially those with fewer stores, to quit an already plummeting business.
The chain, which denied it was for sale, permanently closed more than 1,600 Subway branches in the United States in 2020. Subway sales in the United States fell to $ 8.3 billion in 2020, from $ 10.2 billion in 2019, Technomic reported.
Franchisees interviewed by Insider said Subway is doing everything in its power to increase revenue amid declining store sales.
Under the leadership of CEO John Chidsey, who joined in November 2019, Subway increased its franchisee start-up costs in 2021 and reduced other franchisee benefits. An operator in the eastern United States described Chidsey as “I’m looking for money.”
If the stores close, Subway wants a bigger payment, franchisees said. Under the new franchise agreement, franchisees could have to pay three years of royalties and advertising costs if they leave the system prematurely.
“It’s a pressure on franchisees,” said the veteran operator. “If they can’t make a profit on the royalties, they’re going to take that much money out of the bottom third of the stores until they all close.”
Over the past year, the company has downsized its development officers, an intermediary position that oversees franchisees in major regions, and renamed the role of “business developer”.
Between May 20, 2020 and December 1, 2020, 11 development officers left the system, according to company documents reviewed by Insider. These territories, which include the oversight of nearly 2,000 Subway restaurants in the US states, are now overseen by companies.
A Subway representative confirmed that the chain has adopted this more traditional franchisor / franchisee model in some markets with the introduction of Subway Market Operations.
“The SMO team is led by franchise industry experts who work directly with franchisees to drive operational excellence in their territories,” said the representative. “Subway’s business developers have played and will always play a key role in the development of our brand and the operations of our franchisees. “
With development agents out of sight, Subway gets a bigger reduction in royalties, as these agents typically receive about a third of those fees. The diminishing ranks of these development officers have left franchisees without a layer of protection against executives who might challenge these new conditions by the company. Most devs had their own stores, so they had their skin in the game.
“Development officers publicly won’t say anything, but behind the scenes they’re going to say it’s terrible for them too. So the less there is, the less they are going to back down,” said one veteran franchise operator.
The new deals could also make Subway a more attractive acquisition target, Gordon said. A franchise deal that guarantees a 2 percentage point increase in royalties “tends to make Excel and PowerPoint look better,” especially in a company that’s having problems, Gordon said.
Some franchisees want to take a stand
In May, a group of Subway franchisees wrote an open letter to owner Elisabeth DeLuca, calling on her to resolve the myriad issues they have with the business and reduce royalties to 4.5%. DeLuca, the widow of co-founder Fred DeLuca, owns Subway with co-founder Peter Buck.
Instead, Subway came up with a deal with higher royalties. To some it felt like a slap in the face.
Some franchisees want to take a stand against the new agreement. A franchisee Insider spoke with said he and others planned to contact their elected officials, while another suggested a walkout through the system.
“All they have to do is lock together and shut the doors for a week,” the operator in the eastern United States said. “It would cripple Chidsey.” He added: “You can bring him to his knees.”
Fighting as one is the only way, he said. If everyone protests, Subway will find it even more difficult to retaliate, as the company is expected to submit some 22,000 US units to arbitration for any alleged breach of contract. The operator said Subway is run by executives hired by Chidsey, many of whom from his previous job ran Burger King, who know nothing about Subway.
“He actually pushed Liz and Dr Buck to a corner where they can’t send him back,” the operator said. “There is indeed no one in the company who understands this universe.”
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