STRATEGY

Subway's Fred DeLuca: Nail the Basics, Then Expand

The founder of the world's largest fast-food chain discusses how he learned to scale his company, and what's different about business in 2013.
Fred DeLuca, President and founder of sandwich maker Subway, poses in a Subway restaurant at 'Solna Centrum' in Stockholm on March 10, 2011.
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Forty-nine years ago, at the age of 17, Fred DeLuca used $1,000 of a friend's money to open a sandwich shop in Bridgeport, Connecticut. Today, that business has grown into Subway, the word's largest fast food chain, with nearly 39,000 locations in 98 countries. Last week, DeLuca met with a handful of young entrepreneurs in the library of New York's Hudson Hotel as part of the Subway Global Challenge, an online contest designed to encourage entrepreneurship and franchising. Before his talk, DeLuca sat down with Inc. senior writer Burt Helm about what he believes are the keys to becoming a successful entrepreneur--and why starting a company today may be harder than ever. Below are edited excerpts from their conversation.

You're meeting with young entrepreneurs this evening. What's your impression of the climate for startups in 2013? Do think you could have started Subway today?
Well, if I had the same knowledge and resources I had back then, I don't think I would have been able to get through the maze that we have today. As a seventeen year old--a seventeen year-old with very little money--I would have been blocked. I'm pretty confident that the lag time to get open, the amount of costs to meet regulations, the rent I would have had to pay while I was burning up time...those things would have put me out of business.

Do you think there's still room to make mistakes?
Yes. Everybody who goes through the business will make mistakes. The big question is how big will the mistakes be? How fast will they learn from the mistakes, and how quickly will they get the business in the correct direction?

Six months after we started, in 1964, there was a day when we sold only seven sandwiches. If we'd taken all the money from the register we couldn't have paid an employee, much less the food or the rent or all that. It's could have been a turning point. We could have given up.

But it was ok, because my expenses were low. I was living at home, and we just stuck with it, kept trying to learn the business, to identify what was wrong, fix it, put in new systems. We kept doing that week after week, month after month, and after a couple years we had developed a business that was pretty good. Not a great business, but a pretty good solid business. And from there we had stability.

What do you think is the one advantage entrepreneurs have today that they take for granted?
There's huge access to information. If you need to learn something, you can go on the Internet and learn very quickly. You can reach across miles and miles to find companies that can assist you. I think that's the most important change.

Many startups worry about how and when to scale their business. You are probably the best person in the world to ask about this--no company has scaled quite like Subway has, which started with a handful of stores in Connecticut, and now…
We're approaching 39,000 stores, and we're growing. Last year we added 2,600 locations.

What was the toughest phase of growth?
I'm not sure what part of it was the toughest. But the solving the challenges always comes down to the same queston: how do you run a single store?

Maybe I could liken it to a complex machine like a car. Something little could go wrong--the battery's dead, you run out of gas, or get a flat tire--and then this big complex machine doesn't work. It's the same thing with a business, where you could have a lot of it right and still not make much progress. In our business there might be 100 critical points, or 200 or 300 that are important. These are all things we learned and put in place over time.

These days there's a whole culture around entrepreneurship, whether it's interest in Silicon Valley incubators like YCombinator or Techstars, or reality shows like Shark Tank. What do you think of all that? Is it a good thing, or is it turning startups into fantasy camp? Is it encouraging the wrong kinds of approaches to starting a business?
I don't actually know about all the things that you talked about. I watch Shark Tank, of course. It's very entertaining. I think it's actually good to help people think about the business they might start, and sometimes you get encouraged by looking at someone going into business and saying hey, I could do that.

The important thing, no matter what business you're in, is having some kind of small business experience. I was helped a lot by being a paper boy when I was 13 years old. I had a get up and do the job, I had to collect the money, I had to pay the distributor, and doing that on a regular basis instills a discipline that I just wouldn't have had without having a job like that.

The federal government talks a lot about taking steps to help people start-up companies. Do you think they are really doing that?
If the government was really serious about helping small business, they'd find better ways to make capital accessible for true small businesses. I don't think they've done a very good job with that at all through the recession. The stimulus package was an astronomical sum of money, and I frankly don't know anybody who benefited from it. I didn't see that loans were easier to get. I think they totally misdirected their efforts to jumbo projects.

In the food businesses these days, many people are starting small, artisanal operations--whether they're making sandwiches, or fine chocolate, or pickles. What do you think of those as businesses, and as competition for subway?
When I see businesses like that, I think how cool it is to be a customer. To have all these specialty things that were never available before. I really welcome that. But I don't think that things like that are what I'd consider to be high-level competition for a mass market product like Subway. We have to be extremely efficient. I sell something for $5, and a small sandwich shop will sell theirs for $10. And they will get their customers, but not everybody has that kind of disposable income. Unless they're buying something from Starbucks--then, of course everyone seems to have unlimited money [Laughs].

It's funny you mention Starbucks. Howard Schultz has a venture fund that provides venture capital for food startups. They invested in Pot Belly Sandwiches, as one example. Are you investing in startups?
Look, the best thing in startups could be horribly risky or fabulously wonderful. My partner Peter Buck gave me $1,000 and owns half of this company. How cool is that? But I don't really invest in startups. I don't really think much about investing. It is so time-consuming that I have people who take care of that.

 

IMAGE: AFP/Getty Images
Last updated: Mar 6, 2013

BURT HELM | Staff Writer | Senior Writer

Burt Helm is a senior writer for Inc. Magazine.




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