Subway Restaurants

FOUNDED: 1965

Contact Information:
HEADQUARTERS: 325 Bic Dr.
Milford, CT 06460-3059
PHONE: (203)877-4281 (203)877-4281
FAX: (203)876-6695
TOLL FREE: (800)888-4848 (800)888-4848
URL: http://www.subway.com

OVERVIEW
Subway is the world's largest sandwich chain, with more than 13,200 independently
owned and operated locations worldwide. Its restaurants offer a variety of submarine
sandwiches and salads, as well as snacks and beverages. Subway is the leader in the
"non-traditional branded fast food" category, meaning that it does not offer hamburgers,
pizza, or fried chicken. While a substantial amount of Subway's business is in carryout
orders, most of the chain's stores offer seating areas where customers can eat their
sandwiches and salads. About 2,000 of the Subway outlets are smaller units operating in
convenience stores, truck stops, railroad stations, college and high school campuses,
military bases, airports, grocery stores, department stores, hospitals, and other locations.
According to Entrepreneur magazine, Subway controlled 82 percent of the sandwich
chain market in the United States in the mid-1990s.

COMPANY FINANCES
Subway grew rapidly during the 1990s, with the number of stores increasing from about
5,000 in 1990 to about 13,200 in 1998, second only to McDonald's. Systemwide gross
sales increased from about __BODY__.1 billion to approximately $3.2 billion over the
same period. As of 1998, owners DeLuca and Buck split about $320 million in annual
profits.

The annual store failure rate is only 2 percent, but the "transfer rate," reflecting franchisee
failures in the form of resales, abandonments, and terminations, is between 10 and 20
percent, and tripled between 1993 and 1998.
ANALYSTS' OPINIONS
From 1994 to 1997, Subway franchises were voted America's favorite sandwich chain,
according to a poll conducted by Restaurants and Institutions magazine. In the 1997 poll,
more than 70 percent of U.S. restaurant customers surveyed voted for Subway as their
favorite sandwich restaurant. The chain received the highest rankings overall in the
sandwich category and scored top marks for value, service, cleanliness, and convenience.
Subway is also a fixture on Entrepeneur magazine's "Franchise 500" list. However, many
store owners are dissatisfied with their relationship with the company, and franchise
consultant Cliff Marshall told Fortune magazine, "If anyone in my family ever asked
whether they should buy a Subway, I would say absolutely not, no way."

Some franchisees have even accused the company of damaging their sales by opening too
many stores in the same area. DeLuca contends that clustering stores increases customer
awareness and boosts everyone's sales. However he did establish a site review committee,
charged with preventing new stores from opening if they would reduce a neighboring
store's sales by more than 10 percent.

HISTORY
Subway traces its roots to August 1965, when Fred DeLuca, then 17 years old, opened
Pete's Super Submarine, a sandwich shop in Bridgeport, Connecticut. DeLuca opened the
shop on the advice of Dr. Peter Buck, a nuclear physicist and family friend who also
provided a __BODY__,000 loan for the new business. A year later the two partners
opened their second unit, and soon after that a third store. The third store was highly
successful and is still operating today.

Buck and DeLuca shortened the name of the operation from Pete's Subs to Subway and
introduced the now familiar bright yellow Subway logo. They also began franchising the
Subway concept. The first Subway franchise opened in Wallingford, Connecticut, in
1974. Franchising worked well for the Subway chain, and the operation began to grow
rapidly.

In 1983 Subway restaurants began baking bread in their stores, a feature that would
become a central part of the company's image. Baking units in Subway outlets are located
behind the counter in direct view of the customers. The chain cites in-store baking as one
of the key reasons for its strong growth in the 1980s and 1990s.
In 1984 the first international Subway restaurant opened on the island country of Bahrain,
off the coast of Saudi Arabia. In August of 1995 the Subway chain celebrated 30 years in
business and opened its 11,000th restaurant, with Fred DeLuca still serving as president
of the company.

STRATEGY
Subway is exclusively a franchise operation, and does not own or operate any corporate
restaurants. The Subway chain was built on the concept of franchising units to
independent owner/operators who establish free-standing stores in high-traffic areas, such
as shopping centers and strip malls. In 1992 Subway introduced a new co-branding
strategy, arranging to install smaller Subway units inside convenience stores and other
retail locations. The co-branding concept also included partnerships on local levels with
independent grocery store chains, hospitals, and college and high school food service
operations.

FAST FACTS: About Subway Restaurants

Ownership: Subway Restaurants is a franchise business operated by Doctor's Associates

Inc., a private corporation owned by Fred DeLuca and Peter Buck.

Officers: Fred DeLuca, Pres., 50

Chief Competitors: Subway competes with other fast food and pizza restaurant chains,
including: Blimpie's; Burger King; Domino's Pizza; Little Caesars; McDonald's; Papa
John's; Sbarro; Taco Bell; Tubby's; and Wendy's.

Subway began another major initiative in March of 1997 to expand its co-branding
business when it established an alliance with TCBY Systems Inc., which sells frozen
yogurt and other desserts. The agreement allowed franchisees to combine the TCBY and
Subway brands and services in one location. In combined operations, the two brands
would share the same space, labor, and management, but would maintain separate brand
identity with distinctive uniforms, decor, menu, and color schemes.
In addition to co-branding, Subway's growth strategy has included expansion into rural
areas, where the fast-food market is not yet saturated. It has also sought to increase traffic
in all its stores by stressing value-priced offerings.

INFLUENCES
Military bases are another growth area for Subway. In January 1997 the company was
awarded a license agreement with the Navy Exchange Service Command (NEXCOM) to
develop Subway restaurants on all qualified U.S. Navy installations around the world.
The agreement was to run for five years. Subway franchisees were licensed to operate all
of the sandwich shops on 26 naval installations with 38 sites around the world, with the
potential of developing Subway sandwich shops in more than 100.

The Navy contract was not Subway's first experience in the military market. The first
Subway sandwich shop on a military base opened in July 1989 at the Pearl Harbor Naval
Station in Honolulu, Hawaii. Subway actively developed sandwich shops on military
installations in the United States and abroad throughout the 1990s, and by early 1997
there were Subway restaurants operating on 17 military bases around the world.

In the early to mid-1990s, Subway restaurants targeted amusement parks as another

avenue for sales growth, and the chain was expanding that effort in the late 1990s. As of
1997, 27 Subway outlets were open and operating in park and recreational facilities
across North America, with more units being planned. Two successful, established units
included the Museum of Natural History in New Mexico and Clyde Peeling's Reptileland
in Allenwood, Pennsylvania.

CURRENT TRENDS
In the late 1990s, Subway attempted to address the trend toward low-fat eating by
promoting existing sandwich products that customers could make low-fat by eliminating
certain condiments and food items, while continuing to offer its traditional sandwiches
that were higher in fat. In a promotion launched in early 1997, Subway marketed seven of
its sandwiches as low-fat alternatives by stressing their good taste. Subway's Low Fat
Challenge advertised the seven sandwiches, which contained six grams of fat or less, by
comparing them to competitors' burgers and tacos that contained as much as 30 grams of
fat. The low-fat subs did not include cheese, oil, or mayonnaise.
Another trend affecting Subway in the mid- to late 1990s had nothing to do with food. An
increasing number of franchisees in many U.S. businesses were suing their franchisors
over various disagreements, and Subway was no exception. Legal problems of various
types have plagued the company, which has more legal disputes registered with the
Federal Trade Commission than its seven largest competitors combined.

In December 1995, Doctor's Associates, Inc. (DAI), chain founders Buck and DeLuca,
and the affiliated leasing company, Subway Sandwich Shop, Inc., were found guilty in
federal court of breach of contract and fraud in a dispute with a landlord. DAI, Buck, and
DeLuca were assessed punitive damages of $3 million each, while Subway Sandwich
Shop Inc. was assessed a __BODY__ million judgment. The jury, after hearing from
Subway's top contract lawyer Leonard Axelrod, whose nickname is "Lenny the Ax,"
found that DAI illegally used Subway Sandwich Shop Inc. as a front to shield itself from
liabilities.

A group of 32 Subway franchisees filed suit the following year against Subway for $100
million in damages, charging that the sandwich chain misused advertising funds. They
claimed that Subway Franchisee Advertising Trust Fund members and Subway owners
used the fund to pay for ads recruiting more franchisees and to evict delinquent
franchisees. Franchisees contributed 2.5 percent of their sales to the fund at the time; the
fee has since been raised to 3.5 percent.

Subway franchisees pay 8 percent of their gross sales in royalties, the highest in the food
business, where 4 or 5 percent is more common. But the high fees don't buy a
corresponding amount of power. One tactic the company uses is to lease property and
then sublet it to store owners. Controlling the lease means that Subway can (and does)
evict the franchisee if a dispute arises.

PRODUCTS
Subway sells hot and cold sandwiches on freshly baked bread, including its Cold Cut
Trio, Subway Club, Veggie Delite, and Subway Seafood and Crab. It also offers several
salads, deli-style sandwiches, snacks, and beverages.

CORPORATE CITIZENSHIP
Doctor's Associates, Inc., the franchisor of Subway restaurants, supports a wide variety of
charitable organizations on national and local levels. Some of the groups supported by
DAI include The American Cancer Society, Big Brothers/Big Sisters, the Muscular
Dystrophy Association, and the United Way. Owners of individual Subway franchises
also provide support to the communities in which they operate. Looking to the future,
DeLuca has said that he plans to launch a "micro-lending" enterprise that would float
small loans to entrepeneurs to start businesses, like the borrowed __BODY__,000 that led
to Subway.

GLOBAL PRESENCE
Subway pursues an aggressive international growth strategy. In 1996 the chain had 300
sandwich shops in 29 countries outside the United States and Canada. By mid-1998 that
number had doubled, to 602 in 62 countries. The international growth strategy includes
co-branding smaller Subway units with convenience stores in Central and South America,
Europe, Australia, New Zealand, and Asia. Australia is one of Subway's largest markets,
having celebrated the opening of its 100th Subway restaurant in January of 1997.
Subway's goals for Australia are to have 400 Subway restaurants open and operating by
the year 2000. The company has major plans for Asia as well, counting on the Asian
affinity for American fast food.

CHRONOLOGY: Key Dates for Subway Restaurants

1965:

Fred DeLuca opens Pete's Super Submarine sandwich shop

1966:

Pete's Super Submarine is changed to Subway

1974:

The first Subway franchise opens

1983:

Subway restaurants begin baking their own bread in the stores

1984:

The first international Subway opens in Bahrain

1992:

Subway introduces a co-branding strategy to work with local grocery stores and
college food store operations

1997:

Gets a licensing agreement with the Navy Exchange Service Command to

develop Subway restaurants on Navy bases

EMPLOYMENT
Subway's independently owned and operated locations each hire their own staff. As with
most fast-food restaurant chains, many of the positions are part-time.

Some of Subway's legal problems have stemmed from its relationships with its
franchisees and employees. Its 220 development agents work with potential franchisees
to get new Subway locations in place. They have organized for leverage in dealing with
DeLuca, who they say has broken contracts with them. The company requires that agents
meet ambitious new store quotas or risk losing their territories. This puts them into
conflict with franchisees, who worry about new stores cropping up nearby.

DID YOU KNOW THAT. . .

• there are nearly 2 million different sandwich combinations available on Subway's
menu?
• Subway customers consume about 60 million pounds of lunch meat every year?
• a Subway roast beef sandwich contains 302 calories and 5 grams of fat, versus the
Whopper's 640 calories and 39 grams of fat?
• Subway restaurants have been featured in many motion pictures, including Lethal
Weapon, Happy Gilmore, and Ransom?
• in 1998 there were more than 13,200 Subway restaurants in more than 60
countries around the world?
• since 1994, Subway franchises have been voted America's favorite sandwich
chain, according to a poll conducted by Restaurants and Institutions magazine?
Subway markets itself to potential franchisees by stressing its low startup costs. It
requires an initial fee of $100,000, in contrast to some competitors' __BODY__ million,
and doesn't insist that franchisees have any minimum net worth. As a result, it is the
franchise of choice for many immigrants, who comprise 30 to 50 percent of its owners.
These franchisees are often extremely motivated, anxious to own a business, prepared to
work hard, and are seeking to take part in the "American dream." But in general they
have not had experience in evaluating contracts, and in fact according to the company's
own survey, only 10 percent of its franchisees even read the contracts. Some are surprised
when they discover that they are expected to pay royalties. In fact, some 35 percent failed
a math and English proficiency test Subway instituted in 1997.

SOURCES OF INFORMATION
Bibliography
Allen, Robin Lee. "Subway Ordered to Pay $10M in Punitive Damages to Ex-Landlord." Nation's
Restaurant News, 11 December 1995.

Behar, Richard. "Why Subway Is 'The Biggest Problem in Franchising.'" Fortune, 16 March 1998.

Brooks, Steve. "Can Low-Fat Sell? Two Fast-Feeders Give It Yet One More Try." Restaurant Business, 15
February 1997.

Casper, Carol. "Sub Sales: Sandwich Shops Hope Customers Will Pick Up Lunch at Breakfast."
Restaurant Business, 10 February 1996.

Page, Heather. "No Sub-Stitute: Any Way You Slice It, Subway Comes Out on Top." Entrepeneur, January
1996.

Pollack, Judann. "Subway Slapped with $100 Million Suit: Franchisees Claim Management Siphons Ad
Funds for Other Uuses." Advertising Age, 26 August 1996.

"Subway Restaurants Add Seasonal Appeal to Amusement Parks." PR Newswire, 11 July 1997.

"Two Subway Restaurants Are Targeted by Robber." Chicago Tribune, 4 March 1997.

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Subway's
primary SICs are:

5812 Eating Places

6794 Patent Owners and Lessors

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Subway Restaurants

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