The franchisor-franchisee relationship can be a contentious one, that’s not news to anyone, but the Subway system is particularly prickly right now.
More than 400 franchisees have signed a petition, rallying against a new round of footlong value promotion. The promotion, scheduled to run in January and February, would reduce the cost of a footlong to $4.99.
When contacted for this article, franchisees behind the petition refused to comment, saying only that a constructive dialogue with the franchisor was still the best path forward. The petition and the responding letter was leaked to the New York Post; which petition organizers said was unfortunate.
At the heart of the argument was accelerating discounts into a steep decline in sales and traffic.
"The franchisees are essentially upset that there’s hasn’t been much work at all, in fact no work to improve the food," said John Gordon, principal at Pacific Management Consulting Group and regular expert witness in disputes like this when they reach the courtroom. "The brand only seems to know how to discount as a result. That is the fundamental issue."
The petition also comes as scores of franchisees face a top-to-bottom remodel. At a base of about $100,000 for materials, franchisees who spoke off the record said they felt like they were caught between low profitability and a big capital expenditure.
Responding directly to franchisee concerns, Subway rationalized the discount in a jargon-filled note to franchisees. The note with a forward from North America Regional Director Jack Luttrell made the case for the discount as the first phase of a "Layered Business Drivers" plan.
The promotion, according to the leaked note, was the first step aimed at stabilizing traffic; which has declined 24.5% since 2012. The decline was attributed to a competitive from above at premium sandwich concepts and from the bottom at value players like McDonald’s. It would also serve as a reminder of price and value for core customers who have seen prices at Subway rise 10.5% since 2012, while the consumer price index (CPI) ticked up 4.5%. According to the document, that has led to a large gap between McDonald’s when it comes to price perceptions, further hurting traffic.
Subway said in test markets, the footlong promotion has performed well. Driving traffic, trial rates, sales and gross profit, while slimming check averages slightly. As traffic stabilizes, Subway sees the footlong promotion dovetailing with other initiatives around health-forward options, and new menu items—namely wraps. Those wraps showed some real benefit, according to the document, driving traffic, check and gross profit well beyond the negative effects of the footlong promotion.
The dispute will certainly continue public or not, and provides a clear window into the brutal price war that is fueling the QSR segment’s positive growth.