Many companies, especially, the franchise ones have important roles in the globalization of the current world trade system. The subject states that franchising could not be ignored in the global business market. Franchising is very useful for spreading businesses from many aspects across the borders of countries. Nowadays, franchising is a global matter meaning that most of the countries all around the world are somehow involved in it. Franchise system mostly spread in a large amount of developed economies. This paper discusses Subway franchise system; a well known fast-food business which follows protocols of the current world trade system. Furthermore, this study focuses on the performance of Subway Restaurants as a successful franchise network in the food industry and the fast-foods market.
An Introduction to the Subway Franchise System
The Subway franchise is one of the pioneers in the fast-food business. This franchise carries over 31,900 locations in 90 countries. In restaurant industry, the name "Subway" is very well known among consumers of all ages. The first Subway restaurant was been established in Bridgeport, Connecticut, USA, in 1965 by Fred DeLuca and Dr. Peter Buck. Fred established his first submarine sandwich shop at the age of 17 with a $1,000 loan provided by his partner Dr. Peter Buck. The company was built-in under the name of Doctor's Associates Inc. a few years later the founders felt in struggling about the name, therefore, they decided to change it to "Subway". The history of the name "Subway" comes from those days that they made an advertisement on the radio as "Pete's Submarines" sounded as Pizza Marines. Accordingly, the name was changed to "Pete's Subs" and finally, it was shortened to "Subway". They, afterwards, decorated their restaurant with subway wallpaper of the New York City train routes.
Founders started franchising from 1974, although, not such as a franchise system that we are familiar with today. The Subway franchise was summarized to offer fresh and healthy food to the other fast-food restaurants. The first franchised unit was established in Wallingford, Connecticut and then the business was intensively developed in United States of America and in several other countries. Nowadays, we can find a figure of 31900 Subway franchisees in many countries stating that Subway is one of the largest restaurant chains in the world. For the reason that it has a great reputation, franchisees established approximately 15,000 locations in the last 10 years. Subway believes that it has a strong and growing brand that offers consumers a healthier alternative. In below, there are some exclusive traits clarifying why Subway is placed on the top of the most franchise networks. Points that give Subway its edge in the Fast-Food class are as follows: (7)
- Great food - The different menu provides customers with many tasty options.
- Smoothness - Subway has simple system for those who want to establish their business.
- Support - Subway has a discipline system in relating of assisting its franchisees.
- Control - Subway trains the owners to use particular cost control methods for helping them to run their business successfully.
There are, however, some reasons that make Subway sandwiches superior compare to many other fast-food businesses. These reasons are as follows: (8)
- Bread-Subway bakes bread in every restaurant during the business hours. This advantage can distinguish Subway from other fast-food restaurants.
- Great tastes-Seasoned breads and variety of sauces for sandwiches are two other advantages which make subway special.
- Made to order-each sandwich is made to order in front of the customer
- Orders are not limited in the menu and a customer can make or mix any sandwich of his/her own choice
Evidence show that there are other franchisees that are interested to learn from the Subway franchise network. There are four major specifications that cause this interest: (8)
- Flexibility of location
- The quality of product
- Low investment for establishing a new store
- Wide range of training and support from Subway
In below some important points have been considered in terms of advantages and disadvantages of a franchise. These points are essential to have a deep understanding of Subway franchising network. Thus, before going to details of the regulations, some policies and prospects of Subway chain restaurants (a general conception about franchising) is considered.
Analysis of the system from the point of view of franchisee and the franchisor
From the point of view of a franchisee, one of the most important things is that the main support comes from the franchisor in terms of advertisement, training, consulting, and etc. Therefore the chance of failure goes to minimum due to the proven success of the product and its market security. The franchisee can establish a business and gain lots of advantages from the well-known brand name and the franchisor advertisement.
The franchisor can enter into foreign markets and new territories safely and easily. Franchisor can expand its business without investing a lot of money. It can earn a regular amount of money by means of royalty or fee. By expanding its business, franchisor can obtain economies of scale through bulk buying and can still retain control over franchisees. There are, however, some disadvantages that could affect the franchisor's name if the franchisee does not maintain the standards of quality and service. The franchisor has to provide initial financial assistance and specialist advice and it has to incur the ongoing costs of supporting the franchisee and national advertising. The advantages of franchising can be categorized to both the franchisor and the franchisee as follows:
The advantages of franchising to the franchisor
- The franchisor can develop the distribution network in the smallest amount of time frame
- The franchisor can develop the business without incurring much extra cost because the capital for the outlet will be provided by franchisee. Additionally, the franchisee pays a lump sum of money to the franchisor.
- The franchisor can easily increase the goodwill and its reputation when the network expands.
- Getting much feedback on the subject of popularity of product which will be received by the franchisor. It means franchisor could get information concerning the specific preferences and wishes of customers from the franchisees.
- Being more popular of the brand name which is gained by the franchisor with cooperation of the franchisees.
The advantages of franchising to the franchisee:
- Using the name of the franchisor by the franchisee can catch the attention of customers, and as a result, the sale increases.
- The franchisor provides a high level of quality control. Consequently, the franchisee can satisfy customers by offering of products with a good quality.
- There will be a high chance of success for the franchisee since the brand name of the franchisor is well known.
- As the products and business will be advertised via different media, it would be much beneficial and way easier for the franchisee to run the business.
- The franchisor incurs large amounts of investments in research, advertisement, and product improvement. The franchisee could get much more benefits of these kinds of investments for the business.
- The franchisee is being supported and given pieces of advice by the franchisor regarding store design, training of personnel, and etc.
In below some important disadvantages of franchising has been mentioned from the point of view of a franchisee and a franchisor.
- Sales-"All franchise companies are franchise sales driven in the beginning; this means one must have an effective franchise marketing program with very good sales people. Many variables can affect the franchise sales effort such as interest rates and the bank's willingness to make loans available for the franchise. The condition of the national economy, competition, etc. In franchising if one is not growing, then one is dying. An individual must have the franchise fee income to stay in business until there is enough franchise royalty income to reach the monthly break-even."
- Loss of control-It is clear that franchising a system is not the same as the proprietorship; it means control of the unit is restricted by the franchisor for the franchisee. The control issues turn out to be less important if the business would be so profitable in point of view of the franchisee. For making clear of these important cases the agreement will be arranged between the franchisor and the franchisee.
- Managing growth-"This problem can proven to be fatal. Franchising, by its nature is a very fast way to expand a business since there are few limits that slow down the growth. It is absolutely necessary to be slightly overstaffed at all times rather than there is always the staff to serve the franchisees. This is the real key to successfully franchise. Tremendous efforts and resources should be focused on doing all that is possible to help the franchisees to be successful".
- Litigation-The worst disadvantage between franchisee and franchisor might happen when the business is not enough profitable for the franchisee. As long as the franchisees could make money in their businesses, there isn't any problem, otherwise, a conflict will start and it is possible that this issue will be escaladed to a court. In these kinds of conflicts, mostly franchisee accuses franchisor which it didn't get enough support for handling the business from the side of franchisor. But statistic could subscribe that most of the times franchisees are losers in the court, because a strict written contract has been arranged by the franchisor to prevent such problems. As all criteria are mentioned on the agreement, therefore, it would not be a big concern for the franchisor to go to the court. The best way to stay away from any confliction and litigation is to support as much as it is possible to the franchisees and try to make them profitable.
- Dependency-In general, franchisees are not completely independent in the business. The payment of royalty is obliged to them based on a contract agreed by both sides. In regard to the dependency, there is another issue. This issue is concerning products and supplies which must be purchased from the franchisor by the franchisee, although, less expensive alternatives for purchasing products may be available.
How much does it cost to start a Subway Franchise?
The franchise fee depends on the area meaning the amount of franchising for instance in USA is not the same as the amount in Asia or Europe. Also, even in the continents, the initial price depends on the country. For instance, in Europe, many countries such as Iceland, Ireland, United Kingdom, Finland, Germany, Luxembourg, Sweden, and the Netherlands have to pay an initial franchise fee more than the other countries in Europe. Commonly, this issue is related to the economic situation of those countries. As a matter of fact, the initial franchise fee in USA for a Subway restaurant begins at $15,000 and in Europe the possibility for opening a Subway would be a figure between €7,500 and €10,000. The initial franchise fee is due upon signing the franchise agreement. The total investment to open a Subway franchise in the United States is between $84,300 and $200,100. This amount is variable in Europe from €66,200 to €184,500. Difference between the figures is related to the physical size of the restaurant. A lower cost restaurant is one that would require less leasehold improvement, less seating, and fewer equipment expenditures. This amount is necessary as a complete investment to start a Subway franchise meaning that some costs like Leasehold Improvements, Equipment, Security System, Freight Charges, Legal & Accounting, Training, and some other expenses will be used from this investment. Franchisees are also obliged to pay a royalty fee, which in Subway case is 8% of total gross sale. Table 1 at page 14 demonstrates some of specifications of the capital requirements for opening a new franchise and operating it for three months.
Policies and Regulations of the agreement between Subway & franchisee
In below, some regulations are mentioned showing the obligations between the franchisor and the franchisee with respect to the business conditions.
Logo Use and Restrictions
There are many rules on the subject of Logo and Design mark. In an agreement, following these rules is a must for the franchisor. Paying attention to the licensee of a trademark, the franchisees ought to understand the purpose of these trademarks and the proper way of using the brand. The licensee states that improper use of the brand name could affect in loss of the trademark meaning the misuse would devastate the Subway brand identity.
Franchisee's right to use the trademark is restricted for only advertising of the franchised restaurant for business as the Subway brand. The franchise agreement prohibits use of the Subway trademark for the other purposes. It states that publicly using of the brand name of the Subway for advertising of other businesses is entirely illegal. Using of letterhead or any sign of Subway brand is not allowed for personal purposes.
For the accretion purposes Subway oblige franchisees to use the most current design mark/logo for their business. Other components of a logo such as sheet, disk, and image CD may be provided by the coordinator. These regulations would keep the accretion of franchised network securely and safely.
Profit Building and Local Marketing
For increasing sales, the basic rule is that franchisees must attract new customers to their restaurants and increase the frequency of visits by current customers. Thus, ethics on this business would be the most fundamental item for increasing sale. Undoubtedly, without this characteristic, spending too much money on advertisement does not work properly. Customers look for five basic characteristics in a restaurant. In below these items are considered with a brief explanation. As much as these characteristics fulfill better, the business appears to be more successful.
- Excellent Customer Service: Keeping satisfied customers will fulfill by training the staffs to deal with customers warmly, even though, some of them are unhappy. Coming back of customers to the restaurant is the result of such an attitude. Therefore, business turns to become more successful.
- Good Price: The key point is that always most of customers are looking for a good value for the money they pay as well as a good service. Subway believes that the customer satisfaction through offering high quality of food with outstanding service and good value will be fulfilled. Customers are sensitive to cleanliness. They are highly aware and concerned about food-borne illness and unsanitary conditions in a restaurant.
- High Standards of Cleanliness: Sanitation is the critical case in restaurant industry which indicates the performance of operators from the aspect of cleanliness and sanitation. Following the high standards of cleanness, Subway restaurants ensure that there is a satisfactory condition to their customers.
- Quality Products: Subway believes that the quality of their products is so much important from the point of view of their customers. Customers could realize the differences between products with good and bad quality. Therefore, to have a successful business, Subway is absolutely considering customers attention to this matter.
- Convenience: Finding a good location for a restaurant from all convenient aspects is so essential as a part of the customer satisfaction. Considering a few criteria is important to make a good decision about the restaurant location. An evaluation about the other businesses which are nearby to the business place is a must. A study of how busy a street is as well as considering a parking lot is so essential for the location of the restaurant. A research is also necessary to investigate the potential for downtown area or a mall. All of these concerns should be considered at the time of decision-making about the location of the restaurant. Hiring proper employees is the second most important problem that should be brought to the attention. It is important that the restaurant owner hire trustworthy and responsible persons that will give the business a good atmosphere. Employing rude staff will turn customers away from coming back again. Therefore, it is absolutely beneficiary that a right person is hired who is able to work both independently or as a team member.
All Subway franchisees are required to pay advertising fees according to the franchise Agreement. Advertising contributions are administered by the Subway Franchisee Advertising Fund Trust (SFAFT). Based on the franchise agreement, franchisees are supposed to pay from 2.5% to 4.5% of their net sales to the franchisor. Likewise, this amount varies depending on where the business is located.
From time to time, the development agent or the area development manager may evaluate a specific area of the business and provide training rather than perform the entire standard evaluation. Compliance, however, will still be evaluated and any outstanding issues will be noted. This visit may be scheduled in advance and requires the owner's participation.
- Bread Baking Procedures. This evaluation focuses on the baking process, equipment maintenance, and the final product appearance.
- Catering-This evaluation focuses on the operational elements involved in catering and ways to advertise and market the program locally.
- Customer Experience-This evaluation focuses on the importance of exceptional customer service by reviewing overall atmosphere, customer ordering process, and the work place environment.
- Equipment Care-This evaluation focuses on a proper cleaning procedure which helps to eliminate dirt and bacteria, thereby, helping staff to provide a great atmosphere that is more inviting to the customer, decrease the risk of food-borne illness, ensure equipment operates efficiently, and the warranties retain validity.
- Local Marketing-This evaluation focuses on the local marketing tools and activities intended to build awareness, encourage trial and usage, and increase customer count.
- Profitability-This evaluation focuses on the profit building and techniques to control costs and increase sales.
- Operational Excellence-This evaluation focuses on achieving operational excellence with employees and business so that one can provide customers with good looking sandwiches each and every time, keep the restaurant organized and well-maintained, and ensure that employees know the importance of exceptional quality.
SALES AND COST REPORTING
All items offered for sale must be run through the restaurant's point-of-sale (POS) system. On a weekly basis, one is required to electronically transmit the sales and key indicator information to HQ through an approved point-of-sale (POS) computer system. The Subway owner must report all sales and key indicator information no later than 3 p.m. (in the time zone of the office to which he/she is reporting sales) of the Thursday following the business week.
Alt figures reported are taken from the WISR (Western Institute for Social Research), and if applicable, from the optional program WISRs and/or Test Program WISRs. Figures are weekly totals except for Adjusted Unit Sales for which both daily figures and the weekly figure are reported. The following figures must be reported each week:
- Free Units
- Total Drink Units
- Drink Cost
- Party Breads Used
- Footlong Units
- Hours Open
- Party Platters Sold
- Misc. Sales
- Hours Worked
- Party Subs Sold
- Party Sub/Platter Sales
- Marketing Items
- 6-Inch Units
- Other Units
- Net Sales
- Customer Count
- Unit Sales (daily and weekly figures)
- Deli Units
- Cost of Goods
- Adj. Drink Sales
- Cost of Units
Advertising Materials and Merchandising Policy
All advertising and merchandising materials must be professionally produced. In addition to required materials that must be displayed, optional materials may also be used. DAI (Doctor's Associates Inc) and the advertising fund encourage the owner to use materials that are already developed. There may be a need of occasionally produce materials on a marketwide or local restaurant level. These materials are obtained from the following sources:
- The advertising fund provides the majority of the advertising/merchandising pieces including menuboard, translites, sneezeguard static clings, menuboard footers, window static clings, counter mat inserts, register toppers; floor stand or SmartCurve inserts/toppers, beverage cooler static clings, and chip rack merchandisers. The Instruction sheet included in each window promotional kit will detail all current materials that must be displayed.
- In some cases the local advertising fund board provides materials for a marketwide promotion.
- DAI produces optional materials that can be purchased by markets or individual franchisees. The owner is usually recommended to refer to the franchisee shipping catalog in the opening pack or the franchisee snipping online store accessed through "Subway Partners". Artwork for various materials is also available on SUBWAY Partners website.
- Individual franchisees can have materials specifically produced for their own restaurants.
- Certain types of POP (point-of-purchase) materials are reserved for DAI and/or national advertising fund use.
In this paper, Subway franchise system was introduced and many aspects of it in terms of advantages, disadvantages, costs, rules and regulations, evaluations, sales reporting, and advertising policies were discussed in detail. Subway Restaurants has been recognized as one of the pioneer in the fast-food business In today's world, the reason is that, a successful business is one that is not only money-making, but drives under elemental principles, including truthfulness and responsibility. The obvious object is that, prospect of Subway is not limited only to make profit, being a leader in the fast-food business from so many aspects is more than important for the business.
- T. Talloo, "Business Organization and Management", Chapter 4 (Entrepreneurial Opportunities In Contemporary Business Environment), Tata McGraw-Hill Paperback, 2007.
- Official SUBWAY Restaurants' Web Site. SUBWAY, Student and Educator Resource Guide, SUBWAY History, 2009, available at: http://www.subway.com/subwayroot/AboutSubway/history/subwayHistory.aspx
- Franchise Capital Requirements, http://www.subway.com/subwayroot/Development/05dev/Brochure/i-brochure/
- Subway-Franchise Information-Entrepreneur.com, History and Statistics Figures. www.entrepreneur.com/franchises/subway/282839-0.html
- D. Daszkowski, "Subway FranchiseReview - About.com", History and Statistics Figures, available at: http://franchises.about.com/od/foodrestaurant/fr/subway-review.htm
- Subway Operational Manual, The franchise information, 2009.
- Small Business Bible - Smallbusinessbible.org; Advantages and disadvantages of franchises, available at: http://www.smallbusinessbible.org/advantages&disadvantages.html
- Official website of Franchise Europe, What gives the SUBWAY® franchise system the edge in the sandwich category? available at: http://www.franchiseeurope.com/profiles/subway_en.php
- Directory of Franchise Opportunities & Business Franchises for Sale, What makes Subway sandwiches so good? http://www.franchise.com/franchise/fast-food-restaurant/sandwich-delis/Subway/company-information.cfm