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.

Tuesday, March 15, 2005

Well, it has been a while since my last post.

What is happening in Subway land these days?

At the local front our DA has taken it upon himself to censure franchisees for not following the recommended prices in his area. He claims the recommended prices were arrived at by consulting with franchisees. While this is correct it does not reflect how the franchisees are related to the DA. All have some non arms length connection to the DA or some reason not to disagree with him. As a point in case; the work shop was at the DA’s office with ‘help’ provided by the DA staff.

It is claimed that a food and paper cost of 33% will result from the recommended prices. This is not correct. If one was to do an audit of the financial statements of Subways using the recommended prices you will find that their food cost is above this. I am just one of many of the restaurants with higher than recommended prices. My food cost is just over 35% as per my current financial statements. If I was to use recommended prices my food cost would be close to 37%.

In order to stay in business I will have to endure poor Compliance Reports which are not accurate and distort the local situation. Any positive things which we are doing are ignored while any and all negative ones are exaggerated. Even with this harassment we are successful at maintaining a relatively clean report. I’m sure the Field Inspector will be replaced with a new one which has a more ‘positive’ approach.

Here is a sample of an email which a just sent in response to my recent report:

In reviewing the March 10th report some areas concern me.

You mentioned in several past reports that the wall behind the toaster oven is dirty and recommend cleaning this area. I have examined this area after each of your inspections and I can't see any problem which you describe. I wish you would desist from just copy and paste past reports or using reports from other stores as this reflects negatively on this store.

I also recall in a past report that you said we should not use a long knife to hold the sandwich in place while it was being closed. As you may recall, Zina asked you to show her how this could be done. You were not able to do it and still keep the sandwich in place.

You mentioned that Stettler continues to grow and this is why we have more competition in our town. This is not entirely accurate. Stettler continues to be at the same population as it has for the past 20 or so years! When I came to Stettler some 20 years ago we had a population of about 5,000. Today it stands at approximately 5,200! A 4% growth in 20 years (about 0.2% per year) - hardly much of a growth spurt?

What has happened is that we have had a doubling of the number of QSRs in the town over the past six months! Now we will be getting a Boston Pizza also. This, and only this, is why sales are down. You should also note that we have been very good at recapturing our market share in the town. We are now very close to last year's sales. It is a wonder that our sales are not worse. If we had some of the, more than, $40,000 that we send to FAF each year for advertising we could do a tremendous job of promoting Subway in our town. Heck, we could even reduce our prices!

With reference to pricing; it is unfortunate that the DA has not taken a more understanding approach regarding this. I know from personal discussions with several franchisees in Alberta that they have severe profit problems. Some can not use the recommended pricing as this would just drive the final nail in the coffin. From my own perspective; I would be more than happy to use the recommended prices if they would give me anything near a 33% food and paper cost margin.

You say my prices are too high. At a food cost over 35% I can not increase this by going to the recommended prices. If the DA will cover any shortfall in my profits by using the recommended prices I would be happy to do so.

Yours sincerely

I’m sure this will be give serious consideration. (Incase you don’t get it – I’m being sarcastic.)

I’m sure you have all read this:

Report Shows Link Between Compliance, Higher AUV”, Subway® to Subway® February 11, 2005.

If you would be believe this report you would immediately think that if you focused on staying in compliance your AUV would be high when compared to your area. I’m sure there is some truth to this at the extremes of comparison. A really poorly run store would be expected to under perform a well run store. From my visit to some of our local stores I would suggest that a much more sinister event is taking place. Stores which are underperforming in the market are tagged for termination so that a new owner may try to improve the operation. To justify a termination you need to establish a history of poor operations. Then the new field inspector comes and finishes the job. I have seen this in action.

There are many reasons why a store is doing poorly. It could be a lack of funds to do necessary improvements or the need to relocate. If a store is only surviving then the existing owners have been tapped out. The DA’s solution is to get new funds into the store to do what is required. Having the store make reasonable profits in the first place never enter into the equation.

This recalls a conversation which I had with the DA in front of my store about two and a half years ago. At the time we were looking at how I could improve the appearance of the store. Not that it was terribly bad but just looking for suggestions. During the course of the conversation I mentioned the poor profits of Subway stores. His reply; I never depended upon my Subways to make a profit. This I got from my full service restaurant. I was shocked at this at the time. It also goes to show the continued focus by the DA on sales at the expense of profits.

Before I get to the point of my post let me remind all of the email that Fred sent to franchisees a few weeks ago. I should have kept a link to the site as it was quite something. To paraphrase; it was about how geese fly in a flock together and by the vary nature of their flight (the V formation) they helped each other perform better and fly further. It also noted that if one had problems and fell out of formation two other gees would join in and stay with the sick geese until it was better and able to join the flock. The reference was to Subway and how we do better by working together and then helping each other when on is in trouble. Like most parables there is some truth to this but helping each other when one is in trouble? What are you smoking Fred? I have never seen any of this in our area. The very opposite is true.

Here is my point:

In the past few months we have been required to purchase a speed oven (toaster oven). In one instance, which I know of, the franchisee was not able financially to do this. He had just remodeled his one store to Tuscany at twice the cost he was told it would cost. He also relocated another store and installed a drive through at the insistence of the DA. It would do wonders for his sales. The facts turned out to be the opposite. His sales stayed at close to where they were before but now his operating cost was substantially higher than before. In other words, he was not making any money. The bank refused to provide financing for the two ovens.

He was at a loss as to how to acquire the ovens until he found a lease company to do this at a considerable cost. However they needed the serial numbers for the ovens and DAI refused to provide these. After a somewhat lengthy legal process DAI finally were able to provide the numbers. The upshot of this was that he was served termination notices and forced to pay further expenses related to this issue. Rather than work with the franchisee to help him (remember the geese story) he is now in a legal battle with DAI and the DA.

The franchisee that has been with Subway for over ten years is now very disillusioned. He had worked with Subway for many years and always run good stores.

Take care.

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