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HOW I DID IT

The Sandwich That Ate the World

The founder of the world's largest restaurant chain explains how Subway became ubiquitous, and why surpassing his biggest rival came as something as a letdown.
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At 17, Fred DeLuca used a family friend's $1,000 investment to open a sandwich shop in Bridgeport, Connecticut. Today, Subway has more locations worldwide than its nearest rival, McDonald's. DeLuca, now 65 and living in Fort Lauderdale, Florida, tells the story.

In 1974, we began franchising. We didn't have any big thought process except that, OK, franchising will help us get to our goal of 32 stores and help us run stores farther away from home. It took us a really long time to learn the franchise business, because we started out with a blank slate. We didn't have any franchising coaches or advisers.

Eight years later, we'd gone through the learning curve. We had a lot of experience, and we'd grown from 16 stores up to 200 stores. I sat back, and I said, "Oh, my gosh, we kind of know what we're doing here. I wonder what the possibilities are?"

I took a look at our store density compared with McDonald's and other leading restaurant chains. In our strong areas, we had as many stores as they did, and we seemed to be doing just fine. Could we open as many stores as McDonald's had everywhere? I thought, Yeah. Why not? Anywhere they have a store, we can have a store.

McDonald's had nearly 8,000 stores at the time. I didn't want to go all the way to that limit yet--so, to be conservative, I made a goal for us to reach 5,000 stores by 1994.

The thought process wasn't horribly complicated. Compared with other restaurants, we had a low franchise fee and a low upfront investment. Our stores were simple and inexpensive to build. The low franchise fee came from the fact that we didn't know what we were doing. In the beginning, we charged a flat $5,000 franchise fee, and after several months of trying, we couldn't get anyone to buy. So I cut the fee to $1,000, and some people joined up. A few years later, we moved it back up to $5,000.

We set up a program for select franchisees in which we paid them for getting new stores open and for supporting other franchisees in their region. There was no way a company like ours could have added so many people and so many locations simultaneously without those development agents. There are three reasons why they were successful. No. 1, they all had expertise in the Subway business. No. 2, they lived in the territory. And No. 3, they had adequate incentives to get the job done.

We were growing really fast by that point. I remember very distinctly thinking that getting to a thousand stores [in 1987] was a big deal. But there were still lots of people who didn't know what Subway was. The thing that really struck me was how unprepared I still felt. We had a thousand stores, but I felt like I was only a 500-store president--there were so many things I didn't know. The stuff I learned was the stuff I needed a year ago. At some point, that feeling stops--when you go from 9,000 to 10,000 stores, maybe.

By 1990, we had 5,144 locations, with a goal of reaching 8,000 stores by 1995. After all, franchisees are builders; they want to operate multiple stores.

So I began looking at other concepts that might be interesting: Cajun Joe's, a fried chicken place; Q Burger; We Care Hair, a small haircutting chain. Cajun Joe's was the first new concept we created. We sold a lot of franchises pretty quickly and opened a bunch of stores.

We thought, Well, this isn't very hard. But there's nothing very complicated about renting a piece of property and building out a store. The key thing is that the store itself needs certain fundamentals that are working. Cajun Joe's failed. We Care Hair got to about 200 stores. Q Burger was an experimental thing that a franchisee wanted to do. Maybe one or two stores opened, but we decided it wasn't a viable business.

By 1995, we had 10,000 stores, not 8,000, and suddenly we were facing questions about cannibalization. This wasn't new. Back when we had 200 stores, franchisees would wonder whether we had too many stores. Now we faced accusations that Subway would sell a franchise to any old hick, to folks who couldn't read English. Reporters started suggesting that franchisees couldn't make a living operating our stores. We had all these people complaining to the Federal Trade Commission.

One day, a woman from the marketing-practices division of the FTC visited our headquarters. She spent most of the day with us, visiting different departments, asking a bunch of questions, poking around. At the end of the day, I asked if she wanted to visit a franchisee training class. She said yeah and sat in the back of the room. During class, I got up and asked the trainees to talk about their backgrounds. I asked: "How many people have relatives who are already franchising with Subway?" Hands shoot up. "Who here has a college degree?" Many hands go up. Then I said: "Who here has an advanced degree, like a master's or a business degree?" A bunch of hands go up. "Who's got a Ph.D.?" One hand goes up. That was a good day--a lot of the criticism seemed to die down after that. I don't know if it was coincidental.

Getting through a controversy like that is not as magical or mysterious as you might think. We created a site-review system to deal with the cannibalization issue. Any franchisee who wanted to oppose a new store got a chance to speak up.

I think it helped that the fundamental building block at the store level was pretty good. Because the stores worked, franchisees wanted to build more stores. If your model works, folks who are happy with it will buy out the ones who aren't happy.

We would have passed McDonald's without Jared [Fogle, a Subway habitué from Indiana whose dramatic weight loss was featured in a long-running series of Subway ads] and new breads. However, I don't think we would have gotten as far as we did without Jared and the new bread and the menu that we also introduced at that time.

When we finally passed McDonald's in the U.S. in 2002, we didn't announce it. By then, I didn't think the press would necessarily care about those numbers. But somebody picked up that we were larger than McDonald's, and they put some little piece in the news, and that turned into a giant thing.

The same thing happened when we passed McDonald's global store count in 2010. The following year, I traveled to Finland for a winter meeting. Somebody wrote a tiny piece, and suddenly we were global news. I'm in Finland, and people are excited about it. It was the oddest thing. It felt a lot less exciting for me.

I'll tell you why I think that is. Maybe it's a little like if we were going to take a cross-country trip. We get in the car, and we know we're 3,000 miles away, and then 2,000 miles away, and then 1,000 miles away. You know where you are, and when you're five miles out, you're not horribly excited. When you get there, you say, Hey, great, we're here--but it's like you saw it coming. I think the fact that you could see it coming for a long time makes it a lot different from suddenly winning the lottery. It was gratifying, but it wasn't one of those occasions that called for jumping up and down. At least not for me.

A lot of stuff happens daily when you're running a company like Subway. If you get too happy about some things or too unhappy about others, you get worn out. It's best if you can pace yourself a little bit more.

There's a whole stream of things that keeps occurring in any company as you work on your products. You test this, that, and the other thing. We've been emphasizing nutrition throughout our testing. For the past few years, we've had a salt-reduction initiative. Almost every product's got some salt--the question is, How do we make it better or keep it easier, and reduce the salt?

If you're an old-time Subway fan, you'll see we've added spinach to our stores. We'd add avocado if it sold uniformly across the country, but most stores just bring it in for the summer months. We've also added egg-white patties, which make a terrific sandwich.

I tell everybody there are only three things that we do. We build sales at the store level, we build profits at the store level, and we build more stores. The first two things go in tandem, of course. It's pretty tough to build profits without sales.

Right this minute, we don't have a store-count goal. We're shooting to increase average store profitability by $1,000 per week. That probably doesn't sound like a terribly exciting goal. But we know that if we can boost profitability, we'll have an easy time building out our store network, because our franchisees will be getting a better return on their investment.

Last updated: Apr 30, 2013

BURT HELM | Staff Writer | Senior Writer

Burt Helm is a senior writer for Inc. magazine.




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