World of Franchising - SUBWAY & NAASF

2008-03-09T22:02:00.002-06:00

Every so often I get an email which is just too good not to post. The following is worth reading and, if you are interested in starting a Subway Franchise, following up on. Please, do not limit your research to my blog as you will be amazed at the number of negative comments about Subway you will find. As a note; most of the positive blogs you will find are posted by DAI, Subway or 'friends' of Subway.

"hunt wrote:
The Subway chain used be a good opportunity. Not since Subway headquarter became predatory against franchisees.

Read Fortune magazine archives on how this chain led by president Fred DeLuca (nicknamed BendoveritsFred) has caused a record number of unhappy franchisees, defrauded landlords and violated laws. Discover why after a six year study, U.S. House of Representatives' Dean Sagar concluded: "Subway is the biggest problem in franchising and emerges as one of the key examples of every abuse you can think of." Says Cliff Marshall, a franchise consultant for more than 30 years: 'If anyone in my family ever asked whether they should buy a Subway, I would say absolutely not, no way. A Subway franchisee who asked to remain anonymous for fear of retaliation said the system "is a total mess." Go here learn more: http://nextraterrestrial.com/pdf/FDeluca-Fortune%20March%2016%201998.htm

Learn how DeLuca violated Connecticut's Unfair Trade Practices Act by pressuring independent SFAF board members to block owners he didn't like from running for office. Apparently he has no respect for legal statutes or fair play. Go here to learn more: http://franchisepundit.com/index.php/2005/05/28/what-to-learn-from-this-subway-lawsuit/

Read how DeLuca's franchise agreement forces owners with a legitimate grievance to submit to arbitration where there is no jury, few rules, and the outcome is binding. Arbitration companies compete ferociously for Subway's business and DeLuca uses that leverage to stack the deck in his favor. Florida attorney Keith Kanouse says, "I've seen over 300 franchise agreements, and Subway's is the worst." Go here to learn more: http://franchisepundit.com/index.php/2005/07/05/subways-deluca-loses-battle-with-franchisees/

In a perfect example of poetic justice, the Wall Street Journal recently announced that DeLuca lost a NASD arbitration claim, in which he alleged the UBS caused him $193 million in damages Not only did the DeLuca trusts fail to recover any of their losses, they also were ordered to pay $50,000 to reimburse UBS for document-production costs. Some owners were delighted to hear DeLuca got a taste of his own medicine, but others worry that it will only fire his drive to abuse them more to make up his losses.

If you think Subway owners make good money, think again. A store owner in the US nets less than $26,600 in profit, barely above the poverty level for a family of five. To earn a decent income, they must often work 60 to 70 hours a week and invest in multiple stores. The main problem is encroachment of stores. Even with more than 27,000 Subway's already open, DeLuca keeps building more. The result? Average revenues per store are down some 8% from when they peaked way back in 1994! Go here to learn more: http://books.google.com/books?id=yNFN1OpnkBkC&pg=PA100&lpg=PA100&dq=subway+franchisees+lowest+paid&source=web&ots=l-dgtBas1-&sig=Of1ObbDdfXuZsckQcO2Vp54RAV4&hl=en"

and a second;

" Read how DeLuca's franchise agreement forces owners with a legitimate grievance to submit to arbitration where there is no jury, few rules, and the outcome is binding. Arbitration companies compete ferociously for Subway's business and DeLuca uses that leverage to stack the deck in his favor. Florida attorney Keith Kanouse says, "I've seen over 300 franchise agreements, and Subway's is the worst." Go here to learn more: http://franchisepundit.com/index.php/2005/07/05/subways-deluca-loses-battle-with-franchisees/

In a perfect example of poetic justice, the Wall Street Journal recently announced that DeLuca lost a NASD arbitration claim, in which he alleged the UBS caused him $193 million in damages Not only did the DeLuca trusts fail to recover any of their losses, they also were ordered to pay $50,000 to reimburse UBS for document-production costs. Some owners were delighted to hear DeLuca got a taste of his own medicine, but others worry that it will only fire his drive to abuse them more to make up his losses.

If you think Subway owners make good money, think again. A store owner in the US nets less than $26,600 in profit, barely above the poverty level for a family of five. To earn a decent income, they must often work 60 to 70 hours a week and invest in multiple stores. The main problem is encroachment of stores. Even with more than 27,000 Subway's already open, DeLuca keeps building more. The result? Average revenues per store are down some 8% from when they peaked way back in 1994! Go here to learn more: http://books.google.com/books?id=yNFN1OpnkBkC&pg=PA100&lpg=PA100&dq=subway+franchisees+lowest+paid&source=web&ots=l-dgtBas1-&sig=Of1ObbDdfXuZsckQcO2Vp54RAV4&hl=en

Consultant Marshall estimates that 25% of franchisees are unhappy and suffering, while about 40% are "just getting by and making a few dollars. Barely a third are happy and doing fine, though many of those owners are also development agents who control the number of competing Subways in their vicinity." Steve Sager, a departed Subway agent estimates that half the franchisees in the Northeast are suffering. What does DeLuca have to say about this? "It bothers me that people lose money, but I don't lose sleep over it. This is America." I imagine DeLuca and co-owner Peter Buck sleep pretty soundly indeed, both being ranked by Forbes as the 207th richest men in America. Go here to learn more: http://www.forbes.com/lists/2005/54/BNPG.html

For most people, reaching billionaire status would be enough, apparently not for DeLuca. He recently rewrote the franchise agreement, stripping owners rights and doubling already inflated royalty fees for stores out of compliance of written guidelines. It also eliminates protection against encroachment, encouraging development agents to stack stores. He even added a loophole to take back the lucrative Subway advertising trust which he vested to owners years ago. With apparent impunity DeLuca pronounced his new agreement retroactive for all existing owners! Almost immediately field inspectors began bloating corporate profits through increased compliance fines. Ignoring past policy, inspectors now mark owners out of compliance in several areas for each deficiency! Go here to learn more: http://findarticles.com/p/articles/mi_m3190/is_23_40/ai_n16463127

Even more unconscionable, DeLuca devised a scheme to rip off owners by claiming high internal loss is royalty theft. Using proprietary software he sniffs out owners suffering from excessive shrinkage and forces them to undergo intense internal audits. Owners who can't account for every portion of lost, wasted or stolen meat are labeled thieves and fined up to $50,000! Those who fight DeLuca's illicit attacks are threatened with criminal prosecution or store seizure. Coincidentally, "shrinkage", a term prevalent throughout the restaurant industry, has been stricken from the Subway training curriculum since DeLuca's royalty theft crusade began. Just coincidence? Go here to learn more: http://subwayfranchisee.blogspot.com/2005/04/compliance-issues-at-subway-real-or.html

What help can store owners who suffer from chronic shrinkage or compliance problems expect? Does DeLuca offer additional training and support to help them get their losses under control and their stores back into compliance? Just the opposite! He dangles eviction notices over their heads and charges them huge fines! The U.S. Small Business Administration even stopped lending to Subway owners until DeLuca removed a contract clause that gave him the power to seize any store without cause. Go here to learn more: http://nextraterrestrial.com/pdf/FDeluca-Fortune%20March%2016%201998.htm

Franchisees fear that DeLuca may have bolder plans to cannibalize the chain. For years he pressured owners to abandon cash registers in favor of computer POS systems, despite dependability issues and a higher cost to own. When he encountered resistance, he simply ordered POS systems mandatory. Then he required all owners to connect their POS systems to headquarters, giving DeLuca access to every store's transactions. Using his "spy" software to monitor stores chain wide, now DeLuca can efficiently target owners ripe for royalty theft audits and spot inspections, boosting corporate revenues. Go here to learn more: http://storefrontbacktalk.com/story/081006Subway.php

DeLuca appears intent to use new technology against franchisees. Some owners suspect that the Subway Technology Department's pet video surveillance vendor DTT USA has conspired to help DeLuca spy on owners through live camera feeds being installed in stores. If DeLuca can tap into ring ups and video evidence then use it against them, they might as well kiss any hope of a profitable future good by. Is it coincidence that DeLuca's new contract gives him full rights to transmitted data? If you're a Subway owner, here's a hot tip; If it seems every time you have a minor compliance violation (ie: an oven door latch that won't stay shut or a POP display is out of date), a field rep mysteriously shows up on your doorstep for a spot inspection, Big Brother is watching! If this happens to you, obtain a copy of your DSL provider's server logs and have them scrutinized by an IP expert. If you are being spied on, take your findings immediately to the FCC.

Want more proof that Subway corporate is corrupt? Investigate Subway's legal beagle Leonard Axelrod (nicknamed Lenny the Ax), the architect of Subway's contracts. You'll have to dig deep, the evidence is buried. If you're diligent, you'll uncover how Axelrod was disbarred for brainstorming a scheme to defraud landlords. An Illinois appeals court concluded that there was 'overwhelming' proof that Subway had committed "far reaching fraud". An Illinois jury awarded a landlord $10 million in punitive damages after concluding that Subway had defrauded him. DeLuca spent $1.3 million to resolve 72 similar claims. Go here to learn more: http://findarticles.com/p/articles/mi_m3190/is_n49_v29/ai_17847096

Once landlords wised up to Subway's shell game, Axelrod brainstormed his dirtiest trick; a way to skip arbitration by signing leases with landlords and then subletting stores to unwitting franchisees, unaware they were being used as de facto landlords. This way Subway can quickly evict a store owner in a lease dispute and DeLuca can screw the landlord out of the lease. An Illinois court has called the eviction/ arbitration provision "unconscionable". Go here to learn more: http://nextraterrestrial.com/pdf/FDeluca-Fortune%20March%2016%201998.htm

What effect has DeLuca's predatory actions had on the Subway chain? At a recent franchise convention & trade show, it was all too obvious. Attendance and morale were at an all time low. Store owners sulked by, all emotion drained from their faces, not unlike holocaust survivors. Some wore shirts printed with "I Survived a DAI Audit". They huddled in small groups, searching for some relief from this nightmare. Sadly, Subway was once the greatest opportunity in the industry. Today it's just the greatest con job in the industry. Don't fall for it!

If you are affiliated with the Subway chain and believe you've been victimized by them, I urge you to add a comment to this post by clicking on the "File a Rebuttal" button below, or file your own report by clicking on the "File a Report" button next to it. RipoffReport.com posts are monitored by numerous law firms around the country. Your identity will remain confidential but will allow them to contact you in the event a class action suit or criminal complaint is imminent. Any criminal act that Subway staff may be guilty of negates the arbitration clause you are currently bound to."

Take care.

2007-02-21T15:02:00.000-07:00

I occasionally receive email letters from people either in the system or thinking of getting into the Subway system. Most are usually just letters blasting Subway or seeking information.

The following letter was received recently and goes to the point of why Subway is dysfunctional.

"Hi,

I have been thinking about letting people know how horrible an experience this Subway franchise has been and will be until I die. My husband and I have seriously considered suicide but we love our kids (adults) too much to do that to them. My husband wanted this store so badly that I couldn't say no to him. I'm 59 and have had fibromyalgia since I was 35. My doctor's nurse offered to help me get a full disability at that time. I decided to tough it out so that my kids-I was raising them alone after their father died, wouldn't think that's how to live. I made it through to retirement at U/Mass and was working part-time close to home. I was so happy and wanted my husband to be happy. I signed the papers putting our home up as security-stupidity! 3 months after he started running the store-happily and well I might add-his back went out and we found out he has several ruptured discs as well as other back problems. One operation and several procedures later he is in more pain than when he started and I had to quit my job and try to run the Subway. The day he was going to be operated on I let the corporate office that we deal with know and they told me it would be best if I was at the store that morning to meet with them anyway! I went-because at that time they frightened me-listened to their complaints--which is really all you ever get-even though you will here about the "Subway Family" and how they are there to help you. They couldn't have cared less if my husband lived or died and have not offered one bit of help. I have cried myself into a stupor over the stupidity of signing over the home that I love and have worked so hard to keep to people who couldn't care less and would kick us out onto the street without a 2nd thought. They nickel and dime you every time you turn around and guess what-everyone in our town is down in business because of the drastic weather change this winter. Has anyone from corporate offered any help or suggestions other than give away more free grinders and you'll have more customers. Which is true. There's an old saying that if you give everything away, you'll have more customers than you could imagine!

Well, live and learn and remember that the hell that is Subway school-oh, yeah, I'm serious, is just the beginning.

wondering when it will and how much it will hurt,"

Name withheld by me so that the sender will not be harassed by Subway legal department.

2006-08-20T22:29:00.000-06:00

Subway is suing franchisees!

In order to derail attempts by franchisees to maintain some form of control over their business DAI (Doctor's Associates Inc.) under the direction of Fred Deluca and Peter Buck have taken a very agressive action of going after some of the franchisee's board members. Bear in mind that the board members were all democratically elected by franchisees to represent them.

Here is a copy of an email sent to all franchisees by NAASF (North American Association of Subway Franchisees). To get more detail of event leading up to this you should research the archives in this Blog.

"We want to update everyone in the Subway® family about a troubling development in the dispute between DAI and the Franchisee community involving DAI's attempt to grab control over SFAFT, and to take away many of your rights under your Franchise Agreements.

As you are aware DAI has refused to negotiate a mutually acceptable solution with NAASF. This very fact prompted NAASF to file the current lawsuit against DAI in the Connecticut state court. Rather than responding to NAASF's complaint in the Connecticut state court on the merits, DAI instead chose to file 11 new lawsuits in Federal Court against a select group of NAASF's volunteer Directors. NAASF filed the complaint on behalf of you in good faith and in a manner designed to obtain a prompt, inexpensive and fair resolution. It appears that DAI is trying to avoid having the Connecticut courts review DAI's actions on their merits and is instead waging a very personal war of attrition against selected individual Franchisees.

DAI's litigation tactic is a classic "divide and conquer" strategy. It is designed to maximize the cost to NAASF and to you in seeking a fair and prompt resolution on the merits of the issues that DAI created with its new contract (these costs are trivial to DAI and its owners’ economic resources).

It appears that DAI's strategy is to drain NAASF financially. If DAI is successful, DAI won't have to defend itself against NAASF's forthright challenge to DAI's actions against SFAFT and against your rights as Subway Franchisees. We are also aware of other steps that DAI has taken in the last few weeks designed to eliminate NAASF, and to interfere with or defeat our ability to represent the Franchisees. DAI is interfering with NAASF's ability to represent your fundamental rights and interests as members of the Subway system, and to provide independent information, training, conferences and other services to you - the NAASF member!

We ask that, now more than ever, you continue to support NAASF with your ideas, your volunteer effort and your contributions to the NAASF Legal Support Fund. Every dollar helps, especially when our opponent has such deep pockets. You can do so online at http://rs6.net/tn.jsp?t=vf4bvxbab.0.ovrmvxbab.7w548obab.581&ts=S0197&p=http%3A%2F%2Fwww.naasf.org%2Fpage.cfm%3Fpageid%3D1367. We also invite your (constructive) criticism. You can reach the elected leadership of NAASF at mailto:info@naasf.org

We need to BE united to STAY united. We can restore the economic vitality of Subway if we do that. If we do not stand united, we are allowing ourselves to be bullied and allowing our contract rights to be taken from us."

Best of luck in fighting a corporation with a virtual botomless well of funds and access to any lawyer.

Take Care,

Egil

2006-07-22T18:43:00.000-06:00

The deed is done - I sold my last Subway!

I started with my first store about 15 years ago. At one time I owned five stores, six if you include a satellite store.

I had hoped to build ten stores but along the way Subway changed. It went from a franchise which worked hand in hand with the franchise to one which became confrontational and control oriented. Rather than work with store owners to develop and improve the system it decided that this could best be done at head office.

Doctors Associates Inc. (Subway) took a new path. Why I'm not sure but I suspect it was to try and control as much of the market as possible. One of the objectives was to crowd out any competition by placing a store on every possible location. As this was not advantageous to an owner, due to reduced store sales (cannibalization of customers), there was some objection to crowding the market by over saturating locations. Various models were proposed by DAI to achieve a certain level of market penetration. Cents of sales per capita were used as a measuring stick as were population densities. The Development agents were 'encouraged' to develop their market under threat of termination.

The people most in objection to the New Order at Subway were the old guard of franchiser. There was a queue of people wanting to get into the system but they, Subway, were being hampered in the growth by objections and legal challenges made by existing owners and Development Agents with a vested interest due to ownership of stores or with associates with Subway stores.

So, how best to reinvent the System? Easy said but not so easy done. Get rid of the old guard and replace them with new, forward thinking, owners. To achieve this a new policing system was invented in the form of the monthly inspection report. In this report one DAI employee is empowered to terminate existing franchise agreements with impunity. No appeal is possible and if you do not shape up a letter will be sent by the legal department that your franchise is terminated. Your option at this point is to go to a dysfunctional arbitration with all the 'evidence' of wrongdoing compiled by DAI as evidence. You have nothing but your word and that of your staff and customers.

As this was not enough, a surprising number of owners stuck with the system, a new and improved franchise agreement was developed. Franchise fees are now going up from 8% to 10% over time, severe penalties are now added to any audit errors and further severe penalties are now included with a poor inspection report. This is in addition to the continued ability of DAI to terminate a franchise agreement. DAI also added e new twist to the equation. Now DAI is planning on taking over the Subway Franchise Trust Fund which is administrated by the franchiser at present through an elected board. DAI want control of the advertising funds so that it may utilize these funds for its own ends.

It is finally so bad that the various franchise organizations, FAF and NAASF, have taken legal action against DAI and Fred Deluca. Where this will lead is open to question. I suspect that DAI is within its legal right to do as it has done. It is unfortunate that the owners, the franchise, do not take stronger action. Wasting time in court is just what DAI wants. They have the time, money and resources to continue this battle until fatigue sets in with the franchise community.

My advice: Get Out While You Can.

2006-05-08T20:40:00.000-06:00

I have been receiving a few emails asking why I have not posted in awhile. The fact of the matter is that I am in the process of selling my last Subway restaurant.

After the sale is complete I will post again, telling a story which may be hard for some to believe.

Check back late July.

Take care.

2005-12-17T00:17:00.000-07:00

My Subway store is a cash cow, so why am I selling?

It has come to this that after 15 years in the Subway system I have started actively trying to sell my remaining and first Subway store. The store is very nice, well maintained and sales are up over 20% over the same period last year. It is even classed as a high volume store.

I have no reason to sell other than I have high standards of morality and expectation from my associates, in this case Doctor's Associate Inc (DAI). DAI has been less than honest and reasonable in dealings with me, and others, over the past few years. Subway used to be a great place where there was a family atmosphere. We did not always agree but we worked together to achieve a good working environment, to be benefit of all.

Now, if you have a disagreement with DAI you will receive a termination notice in the mail. You don't get any contact or discussion on any topic but just, to paraphrase; we are not happy with you and want you to give the store to some other poor soul who will be more compliant.

There is no sit down to determine any solution to any perceived problems. There is no appeal to any independent third party. All decisions for termination originates with a field consultant who works for DAI. The reports which are sent to DAI, based on monthly visits, are inaccurate and full of errors and exaggerations. There is little consistency between store evaluations as most of the data is subject to personal opinions.

I'm tired of working as a serf for a king who is not accountable to anyone except his own court. Money is not the 'be all and end all' as there is a life outside Subway.

2005-11-20T22:39:00.000-07:00

Here is a picture of the recent activities on my blog site. As you can see visits and page views are continuing to grow.

The most interesting are the emails I receive from franchise's from all over the world and other interested parties. Most express concern with how franchises are treated by franchiser organizations. It is no joke but the rights of franchise's are about the same as serfs back in the middle ages.

My last post referred to a letter sent by DAI's, Subway, legal department and advised that my Blog was in infringing of DAI's rights and I should immediately delete all offending material and cease publishing this site.

Well, I'm still here and still publishing. I removed one article which made reference to material which is in the hands of anyone who cares to know. It referred to Subway's very ambitious strategic plan. I also asked that DAI provide me with a list of specific articles which were causing them concern. I never received this and have not heard from them since.

Why would Subway want to go to such extremes to shut down a legitimate blog which does not do anything but collect, and republish, internet material and comments from personal experience in the Subway system over 15 years?

Do you know that legal suggested that I should contain my comments of dissatisfaction of nosebag member only web pages and the Ombudman department. There are two very good reasons why this is not an option:

1. No one reads the nosebag (North America Association of Subway franchise's) web post.
2. The Ombudman department is not independent and, from personal experience, not impartial.

Well that is all for today,

Take care,

Egil

2005-10-04T14:47:00.000-06:00

I just received this email from Subway:

Via email:

October 4, 2005

RE: http:// SubwayFranchisee.blogspot.com

Dear Mr.,

As you know, Doctors Associates Inc., a Florida corporation (“DAI”) is the
owner the trademark SUBWAY®, registered at the United States Patent and
Trademark Office, under number 117460, among other registrations. On June
5, you entered into a Franchise Agreement with Subway Franchise
Systems of Canada, Ltd an affiliate of DAI. DAI has been informed that you
are operating a website, or webloghttp://subwayfranchisee.blogspot.com.
Your Blog contains proprietary information such as the strategic plan,
confidential communications from the legal department, proprietary trade
secrets, information from the operations manual, and training materials,
among other confidential information.

Your operation of this web log and disclosure of proprietary information is
an infringement upon DAI’s Federal and Common law trademark rights and in
violation of your Franchise Agreement. You are hereby officially put on
notice that you are infringing upon DAI’s rights, and DAI demands that you
immediately cease and desist from operating this web log, that includes
proprietary and confidential information.

All of this must be accomplished within 48 hours of the date of this letter.
Failure to properly incompletely remove this web log from the worldwide web
and the information contained thereon will result and immediate commencement
of legal proceedings.

Please also note that there are venus available to express your opinions,
and discontent the system. You may voice your opinions to your Development
Agent, there is a secure location in the NAASF, and you may also contact the
Obudsman Department, at headquarters.

Kindly confirm receipt of this letter and confirm that you will comply with
the demands and contained herein. You may contact me at
pochron_v@subway.com, or by facsimile at 203-876-6690.

Very truly yours,

Valerie Pochron
Attorney
International Legal Department
Doctors Associates Inc.
CC: Kristin Corcoran, Jennifer Magyar, Jillian Edo

VP/eag
1004blogspot
Very Truly Yours,
Eliza Gonzalez - Legal Assistant
Legal Department
Doctor's Associates Inc.
p:(800)888-4848 ext. 1563
f:(203)876-6690
gonzalez_e@subway.com

**DISCLAIMER**
The information contained in this e-mail and attachments, if any, is
confidential and may be subject to legal privilege. If you are not the
intended recipient, you must not use, copy, distribute or disclose the
e-mail and its attachment, or any part of its content or take any action in
reliance of it. If you have received this e-mail in error, please e-mail
the message back to the sender by replying and then deleting it. We cannot
accept responsibility for loss or damage arising from the use of this e-mail
or attachments, and recommend that you subject these to your virus checking
procedures prior to use. Thank you.

It seems that Subway is upset that I have the tenacity to post any information on the activities of this organization.

As such, as I have not the financial resourced nor the will to fight - and they know this, I will have to suspend this web site.

Take care

2005-08-13T00:58:00.000-06:00

Subway web links and other interesting stuff:

It is time to repost the link to an excellent Subway Franchisee Site

http://www.subwayla.com/ohcal/

One of the new items on this site are some excellent pictures of the Kiosk which have been mentioned by Fred Deluca on voice mail. In addition there is some additional information which may be downloaded for free and used by your store to improve its efficiency.

I also see that some markets are offering pizza. It is unfortunate that we get this advertising in our area, it is a small world on satellite TV, but we can’t offer it, thus taking advantage of the money we spend through FAF in a more efficient way.

In our area we are being hounded by DAI to reduce the cost of our menu items even though all our costs are going through the roof. No consideration to profitability is made as the only thing of importance is market share. After all, did you not know that Quiznos is gaining on Subway. They must be stopped at all cost – that is, the cost to the franchisee.

To achieve ‘compliance’ on pricing the usual tactic of intimidation and threat is being employed. Here is an example of what you will receive if you do not follow the Subway mandate to the letter, damn profits:

“RE: Termination of Franchise Agreement #

Dear Franchisee:

You received correspondence from the Operations Department dated 2005 indicating that compliance violations were observed. You were directed to correct the issues immediately. The current evaluation indicates food safety violations. Due to the potential negative impact to your
restaurant, your investment, the public and the Brand, we find it necessary to take further action.

On behalf of Subway Franchise Systems, this letter is to advise you that pursuant Paragraphs 5.b. and 8.b. of the Franchise Agreement, Subway Franchise Systems hereby elects to terminate the above-referenced Franchise Agreement between Subway Franchise Systems of Canada Ltd. and the above-referenced individual, dated June 5, 19xx, because you have failed to comply with Paragraphs 5.b. and 8.b.

You have failed to maintain the store in compliance with the SUBWAY Operations Manual. Specifically, according to the July 18, 2005 evaluation, your store is out of compliance in the following area(s):

Food Safety / Glove Usage

Approved Products & Packaging, Products Offered For Sale

Food Quality & Preparation

You may cure this default by correcting the above-specified conditions prior to the sixtieth (60th) day after your receipt of this notice, and be in full compliance. In any event, if the corrections are not made by the sixtieth (60th) day after receipt of this notice, your Franchise Agreement may terminate on the ninetieth (90th) day after receipt of this notice without further notice to you.

The aforementioned corrections shall include any and all compliance issues.

This notice of termination of your Franchise Agreement is separate and apart from any other notice of termination issued, for any reason, by any other department of Subway Franchise Systems or its affiliates. Please be aware that you may be responsible for legal costs and/or filing fees associated with this case if further action is necessary.

If you should have any questions, comments, or concerns, please contact either of the Case Administrators, Sharon Rook-Fallgren at extension 1578 or Renee Dinnean at extension 1553.

Sincerely,

Barbara Mehan
Compliance Coordinator”

I particularly find it interesting that Subway is so concerned “Due to the potential negative impact to your restaurant, your investment, the public and the Brand, we find it necessary to take further action.”

They are concerned about the negative impact to my restaurant and my investment that they find it necessary to take further action. Talk about B.S! I will tell you that this store is well run and can be put up against almost any in the brand for quality and cleanliness. In fact, I have compared it to others in the market and found that it is actually better run! However, there is that one small item of pricing. This store is in a very high labor cost area and also has an incredibly tough time in attracting any help at any reasonable price. For example labor costs have increased by about 30% over the past year but we still can’t find staff. We are not alone as others are in a similar boat.

In contacting Subway to try to get some relief, by reducing the hours of operation, we are ignored. In contacting Subway to get any form of help, we are ignored. The only way we are not ignored is if our pricing has increased by any amount over the past couple of years. In other words, we are not allowed to recapture higher rent, labor, taxes, food or any other costs through pricing increases!

It sure is difficult being positive regarding Subway when they see no benefit in working as a team. I can understand why Subway is running into difficulty in attracting new franchisees into the system when they really do not respect the existing ones. You can count on Subway to give you a helping hand out of the system if you have any troubles, of any kind. No help is offered in correcting any problems which may cost DAI any money.

I guess Quiznos and other franchise organizations are quite happy with this policy of beating up on franchisees by Subway. It must provide a very good source of new franchisees for their brand. After all, any Subway franchisee that leaves Subway will go somewhere. They don’t just disappear into the ether. Sad to say, Subway either does not see this or just does not care.

How does it go again? A happy customer is a repeat customer while an unhappy one will tell 10 friends about the bad experience.

Should not the same thinking apply to franchisee customers of DAI?

I guess not!

Take care.

2005-06-04T15:18:00.000-06:00

Subway Lore, Subway Cheer, Subway Generally – topics for today:

Let’s start with Subway Lore; you know what I mean, we are the best QSR restaurant, we offer the best quality food and our food safety practices are based upon proven scientific practices.

I will only look at the last item in this post – food safety as it relates to our operation.

Let’s look at Folk Lore as it applies to our ubiquitous cell phones. You have seen the stickers at all gas stations, “No Cell Phone”. They can cause fires we are told by no less authority than the gas companies. You would think that this fact was based upon scientific research but it is not. Apparently it stems from a fire which occurred back in 1988 at the oil platform Piper Alpha where 167 people died. To tighten up safety requirements, probably for insurance and moral reasons, very strict safety standards were introduced.

Dr. Adam Burgess, University of Kent, noted in his research that from this point on cell phones were also included in these safety procedures even though no evidence had ever been presented to show that they could cause a fire. From this further reports were circulated as to the danger of cell phones but none were ever based on any actual scientific studies. A myth was born that cell phones are dangerous. Now we have absurd proposals being introduced by no less than a member of the Connecticut’s senate that a $250 fine should be imposed on anyone using a cell phone while at a gas station.

How does this all relate to our Subway Policy and Procedures and our Compliance Report? You may recall that Subway had a case of food poisoning several years back (there are reference to this in my previous posts.) It turned out to be not food poisoning but food contamination caused by a sick employee.

From this sprung the same blind rush to include everything in our Compliance Report and the introduction of policy and procedures which actually made compliance impossible. No actual scientific studies were conducted to see if these standards were reasonable or even necessary. After all how many years have we been in operation without any major problems? Here is the standard caveat, we all endorse food safety and want a clean and healthy operation. But at any cost? I can hear the screams from the balcony – life is priceless and should be protected at any cost!

We double bleach our produce, we gas pack out meat and some vegetables to preserve freshness and we even track our delivery process to ensure that our food is stored and transported at safe temperatures. However, if your tomatoes are sliced and stores at the correct temperature for a few days you are considered to be in serious violation of food safety and may be terminated if the problem continues.

There have never ever been any scientific studies to see if this is a reasonable concern for food safety. We have a Subway Myth that says that you may die if you eat a tomato, a cucumber, a slice of lettuce which has been sitting at the correct temperature for a few days. No matter that just next to these items are cases full of the same product which may have been in the cooler for several days longer. Where are the tests Fred?

Subway Cheer!

Well, I have never seen my phone ring so many times with the same message from our local market. They all say “Hey Ho the King Is Dead…” well not exactly these words but the same massage. Apparently our Development Agent, Dan Mohan, suddenly retired. He is no longer at his office. No one seems to know exactly what happened but I can say I have never seen any ‘retirement’ happen so suddenly. There is no person to take over even! We will have to wait to see if the true story will leak out.

Subway generally;

The last topic sort of ties in with this one: I was told by some knowledgeable franchises that some people actually get phone calls to warn them about when they will get a visit from their field inspector. Apparently there is a pecking order of favorite franchisees in the eye of our ‘previous’ development agent. It had come to light that a franchisee was getting into serious trouble because of his tomatoes and was at the point of getting termination letters. This franchisee is supposed to be representing the franchisees at some of our organizations and committees. So much for an independent representative, independent of the development agent’s influence!

Which again leads me to this; part of our market has elected to discontinue the Sub Club program completely. No electronic replacement. The decision was based upon scientific studied conducted in test markets and further testimony from participants that sales would not be impacted but food cost would be reduced. A no brainer one would have thought. But our ‘previous’ DA had his friends voice mail franchisees to advise them of the folly of this. Apparently he had information which was contrary to the field study but he never shared the details of this. Unfortunately there are franchisees, who listened to these representatives, after all some are in important positions such as NAASF board members, and who will now have food cost at about 2% above their neighbors but with no gain in sales. In addition these same friends of the ‘old’ DA recommended a pricing system which would give one a food cost of about 37%, depending on local product mix.

That is all for tonight,

Take Care.

2005-04-28T19:21:00.000-06:00

Compliance Issues at Subway - real or imaginary?

How is it that a franchisee who has been in the Subway system for well over a decade and who takes great pride in having a well run store gets threatening letters from Subway head office if he has just one incident of a problem. We are not talking about onging problems but, say one in a year.

Here is a typical letter sent to many of most faithful and hard working franchisees on a regular basis:

"Dear Franchisee:

All SUBWAY restaurants must operate in accordance with the strict

standards for quality, service and cleanliness as defined by

the Company. It is the responsibility of each SUBWAY franchise

owner to be knowledgeable of all company policies as well as applicable

health and consumer protection regulations concerning food preparation,

food handling, storage, etc. Health and safety regulations exist to

protect our employees, our customers and the Brand.

Your Store Evaluation & Compliance Report dated xxxxx

indicates that your restaurant is not operating in compliance with the

specified SUBWAY standards regarding the following compliance areas:

Food Safety / Glove Usage

Food Quality & Preparation

In addition, there were 6 areas with a critical rating of “0” or “1”

which require your immediate attention.

Improper food safety may cause illness, which may affect the reputation

of your restaurant, your investment and the SUBWAY franchise system.

It is imperative that you correct the aforementioned violations

immediately.

Please be advised, that if the next Store Evaluation & Compliance Report

indicates that your store is still not complying with Company standards,

we will have no recourse but to refer this matter to our Legal Department,

which could result in proceedings to terminate your franchise.

If you need additional direction and/or assistance on how to correct

the compliance areas in your restaurant, please refer to your

Operations Manual and/or contact your Development Agent or Field

Consultant immediately.

Sincerely,

Policy/Compliance Adm."

Nice wording, is it not?

Now put this in context of this very same person who wrote this letter and who makes a mistake at work. Do you think she would be very happy with such a letter or do you think she would contact human relations, a union, or some other similar body to complain about unfair treatment and abuse by her boss?

Now, consider the owner of a Subway restaurant. He has hundreds of thousands of dollars invested in this store. He also can not just fire anybody because they make a mistake. There is also no guarantee that another new employee will not make a similar mistake. What recourse is there? None at all. He can only hope that the same mistake is not repeated by an employee. It really does not matter how hard he tries to correct the problem as mistakes do happen.

I can understand if this was an ongoing problem so that a history of documented problems exist. In addition one would expect that there would be some history of poor reports from the local heath department. If none of these exist why is it necessary for such a threatening letter after only one such incident?

The interesting thing is that this is not unusual. DAI (Doctors Associates Inc - Subway) do this on a regular basis. They use form letters as they issue so many. In addition, it does not matter if the expiry date is out by a few minutes or days. You get the same letter. It does not matter if it is vegitables or meat. After all, a sliced tomato poses the same health risk as a slice of meat, according to Subway. It does not matter if the product is held at a very correct temperature and constant monitoring of these are done by the store or if this is not done.

What we have is the "No Tolerance" policy which is so rampant through out North America. You know the one where the policing officer does not have to think. There are no extenuating circumstances. I have never found that a no tolearance policy works in any situation. The underlying problem is not solver but just complicated. For example, the incident of drunk driver collisions have not declined in society even with a no tolerance approach. Similarly, you will not reduce the possibility of a person getting food poisoning by using a no tolerance approach.

What will happen is that some of the less hygenic operators will just hide the problem. They will not get caught and when they do have a problem they will point to the clean record from Subway to exonerate themselves.

What we need form Subway is more of a helpfull approach to any indetified problems. Maybe there is some training which is required, maybe there is some operational problems which can be improved.

The only way to correct any perceived problem is to study its root cause and correct it. If after this no major improvements can be made then one has to conclude that it was an error and it should be noted as such.

Take care.

2005-04-24T22:38:00.000-06:00

What do Subway and McDonalds have in common?

Sure, they are both large players in the QSR industry. McDonalds leads the hamburger QSR while Subway leads the Submarine sandwich sector. Other than that nothing is similar? After all, Subway is the healthy choice while McDonalds is not.

I was watching the show “Super Size Me” the other week. You know the one where this guy eats nothing but McDonald food for a couple of weeks and gets ill from the experience.

It got me to thinking what we do in Subway. Our staff is trained to ask, “On a foot long, extra cheese, double meat, bacon”? We don’t say will that be super sized? But the message is the same. If they do not then we get marked out of compliance and penalized for not up selling to the customer.

In this age where so many people are having difficulty in eating properly would in not be nice if there was one place where they were not tricked into eating more than they should? Maybe I should say they are not being tricked into eating too much as much as coerced. For example; the price of a foot long sub is less than 50% more than for a six inch sandwich. You get twice the amount of food for paying about 40% more, in most cases!

My recommendation:

1. Charge extra for extra items so that profits are maximized and temptation for excess on behalf of the customer is reduced.

2. Do not offer a foot long sandwich for less than the equivalent 2 six inch units.

3. Do a better job of promoting salads with low fat dressings.

4. Offer a Meal Deal with a reasonable discount.

5. Do not offer a toy with Kids Packs. Keep the cost low to encourage more kids to visit.

6. Seriously review the breakfast menu by offering a product which the customer wants.

7. Eliminate the drive through.

Some of the above have nothing to do with over sizing the customer’s waist but will improve the satisfaction of the customer while generating reasonable profits.

Item 1 is a no brainer but we still offer the customer a selection of add ones which are not available at any other business. It makes it difficult to control costs and also makes the modest buyer feel like he is supporting the eating habits of the indulgent ones.

Item 2 is supposed to encourage sales by up-selling the customer. Rather, why not eliminate the foot long items on the menu board. It will help simplify a very confusing display of choices by about 40%. In addition there will be less discrepancy between rural and urban stores. Urban stores tend to sell more six inch sandwiches. As such food cost will be more equitable and comparable between different locations.

Item 3 should be obvious to allow the person who wants to eat healthy a choice. It is sad to note that the salad program which we rolled out last year was an abysmal failure. What is even sadder is that our person responsible for this failure received an award for excellence!

Kids should be encouraged to visit more often. Offer them a toy at a price if they want one. However, with a selection of only four toys are we saying expect you to come to Subway only four times in six, or so, weeks? Get rid of the included toy and keep the price down. Mom will be real happy.

We do not have a real breakfast menu. We really need one.

Subway prides itself on making the sandwich in front of the customer. You can not do that in a drive through. In addition, you will need more staff and also have to invest more in capital assets and maintenance. If an owner wants one let him have one but don’t coerce them into installing a drive through.

Well that is about all for today.

Take care.

2005-03-15T01:39:00.000-07:00

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.

2005-02-04T01:45:00.000-07:00

Hello

2005-02-04T01:15:00.000-07:00

I wanted to post these comments for some time but just never got around to it. They are very important as they come from one of our employees and reflect a view which is not often heard by our community but is very important:

"Ok, I'm only a manager, but I am in the store everyday.

1. Eliminate the Sub Club Card. Don't replace it with an electronic loyalty card. Just get rid of it. If I feel the need to reward MY loyal customers, I can handle it locally.

2. Quit introducing products that don't meet the 33% food cost guidelines. It is hard enough to meet food cost goals as is. The products you introduce that start out over these goals only make it harder to do my job.

3. Give the owner's back their 1%. I have seen nothing from DAI in the past year to justify the franchisees' faith in authorizing this money. Let's see: Menu boards that had to be replaced because they were wrong (value meal numbering goofed up), Changing sandwich names to satisfy Atkins(after years and years, the club sandwich is suddenly Turkey breast, Ham, and Roast Beef: this helps my throughput how? Same with the Subway Melt Nobody had any trouble ordering these sandwiches before we changed their names.) Expanding Salad line only to reduce it when it didn't work. Getting rid of sauces that were popular ie. red wine vinegar and dijon horseradish. How many more months until I get a menu panel to replace the one which still adveritises the Dijon Turkey breast, Ham, and Bacon Melt. They sent out little sticker disclaimers to protect themselves after we changed the tuna formulas. Who cares? I don't have any customers who bring their binoculars with them to study the menu board. Do they really think people can see that fine print from across the counter. oh I know let's make it a compliance issue to have to have take out menus in the store, then change the menu so we can't order them and have them be accurate. Yeah that works. Here's a favorite of mine. Customer says "What's the difference between the Chipotle Cheese Steak and the Cheese Steak?" Employee says "the sauce." Maybe the employee should add that according to the corporation, the Chipotle Cheese Steak only has select ingredients on it. But that would only hold up the line and reduce throughput. Why are we wasting a menu line listing both sandwiches? Does anyone have two separate buttons on their register for these different sandwiches? I could go on and on, but you get the point, I hope.

4. Relax the hours of operation policy. Welcome to the real world. Some stores are in locations that do not benefit from extended hours. They were conceived and planned with specific goals in mind and by making them stay open longer, you are only hurting the franchisee. Maybe DAI should work on an individual basis to help the franchisee to evaluate their daily break even point and set their hours to maximize their profit potential. Each location is different and should be evaluated in that regard. Yes, I do realize that the rent is the same for the space whether you are open or not, but there are lots of others factors that affect the bottom line of a store: Labor, Power, Safety, and Security among them.

5. Which leads me into: Discounts and specials: 2 for $7.99, 3 for $9.99, 3 for $10.99, 3 for $11.99. Thanks for increasing my food costs. and my employee turnover rate. Yes you can produce more sandwiches with the same number of employees, but they don't stay happy for very long. In my view, all these discounts tell our customers is that our sandwiches are not worth what we normally charge for them. Coupons, why pay full price when there is always a coupon out there somewhere? Yes, I know that these things are supposed to drive customers into the store. But I spend months afterward having to listen to the customer who really liked when we had that special. Why wouldn't he? It saved him 3 or 4 bucks a pop sometimes. And the customer never understands that they can't get a value meal discount in conjunction with a special. Wouldn't it be better to be able to reduce or prices across the board knowing that we did not have to price items higher to account for all the wacky specials out there."

These comments were buried deep in the bowls of the NAASF web site but should be read by all franchisees.

To this I could add a slew of my own concerns. I can say this though; coupons do nothing to drive sales after the coupon is finished. If they are supposed to attract new customers, why do our customer counts go back to ‘normal’ a few weeks after the coupons are done? They only serve to drive sales with lower prices. At the end of the day your profits suffer as your staff turnover goes up, wear and tear increases and your food and labor cost rise.

I introduced the DA to an electronic gift card as I’m tired of our current Mickey Mouse™ system. The system is available Canada wide through our biggest supplier of electronic card products. In other words it can be implemented by Subway in our total market. I’m holding my breath waiting to get approval to try this in my store.

During my last field inspector visit I was told that my hours of operations were barely within the required hours. I’m open from 6:30 am to 11 pm every day. Only exceptions are Thursday and Friday when I’m open later and on Sunday when I’m open a bit later. By my count I’m open about 119 hours per week. This is barely within required hours? I know, we should really be open 24-7 so that DAI may collect royalties on the last sub we sell. My labor cost has gone from about 17% to 22% over the past two years. This took place even though my sales have grown by over 20%. Maybe my labor cost should be 25% to satisfy DAI goals. I should really be closing early on most nights as there is no justification to stay open after 9 pm in my market. The only exception is three days at the week end.

Take care.

2005-01-20T02:44:00.000-07:00

Here we are in 2005 and Subway continues to do exceptionally well. We can expect better sales and more stores in the coming months. More Subway millionaires will be created and the existing ones will continue their growth in sales and stores. I wish all continued success.

How will NAASF do in the coming year? Will we see some real inroads in our relations with DAI or just more of the same inactivity? That is, promises of action and change but in the end no real progress.

We may have IPS collecting fees for NAASF. This should alleviate some of the revenue pressures on the organization. It will require almost all the franchisees signing up for this and I don’t know if this will be possible give that we still have about 30% of the franchisees not signed as members with a free membership.

I went to a DA Regional Conference this week. It was a one and a half day event. It was well attended but I was quite surprised at how many of the franchisees were new to the system. Given that we have not seen such a large growth of stores in or market it was remarkable how many were new faces. I guess we have a high turn over in more than staff at Subway.

In talking with some of the new franchisees I learned that some were disappointed with their profits and the amount of time that was required to operate a Subway. Some were knowledgeable of their real food and paper cost while others were not. For example; one franchisee told me his food cost was 31%. I was surprised as I’m having a hard time getting anywhere near 35%. I also learned that his prices were at the ‘recommended’ prices which are quite a bit lower than mine and many of the more seasoned franchisees. In further questioning I learned he had been in the system 8 weeks and his costs were generated from the SubShop 2000 program in our POS. Boy will he be in for a surprise at the end of the year when his accountant adds up his costs. I recommended that he invest in an accounting program and take off monthly statements.

The Convention was quite well run. The best part was the presentation by Raghu Marwaha and Bob Grewal of LA. The IPC presentation was disappointing and seemed to only go to support the DA’s statement that we should not be in a rush to raise prices as food and paper costs are generally coming back down. No mention of the long term trend of raising costs over the past few years. Only focus was on the past few months. Then there was the Balanced Scorecard presentation by Suzane Ebelher. I have no idea as to the relevance of this to our business. ‘Local Restaurant Marketing’ was explained by Carolyn Martin, a past field rep. I guess some of the ideas are useful to the new franchisees but I did not see anything which I had not done or was not doing in my market.

Our NAASF board member was present at the meeting but no mention was made of NAASF to the participants! Not an introduction, no recognition and no mingling during the convention that I saw. There were no membership hand outs – NAASF was absolutely invisible! I was very disappointed.

The only FAF presentation was by our Advertising Agency, Scott Richards. It was again to support the DA’s views. It was in support of continuing the Sub-Card. No mention of the successful trials which support elimination of the Card and Stamps.

If I have any complaint it was that the convention was DA-centric and not for the benefit of the franchisee. There were no round table type of exchange process and there were no question and answer sessions. A work group to set recommended prices could have been useful and would have more belief than the current one set by the DA.

Here is a good link to some useful information on our SubShop 2000 POS and other related material. Check out the training for your managers for the POS.

Take care.

2004-10-25T22:48:00.000-06:00

A busy post tonight with some good material scrounged from The Economist and all related to our Subway business. Makes up for an easy time over the past month. Better to have quality than quantity:

On Profitability:

I'm still thinking (worrying) about Fred's email about Starbuck's 20% store expansion goals. It really worries me that he is still so bent on having a Subway on every corned, like Starbuck's. You may have read some analysis on this in earlier posts. Basically, the analysis shows that Starbucks can do this as they are corporate owned while Subway is franchisee owned. It is like comparing apples to oranges. I don't think Fred gets it.

I got this email from a NAASF board member some months ago:

"The feelings at Subway today are much different than when you were on the board. Fred is very concerned about the loss in franchisee profitability - he showed me a chart that he keeps with him, update weekly, on franchisee profitability per region."

I'm sorry but I still don't get it, I guess. Fred is concerned about store profitability? Maybe this following post by a Subway franchisee can shed some light on DAI's concern:

"We put up a door cling and a couple of signs in the stores June 17th telling the customers that we were phasing out the SCC program. We stopped passing out stamps on July 5th and stop taking SCC altogether on August 17th. Here's our sales results compared to the rest of the country. Week Ending St. Louis National
10/5 99 100
9/28 110 102
9/21 104 100
9/14 104 101
9/7 92 94
8/31 105 101
8/24 88 91
8/17 88 88
8/10 90 91
8/3 86 91
At the last SAC meeting Bill Schutini said that our sales were in the "tank". You do the math...St. Louis averaged 96.6 VS National at 95.9. By my math we beat national by over 1%. My WISR food cost during this 10 week period of time has gone down an average of -.38 percent. I thought it would have gone down more but if everyone else's has gone up 1 to 1.5%, I like that spread! It's not to say that we haven't had some upset customers - we have. However they have been far and few between. If you explain to the customer that stamps and full cards are available on ebay they then understand why we had to eliminate the program. It all comes down to how you explain it to the customer. I have heard rumor that they were going to enlarge the test program to include some other markets. Hopefully that happens and then goes nationwide."

Bill Schutini said that our sales were in the "tank"! Why would he say that when the franchisees experienced no such results when eliminating the stamps. Ah, he is a bit concerned that sales 'may' be down a fraction of a percent. Never mind that stores profits are up. "Fred is very concerned about the loss in franchisee profitability." He is?

This is where I have problems with some NAASF board members. They are just to close to the DA and DAI community to truly represent the average franchisee.

On Succession:

Have any of you given consideration to what will happen when Fred dies or is incapacitated? I know, we will all live forever and have never though about our mortality. Who is the heir of the empire? Fred's sister who is currently responsible for our R & D department? I have no idea who is being groomed for this and I do have some concern as this organization is just too focused around Fred.

I came across a couple of good articles this past week. This first one is about succession planning and is a good read for anyone. The second article is about McDonald's. Not something you would see in an email from Fred:

Original article link to The Economist here.

Chief executives Passing the baton
Oct 14th 2004 From The Economist print edition

It is rarely a good idea to appoint an outsider as the company's new boss
PATRICK CESCAU is settling into his new job as the head of Unilever having taken over from Niall Fitzgerald. The transition was smooth: when Mr Fitzgerald took the post he said he would hold it for eight years, and his eight years are up. In February, he said Mr Cescau, a 30-year veteran of the Anglo-Dutch multinational and then head of its foods division, would be the next chairman, and from April Mr Cescau shadowed Mr Fitzgerald on the job. In another well-planned move, Mr Fitzgerald is not hanging around to watch over the new man's shoulder. On October 1st he became non-executive chairman of Reuters, the news organisation, a role he is combining with a clutch of other appointments outside Unilever.
These careful steps are a sharp contrast to the uncertainty over succession at many other companies. This week, after the sudden withdrawal from the market because of health fears of its painkiller Vioxx, it emerged that Merck had begun looking for an outsider as a possible replacement for its chief executive, Raymond Gilmartin, who is due to retire in 2006. While an internal candidate might yet be appointed, the widening of the competition for the top job adds a new level of unpredictability to the future of the American drugmaker.
This could be made worse if the search drags on, like the long-drawn-out affair at Walt Disney. There Michael Eisner, its deeply entrenched boss, was forced to give up the chairmanship by dissatisfied shareholders in March and has said he will step down as CEO when his contract ends in September 2006. As with the recent pronouncement by Tony Blair that he will not be Britain's prime minister beyond a third term, the timing of his departure may not be entirely his to determine. George Mitchell, Disney's current chairman, has been quoted as saying that Mr Eisner will continue to be the chief executive officer until such time as the board determines it is appropriate for the new CEO to take office.
There is intense speculation about who that might be. Among the possibilities are Mr Eisner's personal favourite, Robert Iger, currently Disney's chief operating officer, and Terry Semel, the boss of Yahoo!.

An inside job
What is the best way to replace the boss? A recent study of large, non-diversified publicly traded American manufacturing firms in the Academy of Management Journal suggests that companies perform better under a new leader if that person has been groomed as the heir apparentwhat it calls relay succession. The grooming period, say the authors, Nandini Rajagopalan and Yan Zhang, professors at the University of Southern California and Rice University respectively, is akin to a school, within which a new CEO's education takes place. They found that, other things being equal, relay succession produces a significantly better financial performance than the alternativesselecting an outsider, who inevitably lacks knowledge of the firm, or holding a competition between internal candidates.
But boards must do more than draw up a list of high-potential employees to plan an internal succession, argues a new report from A.T. Kearney. The management-consulting firm says one of its clients uses a talent-management programme that includes evaluation, mentoring and individual development plans for its high-flyers. "With business units often larger in size than some countries' economies, and business complexity that requires continuity to sustain and grow shareholder value, more boards are making enterprise-wide succession plans," claims the report.
Companies feel the need to turn to outsiders most strongly when they are underperforming. But unpublished analysis by Marakon, a consultancy, of transitions over the past decade at the top of Britain's biggest quoted companies shows that internal appointees have been slightly more successful at turning round underperforming firms than outsiders, confirming the findings of Ms Rajagopalan and Ms Zhang. In fact, they found that struggling companies (other than those in 'unstable industries', such as computers and toys) gained even more from relay succession than did companies that were doing well. So if Disney, whose recent performance has been far from stellar, takes note of these findings, it ought to hand the baton to an internal candidate sooner rather than later.
And yet relying mostly on internal candidates can carry risks. In Disney's case, the company's problem is that the board, while appointing headhunters to trawl outside for a new boss, has said that Mr Iger is the only internal candidate, and a significant group of shareholders, incensed by Mr Eisner's high-handed ways, are threatening to challenge anyone they feel he is trying to foist upon them.
The cost of holding a competition for the job among internal candidates seemed most apparent when General Electric chose Jack Welch's successor by means of a three-horse race. The winner, Jeffrey Immelt, was announced in November 2000. In little more than a week, the two losing candidates had been lured away by big prestigious companies; James McNerney to 3M and Robert Nardelli to Home Depot. Their immediate loss was a high price to pay for holding a competition.
Even when succession planning works triumphantly, however, it can be undermined by accidents. McDonald's boss, Jim Cantalupo, (see article) died of a heart attack in April this year while attending a company convention. Within hours the board had replaced him with their pre-agreed successor: Charlie Bell, a 43-year-old Australian. But Mr Bell almost immediately had to undergo surgery for cancer from which he has not yet fully recovered.
In November last year, Boeing had to sack its heir apparent, Mike Sears, when he was found to have offered a job to someone in the procurement department of the Pentagon. When the CEO, Phil Condit, was forced to resign soon after, the company had to call on 67-year-old Harry Stonecipher, a retired Boeing executive.
Unforeseen events and accidents aside, the evidence is now strongly in favour of the appointment of internal candidates to succeed the departing chief executives of big companies. This should mean that boards which turn to outsiders should have to give shareholders compelling arguments for doing so.

Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved.

Here is the article on McDonalds turnaround and plans for the future. Please note the new sandwich and toaster oven:

Original link to The Economist article here.

McDonald's turned around - Big Mac's makeover

Oct 14th 2004 OAK BROOK, ILLINOIS From The Economist print edition

The world's biggest fast-food company has pulled off a remarkable comeback
Get article background

IN THE entrance to Hamburger University, the ultra-modern training centre for the world's biggest fast-food operation, Ray Kroc's office has been faithfully reassembled. McDonald's managers have looked to their late founder quite a bit lately for inspiration in how to deal with a series of crises, any one of which would have destroyed many companies. Mr Kroc used to say he didn't know what McDonald's would sell in the future, except that the company would sell the most of whatever it was. Remarkably, McDonald's has turned itself into the world's biggest seller of salads and its business is flourishing again. Yet despite all of its new lettuce, free-range eggs, bottled water and yoghurt parfaits, success remains, at least for now, all about burgers.
The company reached a low point in 2001, when customer-satisfaction surveys showed McDonald's was falling well behind its direct rivals, Wendy's and Burger King. Customers were also switching to healthier offerings, such as Subway's freshly filled sandwiches. Lots of money was spent opening yet more stores, but margins were shrinking and complaints about dirty restaurants and indifferent staff were growing. The firm's philosophy of QSC&Vquality, service, cleanliness and valuejust was not working any more. McDonald's ended 2002 with its first quarterly loss since 1954, the year Mr Kroc persuaded the McDonald brothers to let him franchise their new 'Speedee' self-service restaurant system.
McDonald's had lost more than direction. A wave of anti-American feeling abroad turned its world famous 'golden arches' from an asset into a liability. And there was growing concern about obesity and junk food. McDonald's was even sued (so far, unsuccessfully) for making people fat. Even now, long after its debut in America, Morgan Spurlock's film 'Super Size Me' is making overseas audiences cringe at how he made himself ill and gained 25 pounds (11kg) by eating only McDonald's food for 30 days.
Many companies might have tried to muddle through. But in January 2003, Jim Cantalupo, a McDonald's veteran who used to head international operations and who had been passed over for the top job, was brought back from retirement to replace Jack Greenberg, forced out as chief executive by worried shareholders. The Plan to Win, as the company's recovery strategy is called, is largely Mr Cantalupo's work. He was hugely popular at the firm's headquarters in a leafy Chicago suburb. However, in April, while attending a McDonald's convention in Florida, Mr Cantalupo, who was 60, died after a heart attack.
A lot of businesses would have been thrown into chaos by the loss of their leader at such a time. But McDonald's swiftly executed a succession strategy already in place. Within hours, Charlie Bell, a 43-year-old Australian promoted by Mr Cantalupo to chief operating officer, was addressing the troops as the first non-American to head the company. Yet the health scares remain. Mr Bell was diagnosed with cancer in May. Even while recovering from treatment, he has been determined to remain at the helm.

Fat, dumb, not happy
Mr Bell, who joined the company as a 15-year-old restaurant worker (a 'crew member', as McDonald's calls them), is characteristically blunt about what went wrong. There are a lot of companies, he says, that get fat, dumb and happy and take their eye off the ball.' People thought McDonald's was no longer capable of impressive results, he says. Yet for the first half of this year sales were up 13% to $9.1 billion, and net profits rose 38% to $1.1 billion, compared with the same period a year earlier. On October 13th McDonald's announced stunning third-quarter preliminary results. Its earnings per share jumped by 42% and sales again grew strongly. Much of McDonald's growth, though, has come from America: Europe has not yet shown a decisive turn for the better.
Measured by sales, McDonald's is about twice as big as its next global competitor, Yum! Brands, operator of Kentucky Fried Chicken (KFC), Pizza Hut and Taco Bell (although McDonald's operates slightly fewer restaurants). McDonald's makes its money from its 9,000 company-owned restaurants and the rent and service fees paid by franchisees and licence holders, who operate a further 22,000. A study by Citigroup Smith Barney reckons the average franchisee expects annual sales of about $1.7m from a restaurant and an operating profit of almost $150,000. This, it believes, could grow now that McDonald's is concentrating on expanding sales in existing restaurants.

Instead of opening lots of new restaurants, McDonald's has switched to generating more sales from its existing ones. This year, some 90% of McDonald's growth is likely to come from incremental sales at its existing restaurants, compared with around half last year (see chart 1). Last year, its restaurants worldwide generated an additional $400m to take annual positive cashflow to $3.3 billion. In September, McDonald's said it would use its cash pile to boost its annual dividend for the second consecutive year, pay down $600m-700m in debt and spend up to $1.6 billion opening some new restaurants (often in places like China), but mostly in doing up its existing ones.

Back to basics
Cleaner, smarter restaurants will help, but it is notoriously difficult to impose and then reinforce standardised operating procedures through a highly decentralised businesspart of the problem when standards were falling. New technology will make things easier. Every McDonald's has a 'travel path' along which a member of staff must walk "sometimes every 30 minutes" to ensure that all is well. The company is now testing small hand-held devices, which can be used like electronic clip-boards by those making the rounds. Failures to check, say, the temperature inside a refrigerator (the devices are fitted with a probe) or to scan a location barcode (they have a scanner too) when checking the play area, will be recorded. If too many incomplete checks build up, the device can automatically alert the local manager by ringing his mobile phone.
This might sound Big Brotherish, but McDonald's insists that its businesses will remain, in effect, lots of local restaurants, although ones expected to operate within clearly defined parameters. That still allows for plenty of variation. In some Latin American cities, McDonald's is even experimenting with differential pricing: charging different prices for meals according to the relative wealth of their neighbourhoods. If you are looking for a command centre with one push button that operates our restaurants in every corner of the world, you won't find it, says Jim Skinner, McDonald's vice-chairman.
And like any local restaurant, it is what is on the menu that is really important. The average sale in a McDonald's is just under $5. Typically what might happen is a mother comes in, buys her children a Happy Meal, and herself just a coffee. Now that salads and other lighter options have been added to the menu, many of those mothers now buy themselves a meal too, lifting the order value to around $12. The lighter options also encourage existing customers to come back more often because there is a greater variety of things to eat. Nevertheless, for now, the Big Mac remains the most popular item worldwide.
McDonald's does not publicly break down sales and profits of its individual items. But anything that involves fresh, perishable produce that does not come in a standardised and easily storable form (ie, a lettuce compared with a frozen hamburger patty), increases complexity and cost. McDonald's officials insist their salads are priced to be profitable, arguing that if they were not its franchisees would not want to sell them. But then, by some measures, supermarket loss-leaders are also profitable because they bring in customers who buy other products. Nevertheless, salads are sending a message to millions of customers: that it is now acceptable to eat at McDonald's again because the menu is healthiereven though the vast majority still order a burger and fries.
"There is no question that we make more money from selling hamburgers and cheeseburgers," says Matthew Paull, McDonald's chief financial officer. Sales growth is, he says, being driven by the 'halo effect' of healthier food appearing on the menu. He expects that will continue. Beyond 2005 he reckons sales will grow 3-5% a year, and the return on the company's investments in new and remodelled restaurants to be in the 'high teens'. There will also be more new items appearing on the menu.

What's cooking?
The future of fast food is being cooked-up in an anonymous warehouse sitting among many others on a vast distribution park on the plains of Illinois. This is McDonald's Innovation Centre. Inside are several fully functioning restaurants. As staff prepare and cook meals, others act as customers. Any one of the more than 31,000 McDonald's can be replicated here. Despite the common perception that they are clones, there are plenty of differencesespecially on a regional level. The fruit servings that McDonald's is starting to offer its customers illustrate this: there are packets of skinned apple-slices for the Americans, but the skins are left on for Europeans. The Australians, meanwhile, just get an apple. Local tastes and preferences, says a chief, count for a lot.
At a busy replica of a British restaurant, video cameras record a time-and-motion study. Moving the relish dispensers could mean a crew member in the food preparation area no longer has to make a half turn. That could save a second or so, which means a customer gets his burger faster. But will it cause problems elsewhere in the system? Nobody, as Mr Kroc used to say, takes hamburgers more seriously.

Yet the really interesting thing going on here is at a hybrid restaurant, which in part uses McDonald's Japanese system 'creator of the Teriyaki burger' and a new concept from Sweden, which grills burgers vertically instead of horizontally as on a traditional griddle. This new type of grill offers great space - saving possibilities - extremely useful in crowded Japan. But it is what is on the menu that, for McDonald's at least, is truly revolutionary.
Among half-a-dozen choices are a 'New York Reuben', a 'Grilled Veggie' and a 'Leaning Tower Italian'. As in any experimental facility, McDonald's stresses that not all the ideas being worked on here will make it to market. But the signs are that McDonald's is getting serious about sandwiches. Their experimental 'Oven Selects' range, freshly made and toasted to order, is now going on trial at some 400 restaurants in America. If the sandwiches, which will sell for $4 each (relatively expensive for McDonald's), are a hit, they could become a global product.
Moving into the sandwich business means that McDonald's will compete more directly with the likes of chains such as Subway, and against countless corner delis and supermarkets. "Sandwiches outsell hamburgers by ten to one," says Russ Smyth, president of McDonald's Europe. "So there is a great opportunity here." In order to grow the business in some of its mature markets, McDonald's has to take market share from others. In Europe, says Mr Smyth, the so-called 'informal eating-out market' has been declining, but McDonald's has lately managed to boost its share from 11% to 12%.
Sandwiches are not the only innovation in the works. The Australian market pioneered gourmet coffee for its customers. This has been developed into a concept called McCafé, which is already providing coffee lounges inside 500 existing McDonald's restaurants. Some of these are being fitted out as wireless hot spots for the internet. But can McDonald's really hope to take on Starbucks too?
It will be a challenge for the company to manage a multi-format operation under one brand, says Jim Farrell. He has followed McDonald's closely since working there as a teenager and later in his career as a management consultant based in Chicago. Having a bigger variety of items on the menu means more potential problems and higher costs. It also means trying to appeal to one group of customers without alienating another. For instance, says Mr Farrell, a restaurant that is attractive to families and is full of children clamouring for Happy Meals (or the toys in them) might not appeal to stressed-out office workers who have popped out for a quick sandwich and coffee.

Hot in the kitchen
McDonald's could try to become different things in different locations, and at different times: it is already trying harder to catch the breakfast trade. Mr Farrell suggests another way could be a cluster of operations in which a coffee bar, fast-food outlet and sandwich counter share adjacent parts of the same buildinga bit like a food court.
Yum! Brands already does this by grouping some of its restaurants together to provide an assortment of pizzas, tacos and fried chicken. However it tries to manage this, McDonald's also must watch out for its rivals improving their menus too. Wendy's, for instance, is developing its already successful Tim Hortons brand, which is a North American coffee-shop cum-bakery operation. KFC offers the option of mashed instead of fried potatoes and has started selling chicken with rice.
If more customers start to choose salads or toasted sandwiches, then the balance of the business will change
It remains to be seen just how far McDonald's can expand its menu while keeping its restaurants under the golden arches. As film-maker Mr Spurlock says: "People go to McDonald's to eat burgers." But if more customers start to choose salads or toasted sandwiches, then the balance of the business will change. If that happens, would the McDonald's brand still work? The company has steadily been buying into chains that operate under different brands. Among them is Boston Market, bought in 1999. It operates 630 restaurants in America that boast high-quality 'home-style' cooking. In 2001 McDonald's also acquired a minority stake in London-based Pret A Manger, a relatively upmarket coffee, sandwich and salads chain that has done well in Britain and is expanding overseas, with mixed results so far. McDonald's management are guarded about what they intend to do with such investments. But clearly they provide a hedge against the future, just in case existing McDonald's sites needed to be replaced with something radically different.
For now, that is far from necessary. Larry Light, who became global marketing chief in 2002 after running his own brand-building company, quickly trots out all sorts of figures to show how awareness of the McDonald's brand, already high, is actually growing. Next to Santa Claus, the most instantly recognised figure in the world by children is Ronald McDonald, the annoying clown who serves as the company's 'chief happiness officer'. Television ads of his synchronised swimming and high-diving during the McDonald's-sponsored Olympic Games won the company lots of plaudits from the advertising industry this summer.
But Mr Light is doing things differently. "The days of mass-media marketing are over," he says. The three main target groups the company is trying to influence are children, mothers and young adults. Teenagers, for one, are a tough lot to reach now that they spend more time on the internet than watching television. So marketing has to follow them there or to the music charts by signing up Justin Timberlake and Destiny's Child as part of the company's ad campaign.

The food of love

The McDonald's brand is big, but it means different things to different people. It can also be positioned differently throughout the day, during breakfast, lunch and dinner, if you are eating alone, or with children. Hence the new advertising campaign that Mr Light launched, anchored around the catchy ditty "I'm lovin' it', takes many different forms.
The campaign also has to deal with the most sensitive issue of all: the one portrayed by Mr Spurlock, which has it that eating at McDonald's makes you fat and ill. The company shows no sign of ducking this. The 'supersize' portions have been phased out, even though McDonald's maintains that Mr Spurlock was simply acting 'irresponsibly' by deliberately consuming so much food and limiting his physical activity.
Such things come with the territory, reckons Mr Bell. He likens it to what Australians call the 'tall-poppy syndrome': when you are the tallest in a crowded field, someone will try to cut you down. He agrees that obesity is a genuine problem, but believes his company can help by promoting more active lifestyles and offering more balanced food choices. Is that a marketable proposition? Mr Light, whose job it is to put this message across, thinks so. "If we behave responsibly," he says, "we will be perceived one day not as the problem, but part of the solution."
If McDonald's can pull that off, then it will have achieved a remarkable transformation, as well as having cemented the turnaround in its fortunes. What are its chances? Well, the company is trying pretty hard. In America it has been offering a meal for grownups, promoted by Bob Greene, Oprah Winfrey's personal trainer. It comes with a salad, bottled water, a book of walking tips and a pedometer.
While it is easy to dismiss this as just another sales gimmick, if only a fraction of the 30m pedometers that have already been sold end up being clipped to people's waistbands and succeed in encouraging them to walk a little further, then McDonald's may already have taken one small step toward helping an overweight America to slim down. And that will do its health no harm at all.

Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved.

You don't need me to tell you the relevance of these articles.

Take care.

For more information, link here.

2004-09-22T01:16:00.000-06:00

Low Carb

Here are some comments from a few Subway Franchisees:

“I have been with Subway for 6 years and I am pleased for the most part; however, over the past year I feel that DAI has not put forth any ideas that have been to my benefit. Toaster ovens, increased hours of operation, getting in bed with Atkins, the 1% increase in FAF funding none of this has helped or will help me. I think we need more direct action- petitions, etc. to get the word to DAI that they have lost the backing of the owners. I for one will not be funding my account for the toaster ovens any time soon. Maybe we could suggestion that nobody fund their account? Short of that maybe we could get DAI to buy our stores and assume some risk.”

Another:

“I have a theory on why some customers are not coming back as often as they used to. We make the customer work too hard!! What kind of bread, what kind of cheese, what kind of dressing, etc etc. This is compounded by the idiots in menu development that take the name of one of our most popular sandwiches and give it to a friggen' salad. Did McDonalds take the Big Mac name and give it to a salad? Hell no. We are wearing people out. They change all the fresh value meals then change them back. Who makes these decisions and are they still employed at DAI? Then the brain trust at DAI fires the Ad agency like it their fault the menu choices and lo-carb BS is not what our customers want. We are the best sandwich chain in the nation and anything we do that harms that or takes away from that needs to be looked at very carefully. DAI's vice president of change for changes sake needs to get the boot. The new salad program is so inefficient it is criminal. I want to know who makes these decisions and see their head on a pike!”

Another:

“Funny how DAI is now concerned about price of admission after increasing our food cost. labor cost and decreasing sales at the same time. Not to mention the increase in FAF funding, purchasing the Quizno's oven, and on and on. I don't know about you guys but all of my costs have increased this year, insurance, unities, everything. If DAi is really concerned about price of admission they need to refund our 1%, cut down inventory (which would save some labor), and bring out some products that bring in customers. I have a real hard time putting any faith in DAi because their track record lately. I know Fred started and built up this thing from nothing but we need positive growth in existing stores not just positive growth because more stores are open. Let's get back to focusing on our sandwiches and being the best sandwich shop there is. Anything that takes away from that needs to go away.”

From me:

“I've been in the system now for almost a decade and a half and have seen some very disturbing trends. I posted, on my web site, the question of where is DAI taking us. We seem to be heading for a premium brand with all the decor and food items going up in cost. Service has now to be top quality or we get Termination Notices. Staff training and selection is very critical to maintain the expected standard. Our operation is very complex when compared to any other QSR and we need very smart people to run our stores with the very complex menu, etc. I'm at the point were I can't afford to stay open late as it is impossible to get quality staff for the late shift. This coupled with the need to sell no less than 5 units per hour to break even makes it impossible to have extended hours of operation. I used to be able to make money with unit sales of 3 per hour. My labor cost is several points above what it was just two years ago. My food cost is also several points above that it was before. There is absolutely nothing I can do to lower either while keeping the operational quality and prices in check. The short of it is that I need to do about $10,000 per week in sales to just have the same profit I had when I used to have sales of $6,000! I look at my neighbor QSRs and note they are full at breakfast while we have only a few customers. Our breakfast product sucks big time! I look at my neighbor QSRs and note they are very bust at night with coffee and donut sales. Our evening menu sucks big time. We need to improve our product to meet the need of the morning and evening customers. It is not the other way around. Advertising will not give them what they want! Discounting our product sounds like a good idea to bring in new customers until you realize that the other QSRs have food cost and labor cost several percentage points less than us. They have some margin to absorb the cost of discounting -- we do not!”

To my comments I got this reply from one franchisee:

“I have been in the Subway system for only two years, but I pray that at year fifteen I am not as miserable and unhappy as ‘you’. I have 30+ years in QSR and the last two have been the most satisfying for me. I know of no other QSR chain as easy to operate. If I was so unhappy, I'd sell and buy one of those other busy QSR's. You'll find thier COGS aren't much lower than ours either.It's easy to complain about what is always wrong, but what about ideas that would make it better ? I don't agree with everything that DAI comes up with, but we do more right, than wrong at Subway. I am excited about speed ovens, and what it can do for breakfast and dinner. Hope you find something that make you happy”

Wow – all I can say is what are you smoking? Are you truly so excited about the fact you have no recourse if you find yourself discriminated against by you development agent or DAI? Can you not see that we are being crowded out in our market by fellow franchisees and end up cutting our own throat with cannibalization?

With people like this we there is really no hope of reforming the system. It is possibly also why NAASF has only 70% membership. Why join as everything is just great!

On this positive note: I just received a letter and documents from a franchisee in a small town. He is currently doing a CPC of $1.05. The town in less than 10,000 population and the trading area is about 50% larger. Wal-Mart just located to the town and the DA wants a Subway in this location. He was approached but declined due to the fact that there was not room for two Subways in the small town. The DA went ahead with a study which proved that there was room for two stores and sold the location to an existing franchisee from an adjacent city. The franchisee had an independent person with several years of Subway experience look at the proposed store and came away with the assessment that his business would see about a 30% loss in sales. Talking to DAI was of no help and the DA is going ahead with the new Subway. Now neither one will be profitable but DAI will probably see a marginal growth in revenue from this action.

I also received a call from another franchisee who was complaining that a second Subway was being constructed 20’ away from their store. Yes, I said twenty feet! It was appealed but, again, it went ahead.

All I can say to Mr. “30+ years in QSR” is that all is not so rosy in our system. Why do you think Subway is the most litigated QSR in the world? I guess “I know of no other QSR chain as easy to operate” is a relative term?

Take care.

PS. I'm not miserable at all :-)

2004-09-07T03:02:00.000-06:00

It has been a few days since my last update to the site. Many things have happened, most for the better.

For one; I now see more activity by some NAASF Board members in their own Discussion Site. It can still be improved but this is a good start. It would be nice if they would formalize this with the establishment of a communications committee. This committee should be responsible for the monitoring of the site and to answer questions, in a timely fashion, of members.

I note that Fred DeLuca has made a trip to the Mid West and that he observed some serious problems with our store operations. For a change they were not being identified as being caused by owners but rather DAI. Our menu is too complex and we have too many items in inventory. My question is; why did it take a trip to identify this? Why did not Research identify these problems? Oh, (a little sarcasm here) this department is run by Fred’s sister! No wonder there is so little accountability and correction of errors at DAI.

Where is NAASF in all of this? No mention was made by any input that we had on these matters. I guess that DAI does not really have much respect for NAASF or there would be a bit more than just cursory recognition and participation in SAC. NAASF needs to fight for respect. It will not be handed to it without a fight. NAASF has to have legitimacy. This can not be won with free membership. If it remains free it needs to have close to 100% participation of members. I believe that membership has stagnated at about 70%. With paid membership this would be excellent.

I will, again, make mention of web based survey tools. It is imperative that NAASF use these to get input to survey questions. In addition we need to use a professional question designer. It is not easy to design a survey which gets to the truth in an unbiased fashion and then ensures that the results are interpreted with some statistical significance.

Why is this important? We need to develop a database of issues which are important to the franchisee. Only the franchisee can legitimize the stance of NAASF and with a firm base on which to build will NAASF be able to say to DAI that these items will have to be corrected. It not, alternate action will be necessary. A strong bank account is also an important tool of strength. Without both franchisee support and the ability to act NAASF will be like a dog on a chain. We can bark all we want but that is about it!

If you want to send NAASF a letter address it to Jim Hatfield, Chairman NAASF. I’m sure they will appreciate any input, positive or negative. Let them know your opinion and your willingness to support NAASF in extracting justice from DAI.

In my last posting I expressed my desire for change within NAASF. Here is my wish list of items I would like to see improved at DAI:

1. Independent audit by an independent audit company.

2. A random generated number for stores selected for audit. What this would entail is the selection of stores for an audit not by the whim of the DA or any other individual but by a random process. The exception would be where fraud is suspected. In this case it would have to be shown why this was suspected and the auditor advised to transmit the reason for the audit to the owner.

3. The selection of a new store location also needs to be farmed out to an independent agency. Only then will store owners feel less threatened by new business development. If an existing owner wants to appeal the decision then it should be handled by an independent audit firm and all matters kept confidential. Any cost for an appeal should be shared equally by DAI and the store owner fighting the appeal. In any case, there needs to be a maximum amount set for all costs.

4. When DAI wants to add a new menu item it should remove another which is not selling well in a market.

5. All new inventory items must be consumed in the production of sales. If it is found that stores are throwing out product due to low sales then the sales item must be removed from the menu in order to reduce food cost.

6. The menu board needs to be simplified. A standardized pricing system should be developed which is less confusing to the customers as well as simplifying the job of the staff.

7. Research and Development needs to do real research in the field. It is not sufficient to sit in an office and brains storm new ideas. They need input by franchisees before any testing actually begins. Then it has to be shifted to a new set of testers with a new group in a new location. Staff and owners need to be surveyed (see my comment above regarding survey questions) to see if they are interested in the item. All aspects of the product need to be discussed. The taste, the cost, the time to prepare and any technical difficulties. It is also important to develop a way to track the new product with an update to the POS system.

8. In building new stores more attention needs to be given to future growth and development. Is there sufficient capacity in the design for new products and equipment, etc?

9. The construction department also needs to develop store view perspectives which show the design of the store in a three dimensional view both inside and outside. This has to be integrated with the geography of neighboring businesses and tastes.

10. Finally we need a long term and shorter term plan as to future development and direction of the system. Where are we headed? Why?

That is by no means a complete list but it underscores the lack of current planning and development of Subway. It is possible to grow the brand with no more stores. Focusing on internal items which will enhance sales will be a better and wiser way to grow the brand. With stronger stores we will be better able to face change and improve our operation. In the longer term it will be the strength of the store which will result in a stronger and more vibrant Subway.

Take care.

2004-08-10T00:16:00.000-06:00

I’m no Don Quixote.

Who was Don Quixote you may ask? He was a character in Cervantes' masterpiece which narrates the travel adventures of an old gentleman who thinks he is a knight errant. After going insane from misreading tales of chivalry, he abandons his home to search for adventure on the highways and in the rural landscape of imperial Spain. The first part of the novel takes Don Quixote from his small village in La Mancha to the forests of the Sierra Morena, and then returns him to his village where he recuperates from exhaustion and various and sundry injuries. His encounters with other characters often take place at roadside inns which in his madness he believes to be castles. His goal is to right all manner of wrongs and to gain fame for his valorous deeds. Don Quixote meets a wide variety of characters from peasants to noblemen, from criminals to priests, from prostitutes and insane lovers to wronged women and jealous men

At least he had a reason for taking on impossible tasks – he was insane.

I can’t offer insanity as an excuse for the impossible task of getting a fair deal from DAI. The only way that can be done is if franchisees band together as a unified group to demand changes in our relationship. From observations over the past four years I have come to the conclusion that this may be an impossible task. I thought that NAASF would offer a solution but this has not been the case.

I understand that franchisees with multiple stores have a substantial investment in the current system and certainly do not want to jeopardize this investment. New owners want a piece of the pie also and will do almost anything to build their business with more Subway stores and greater profits and wealth. This poses a serious impediment for change. Only a franchisee that has had serious run inns with DAI or their DA is prepared to stand up and be counted. They probably feel that by this point they have little to loose. Unfortunately they are branded as trouble makers, complainers, sore losers, etc. They should be looked on as risk takers and heroes who are prepared to effect change in the system even if DAI do not want this.

How then can NAASF effect any change? When you talk to individual members and the Board you will find that overwhelmingly the majority want change and better representation. All want to see a stronger and healthier relationship between the franchisee and the franchisor. How this can be accomplished is the major bone of contention. One would think that after half a decade of no change that NAASF and the franchisees would opt for a new approach. This does not appear to be the case! We are still being used by DAI to do surveys of our members to effect changes to the operation. This was done before NAASF ever existed. NAASF had nothing to do with this being done today. We are still asked to participate in decision making procedures but this is just to placate the franchisee and has little to do with improving the system. Sure the system has to be improved when you see the difficulty our staff is having in coping with an ever increasing complex operation. This is recognized by DAI as it is starting to affect sales and profits.

We are being ‘asked’ to install a ‘speed’ oven which will make our sandwiches more desirable by the public. I’m sure they will but wonder if better tasting bread would not have done this? The oven will affect our through put inversely to the success of its implementation. What I mean is that the more customers ask for a toasted sandwich the more difficult will be our ability of serving our customers. Our line will slow down! Then there is the hanging question posed by the fact that Fred wants us to serve a pizza product. This oven offers DAI the perfect vehicle to do this. Rather than simplify or menu you will see new products offered.

I don’t want to sound like a habitual complainer but saying nothing when I see an injustice is just not my style. I have been asked by some NAASF board members to lighten up and let them do their jobs. I was also accused of not contributing to the Board meetings when I was a board member. My posts on the NAASF Discussion Forum have been 'edited' by an unamed individual even though they contained no offensive language.

All I can say to that is that I contributed fully and offered many comments for improvements and change. I also wanted NAASF to engage the franchisee community more by doing surveys and research using a very good web site which I found for this. I also wanted NAASF to set up a database of information for all franchisees. This would include, but not limited to, legal advice and procedures for dealing with DAI or a DA. I wanted the Communications Committee to be a bigger part of this process but what happened? They terminated the Communications Committee!

What do I want NAASF to concentrate on?

1. Truly representing the wishes of the franchisee community. I’m sure doing surveys for DAI is not on top of this list.

2. Set up a database for the use of the franchisee to help them in legal disputes.

3. Make recommendations on how to proceed when DAI is telling us one thing but we suspect they are wrong.

4. Take a stand on issues and make all aware of the stand.

5. Set a goal which includes actually improving the franchise agreement.

6. Expect better performance and value from employees.

7. Keep funding of NAASF 100% independent of any influence of DAI.

8. If DAI wants NAASF to do surveys on their behalf charge them for this service.

9. Improve communications.

10. Continue to improve communications and feed back to effect positive change in the system

There are my 2 cents worth. Guess I’m insane after all!

Take care, Don Quixote.

2004-08-01T01:15:00.000-06:00

I have attached a link to a short video. The video, in full, was sent to HQ and subsequently to the DA by HQ so it will not be news to them.

The purpose of the video was to demonstrate the two standards being used by the Development Agent and also DAI in monitoring Subway stores. In this case one store was being threatened by termination as it was poorly run, in disrepair and dirty, etc. In other words such a disgrace to the Subway system that termination of the franchise was necessary to preserve the good name of the brand! You have all seen Compliance Reports and understand how impossible it is to pass any test if the Field Inspector wants to implement the white glove treatment. My point in creating this video was to show that this policy was not being fairly applied to all stores.

As a follow up: The store owned by the Development Agent still is in poor repair and poorly run. It is also in the yellow color scheme even though other stores have been threatened with termination if they did not remodel immediately. I also note that there continue to be other stores in the area which are in the yellow color scheme. I suspect that there is 'special' circumstances which has little to do with need but rather relationships.

As an aside but still related to 'special' relations: If a new franchisee wants to buy a Subway store they are required to relocate if they live outside the immediate area to the neighborhood of the store. This is required before they are even granted an interview with the Development Agent. They are also required to work full time in the store. However; exceptions have been observed in recent store development where an individual continues to live well outside the area of the new store and also continue to work in another job. The store is being run entirely with staff. The individual continues to be a Field Inspector of Subway!

Here is the link to the video again. You may have to right click and 'save as' then play it later.

Take care.

2004-07-30T01:19:00.000-06:00

Just back from holidays and decided to check and see how my emailed questions to NAASF and my rep were answered. I have to admit I got an email from my rep on the board. He was very excited about the Convention in Las Vegas. That is about all folks!

What is it about NAASF which is so secret that they can't even tell us what is going on? The last update I have is the NewsWire which said that they were getting nowhere in their negotiations with DAI. That is a few months old now. They still don't use their own web site for any useful information. I'm sure it must just be run by an administrative assistant. How may hits do they get on that site and how long do they spend reading it?

I got a voice mail from my HQ co-ordinator which said that they only got 20 franchisees signed up for the install of the 'Speed Oven' and that the installation was now in our hands as they would not send an installation team. Boy, it must be very difficult to run some electrical wired to an oven. Can it be much worse than our bread oven? My electrician was able to do that one with no difficulty. It appears we will be getting the oven some time this fall. I will wait to see the oven and then decide where it will be best to install it.

We are now over 2000 visitors to this site and it continues to viewed by people from across the world.

I was reading some Subway disclosure information the other day. In our market of just over 200 stores there has been over 80 transfers as of this summer! This seems a bit high to me. Also there had been four abandoned stores, including one owned by the DA. I guess more than one franchisee took Fred's advise on; this may your best time to sell and get out of the system if you don't like what I'm doing?

On this note; does anyone really like the direction Subway is going these days? I noticed that even though my stores are among the best run in our area that I'm still getting marked out of compliance. How do I know my stores are among the best run? I do visit other stores and also very carefully monitor my stores. My labor cost is high because we have extra staff to ensure good customer service and a clean store. I also have sales among the best in the area.

In my latest travels I came across a TV ad., in a different territory, where they were advertising a 6" sub at about 1/2 the regular price. I can't see this being something which the franchisees would be wanting to do. I read the DA's hand in this advertising promotion. It sure makes it easy for the DA to direct the policy of the local FAF board when he has friends and family members controlling the vote. Do you think DA's have 'friends' on the Board of NAASF? I do.

That is about all for today.

I have attached a link to my holiday video which you may enjoy.

Take care.

2004-07-08T20:43:00.000-06:00

It has been some time since my last post as I was waiting for some news from the NAASF Conference. Here is what I got from the News Section on NAASF's own web site:

"Stay tuned to this page for news and details of the NAASF election procedure.

Elections for the 2005 NAASF Board will begin in June, when nominations are open to all members.

Final results of this year's election will be announced this November."

I am wondering if they even had a Conference in Las Vegas but I'm sure they did. Maybe nothing happened which was news worthy? I doubt that also. Probably it is just the bored Bored members and staff which have forgotten that they have a web page! Why else would they not use this excellent communication tool? Maybe it is because they have no one in NAASF who is responsible for communications! Come on guys and gals, use the tools which are there for you to communicate with the franchisee community!

I wonder why so many franchisees are apathetic about NAASF?

The other day I received an advertisement for a new POS. It was not one that IPC was working with, as far as I know. On this note, where is the DELL system for the Canadian franchise? It would be nice if either IPC or NAASF would comment on this new POS as promoted through DAI and the fact that Canada still has no special Subway deal with DELL.

We are currently being pressured to offer low price point sandwiches to attract new customers to our stores. A low price package is being promoted by the local FAF board. Possibly similar offers are being made nation wide? The object is to increase customer counts. This is admirable and also necessary as there has been very little growth in customer counts over the past several years. We have been increasing sales with higher priced products, bundling and miscellaneous sales. There is only so much one can extract from the same customer for a sandwich dinner.

Over the years the cost of making a sandwich has steadily increased. there is not one item which accounts for this but a series of events ranging from; labor laws, supply and demand of labor, utility costs driven by the oil industry and environmental concerns, stricter compliance guidelines which result in higher labor costs, repairs and maintenance, more expensive and frequent renovations and upgrades, additional equipment for new products and expanded service, new product mix and complexity of menu items, reduced capacity with four bread per bread form rather than five (20% reduction in capacity), increased vegetable load on sandwiches due to the perception of a bigger bun (food cost increased by about 2 to 3% points), now the new toaster ovens which will further reduce through-put and add to the operating and equipment costs.

Some of the increases are outside the control of Subway but many are not. The problem as I see it is that there is no over all plan as to where we want to go and what will wait us when we get there. No vision and no long term planning at DAI. Has anyone done any study to see what the effect of more expensive sandwiches will do to our bottom line in the longer term? Maybe DAI is going for an upscale, bistro, sandwich restaurant? Will we be serving beer and wine next? How about table cloths and waiter service? Why not, at the prices we are charging the customers will expect more than counter service with subs wrapped in paper.

Lets assume (I know it is dangerous to assume anything) that DAI does not have a plan for an upscale sandwich restaurant. In this case we really do need to start attracting new customers with a more affordable menu offering. We need to get back to basics with some low cost and low priced offerings. Why not have some sandwiches with lower food inputs, less meat, cheese and vegetables on a 'new' deli sub? Make the cost affordable to children and people who don't want to have an after dinner nap after eating our typical foot long sandwich. Set the cost at 50% of a six inch and price accordingly. Now stand back and watch the new customers flock in to your store.

Lastly, lets stop this automatic remodel at 7 years, whether the store needs it or not. With a very high volume store it may be necessary due to wear and tear. A low volume store should not need it any sooner then 10 years. This will substantially reduce the operating cost of the stores.

Take care.

2004-06-18T21:34:00.000-06:00

I read this comment on the NAASF web page (you can link to NAASF directly and read these comments in context of previous posts):

"I sympathize with your view, but am less than convinced that it can be done. For one thing, there is so much dirt to dig, and so many that continue to bury it, legally and otherwise, that it would take an army of experts to do so. At this point, NAASF is so far behind in the fight for equity, that I suspect they are a little overwhelmed with it all.

Consider--DAI has kept them occupied with planning and executing an every-other year convention (plus spring and fall forums), testing of equipment and new products, going to various and sundry alphabet-committee meetings, collecting information they want on various polls, keeping them involved in the on-going "upgrade" of our software, etc., etc. Perhaps the intent is to keep them so diffused and occupied that they won't be able to focus on any one or two important issues. With "importance" being defined by the franchisees, not DAI.

NAASF should be fully independent of DAI, friendly, but not beholden for anything, including funding. The tough part of that may be walking the line between too-friendly and war. Litigation might begin war. If that happens, NAASF will not be effective at anything else at least until the war is over, and maybe not even then. The other danger is that of a few, or maybe more than a few, franchisees to become sympathetic to DAI during the lawsuit and undermine those who are not. The most likely to be sympathetic to DAI would be those who are naive or are not affected by the issue in litigation. This would divide the franchisee community, and probably make the situation worse.

And then there's the fact that DAI employs or can employ as many attorneys as they want, because of their bottomless pockets. Litigation could last for years, and not actually win franchisees any improvements. How would we feel about one lawsuit draining all resources NAASF has, taking years to settle, dividing (maybe bitterly) the franchisees as a group, and immobilizing NAASF on every other issue? I'm not sure this is what we really want."

Obviously there are problems perceived in going head to head with DAI. My point that the above writer was referring to was that NAASF needs to do something now. They are fast loosing credibility as a champion of the franchisee. Please take the time to go to the NAASF web site and read the various comments on this and other posts. Add you own and lets start a discussion on this or any other topic you may have.

Take care.

2004-06-16T12:15:00.000-06:00

One of my concerns regarding NAASF and DAI has been the apparent opinion that we can work together as a team to build the brand and improve the operational relations with DAI and the franchisee. Time and again we see that DAI will do what they want and just seem to play NAASF with appearance of inclusion in decision making.

In the latest Newswire (Vol. 2, No. 21 - you can view these by linking the the NAASF web site) we are given a glimpse at the process which happens all the time: "During the past several years, [italics added] your NAASF has worked with DAI to develop a process to assure that, as we grow the brand, we do not overdevelop in specific markets..." "However, NAASF's basic goals have not yet been met."

Even the basic goals which NAASF set were not met after several years of discussion! In reading some of the links on this web site you can get a pretty good idea of the character of the person who controls Subway. That we continue to think that such a person will voluntarily give up control is not born out by the evidence.

The major investor in Subway is the franchisee not DAI. It is time that we take some control of the situation. By just talking we will not make any significant inroads. We do have some power to influence the process. One is to enter into a test case against DAI. Encroachment would be a very good test. Why is NAASF so reluctant to support the franchisee on this issue?

One of the solutions that NAASF has latched on to is the need for DAI to hire a CEO. How does NAASF think that this will change the culture at DAI? In all my knowledge of corporations the CEO reports to the owners and not the staff. Any CEO worth his money will know who writes his paycheck and it is not the franchisee!

I came across an article which supports my opinions regarding the corporate structure in North America (why else would I refer to it :-)). You may find it interesting. I have provide a direct link for you. The article appears in the June issue of Wired Magazine, 12.06, June. For the busy or the lazy; the article basically says that the group does a much better job of predicting than the individual. It goes on to suggest that the operation's employees should be used much more in making corporate decisions and less emphasis should be placed upon the decision of the CEO!

On this note; we really need to get back to basics where the franchisee takes control of the operation. We will make better decisions than DAI with or without a CEO.

Link here to the Wired article.