Subway supremo Fred DeLuca is refreshingly low-key in his demeanour, but fiercely ambitious in his outlook. Now he has his sights set on taking advantage of the economic downturn by expanding in the UK and Ireland. Helen McCormick reports.
Fred DeLuca is as down to earth as his product. “Our goal in the UK is to have 2,000 Subway stores by 2010,” the chain’s chief executive and founder says, his quiet New England-accented voice almost in-audible against the hubbub of a lunchtime sandwich shop on Kingsway, a busy thoroughfare in central London.
Prompted by one of his staff, he adds: “Actually, I think the exact number is 2,010 by 2010. That means we’re going to lease over 600 properties in the next few years.”
This rather charming failure to remember one of his company’s key advertising slogans belies DeLuca’s fierce ambition – he opened his first sandwich shop when aged just 17, in his home state of Connecticut, where he and his company are still based (see box). After an initially slow start in the UK in the mid-1990s, Subway has grown rapidly here in recent years, and DeLuca believes its expansion can continue despite the economic gloom.
In 2000, there were just 25 Subway outlets in the UK and Ireland. Now, the privately owned company occupies more than 1m sq ft of retail space across more than 1,350 franchised stores. This is around 80 more than McDonald’s, although its rival has far larger stores and has a vastly bigger turnover – around £1bn to Subway’s estimated £400m.
By the end of 2008, Subway will have opened in 280 new locations, and expects to open a similar number in 2009 as it ramps up its annual UK advertising spend by two-thirds to £18m.
There are 440 franchises in development, where the franchise has been purchased but the store is not yet open.
As with budget retailers such as Aldi and Lidl, Subway seems to be thriving on recession. “The economic downturn is a real opportunity for us,” says DeLuca. “We’ve seen this before in our history – more locations become available, which provide us with extra opportunities that we wouldn’t have in a more normal market.”
These apparently recession-proof businesses are based on one thing – competitively priced food.
“People always have to eat,” says DeLuca. “The question is: where are they going to eat, and what are they going to spend their money on? They start to prioritise necessi-ties over luxuries. A cappuccino might be considered a luxury, but a sandwich is still seen as a necessity. We’re not at the top of the pyramid in terms of price, so people might start trading down at lunchtime, and find us.”
DeLuca believes that much of Subway’s success can be put down to its ability to be flexible about location.
“The reason we’re able to grow so much is that we can go into a lot of different types of site,” says DeLuca. “There are the obvious in-town sites, but we’re also on quite a lot of new commercial centres built out of town. There are some shared-use locations in the UK, where we locate inside another business such as convenience stores in petrol stations. In the US, we are in 1,500 Wal-Mart stores, often where there used to be a traditional snack bar.”
DeLuca believes that that kind of set-up could work in the UK too, and his com-pany is increasingly targeting other less- traditional locations, from football stadiums to, bizarrely, hospitals. “We fit into so many different locations,” says DeLuca. “College campuses, railway stations, airports, military bases – anywhere there is a good customer base.”
DeLuca does not have particular geo-graphical areas in mind. “We’re looking everywhere in the UK,” he says. “We’re in almost every town and we’re still looking within those towns. We can handle a fairly high density of stores.”
In Northern Ireland, for example, Subway has already reached a density of one store per 20,000 people, and is still growing “very quickly”, says DeLuca. “So even in areas where a landlord might say, oh, they don’t need a Subway here, because I see there’s already one in town, that doesn’t means that’s the last one we’ll open. Once we have 2,000 stores in the UK and Ireland, we will have a density of one store for every 30,000 people, and I would be surprised if we didn’t grow past that mark.”
Potential store locations are sourced in three different ways. Subway has 18 development offices across the UK and Ireland, with development agents scouting the local area. Existing franchisees also keep an eye on potential sites near their own stores, but between one-third and half of new sites result from calls from landlords and estate agents, despite there being no finder’s fee.
“That’s a very important source for us,” says DeLuca. “Landlords obviously know about their own locations, and a lot seek out chain tenants.”
He says that landlords are more willing to work closely with large chains such as Subway than with smaller companies that have less of a track record. “This is especially true when you’re dealing with small spaces. Landlords are keen to fill them with the best brands to try to increase the value of their estate.”
So what does Subway look for in a site?
“The real simple explanation we tell people is PVA – people, visibility and accessibility,” says DeLuca. “If you have enough people of the right demographic, and they can see the store and can get in the store, you have a good shot at being successful.
“The next step is a site review. Once we have identified a site that appears to have the basic qualities for a good Subway store, we check with our surrounding stores to see if anyone thinks the new location might have an adverse impact on an old one.
“Then we do a more detailed study of customer patterns – go to the existing store, interview the customers, see where they’re coming from and going to, and make a decision based on that as to whether the new store should go in.”
It’s not always about distance, he adds. “Sometimes you could be real close and be in distinct markets,” he says. “For instance, on a busy highway which isn’t easy to cross, you can put a store on both sides. Or if we’re on a main high street, we might place one a few blocks off it. It depends how people move through the area.”
As for demographics, the customer base is split almost 50:50 between men and women, with a fairly wide age range. “We don’t get too many little kids – Subway eaters start at about 10 years old and go on to ancient people like me,” laughs the 60-year-old. “But our biggest target is 18- to 34-year-olds – young, active people who tend to eat more than average.”
Many stores open fairly late in the evening, so the Subway sandwich has become an alternative to the doner kebab for passing post-pub traffic. A typical store is around 800 sq ft, although they can squeeze into spaces as small as 400 sq ft.
“It’s a very simple operation,” explains DeLuca. “There’s very little in the back room, unlike a traditional restaurant – just a refrigerator, a freezer and a small prep table – and out front there’s an area where we make the sandwiches. This store [on Kingsway] is larger than average and happens to have seating, but not all do.”
The franchise fee is about £6,000 per outlet. Royalties and fees are based on gross sales minus sales tax. The royalties are 8% to the Subway chain, plus a 4.5% advertising fee paid to the Subway Franchisee Advertising Fund Trust.
The franchise agreement is typically for 20 years. If the store is not owned by the franchisee themselves, they will also have to pay rent to the landlord. To encourage multi-unit operation, the franchise fee is reduced to about £1,500 for additional franchises and, as a result, more than 70% of franchises are purchased by existing owners – there are 660 in the UK.
“Amir, the guy who owns this store and who I met for the first time today, is a great example,” says DeLuca. “He owns 12 stores, and bought his first franchise just five years ago.”
He says that the company is looking to take on new franchisees, but “not at a high rate”. The typical conversion rate globally is just 2%. “For every 100 people who ask about franchise information, two will become franchisees,” says DeLuca. “In a new market, where we don’t have a lot of existing franchisees, we’d expect that sort of level, but here in the UK, where we get 12,000 enquiries a year, it’s just 0.5%. It’s not that people don’t want to buy, but we give preference to the existing franchisees who we know are doing a great job already.”
Outside North America, Europe is now Subway’s fastest growing market and DeLuca has his eye on further expansion across the Channel.
