World of Franchising - SUBWAY & NAASF

A discussion of issues affecting franchisee operators in the Subway franchise system and how the system may be improved. If you have any comments and wish to contribute to this web page; feel free to email the author.

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Location: Canada

My background is in Research and Development (Science) as well as Economic Development (Business). Currently managing my own businesses. My degree; B.Comm, Finance Major.

Monday, June 07, 2004

In my last comments I ended up discussing the impact of the new ovens:

"Now we will have the new induction ovens. They are also being tested by DAI and NAASF members. We are told by NAASF that they are a great addition to our offering to the customer. From my understanding, sales in the test stores are not up significantly to justify this investment. Apparently sales are up about 3%. This is not a statistically significant amount and may be due to the novelty factor of having this item in a store and also possibly where a neighboring store does not have this oven. The cost of the oven will result in increased operating cost due to the initial investment, maintenance, electricity and staff time. It will slow down your line; do not be fooled into believing it will not. If you are already tightly scheduled you will have to add more staff."

I received a voice mail from my Subway coordinator the other day. She was very concerned that only one person had taken the trouble to complete the order form for the oven so that DAI could plan the installation of the oven.

Apparently, if you have not heard, DAI will deduct a good portion of the installation cost of the oven directly from your bank account. It will then sit on this money and use it for the costs associated with its installation. The total profit that DAI will reap just from sitting on your money for a few month is quite substantial! There is no indication as to how any profit will be returned to the franchisee. What ever happened to the process where one would just order the equipment and then send the money to DAI? I can't say I'm very happy about DAI just deducting a few thousand dollars from my checking account. I never keep much cash in this account as I earn no interest on it. So, to make sure I'm not short (NSF - anyone?) I'll have to add a substantial amount to this account and then have it sit, without interest being earned. Once it is withdrawn by DAI it will sit in Subway's bank account for a substantial period of time before it is disbursed for the purchase and installation of the oven.

This is a growing trend by DAI. They have been deducting a larger and larger amount from my bank account each year. It used to be that they were limited by the amount you would allow them to deduct but now it is up in the thousands. Next on the list will be the breakfast program and the skillets needed for that. Maybe we will need additional electrical for this also?

After this, why not renovation and other items? Why not just take over the whole management of the store? Why not indeed? After all, DAI can do a much better job of managing your investment. I'm sorry, did I say your investment? DAI does not see it this way. You are allowed to operate a Subway store but only by paying a hefty fee to do so. It used to be 8% of your gross sales. It is not substantially more than that if you factor in all the mandatory upgrades and improvements. If you do not do the 'recommended' improvements 'your' store will be taken away from you.

I'm sure you think I'm exaggerating. If you have been in the system for more than a few years you will have seen the growing control of DAI in every part of your business. Sure a franchise system needs to have some conformity to maintain a distinct identity and product which is consistent from location to location. How far one has to go is the question. After all, DAI benefits from you investing a substantial, if not all, your wealth in the system by operating 'individually owned' franchised restaurants. We are not Starbucks where the chain is mostly owned by the company. However, DAI wants us to be like Starbucks with a store on every corner and almost an identical look from location to location. In a Starbuck the corporation can take a loss in a location and equalize this from another just to keep any competitor out. In Subway the franchisee will work for nothing in the over developed location and eventually loose his business as he will not be in a position to do the necessary improvements and upgrades.

If the franchisee is able to develop a location and his sales grow then his area will be marked for additional development by DAI. His reward for his hard work will be, if he is lucky, a new store which he will be asked to open or a new store which someone else opens. In both scenarios the franchisee takes a hit in his bottom line. In the first one he may be able to equalize some of the loss over two locations but in the second he will lose without any recovery possible. Rather than allow the franchisee to determine when it is the opportune time to increase his investment in the market place by adding a new store this has now been taken away from him. If you are lucky you have a DA who has some conscience and still treat the franchisee as mensch.

Do you want to get a better idea of what a good citizen Fred is? Here is an interesting link.

Stay tuned,

Take care for now.


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