The rise and fall of Subway: The $11 billion empire that crumbled

In 2011, the Subway sandwich shop chain was the master of the universe. Uh, they had over 40,000 locations. They were doing $11.5 billion in sales, and they were growing so quickly that they were opening at one point a new location every 8 hours. But fast forward a decade later, and the original owners were exiting the business. The chain was struggling. Uh, their key spokesperson had been arrested, uh, and they were closing thousands of stores. So this is a video that talks about the rise and fall of Subway and explains why it all happened and what we can learn from it as business owners, as lessons to take away to our daily lives. My name is Michael Girdley. Uh, recently I've been making a lot of videos that explain business through the rise and fall of iconic American companies. So if you're interested in that kind of stuff, give me a like and a follow and a comment below. Tell me I look funny. It'll make me feel good about myself. And if you stick around through this video, I will explain why I'm recording the intro in front of a dying horse racing track here in San Antonio, Texas. Its tie to Subway will kind of blow your mind. The Subway sub chain gets its start back in the 1960s when a 17-year-old Fred DeLuca borrowed $1,000 from family friend Peter Buck with the idea of starting a sub chain. And the goal was for young Fred, who was a hustler at the time, by the way, you have to be if you're opening your own sub shop at 17 years old, to use the money to pay for his eventual admittance to medical school. But in contrast to a lot of the fast food concepts at the time, which were mostly hamburgers and greasy french fries, the idea of fresh subs was a total hit. And eventually young Fred gave up on the whole medical school idea and went all in on the sub shop business. And so young DeLuca and Buck opened 16 stores over the next year, such that in the mid-'70s, in 1974, they had quite the little business going. But being ambitious entrepreneurs, the slow growth of coming up with money to open stores one at a time, that wasn't going to cut it for these two. So they did what a lot of folks did at the time, which was get into franchising. And with franchising, you are not using your own money to open these new stores. In fact, the franchisees are investing their dollars to build and open the stores in partnership with you. And the concept of Subway was quite genius at the time. It had a lot of the same characteristics as other franchisors like McDonald's or Burger King or even Taco Bell, but it did something quite different. And that quite different thing was that they made it super accessible for incoming entrepreneurs. If you wanted to open, say, a McDonald's at the time, it might cost you $1 million in costs before you even make your first dollar in revenue as an entrepreneur franchisee. But for a Subway, man, since all you're doing is slinging deli meat and bread on a countertop, it was like $150,000. And it was a genius concept because suddenly it made franchising and a good concept like Subway accessible to many more entrepreneurs and people who couldn't afford to get into the big high-priced ones. And the concept was a hit. It totally worked. By 1981, they were at nearly 2,000 stores, and by 1990 they hit 5,000 stores. Suddenly you saw Subways in almost every random place you could imagine: strip centers, standalone buildings, churches, truck stops. Wherever you could fit a countertop and a few things needed to make some sandwiches, people were putting in Subways. The beauty of this is Fred and Peter had crafted a perfect niche strategy. They were going to own this corner of the market through a unique model and a unique offering. And you couple that with their ambitions, which were huge— they eventually wanted to become the biggest restaurant chain in the world— well, things were not going to hold them back. And a common trend amongst every business that eventually gets huge is it rides massive trends. And Subway is no exception to that. And if you think back to the '80s and '90s, there were very different ideas about what healthy, quote unquote, meant back then. This was peak food pyramid. This was peak low-fat, high-carb diets were the way to be super healthy. And Subway was a perfect answer to that. They had meat, cheese, bread, lettuce, tomato, some vinegar, while the other guys, they had French fries and greasy hamburgers. And Americans, they loved it. And at this time also, people were getting tired of standardized food. They had all been to McDonald's dozens of times a year for the past decades, and every single McDonald's was designed that every single meal that comes out is exactly the same. Well, people were hungry for customization. They wanted things tailored to their tastes, the things they were interested in. And Subway was perfect for that. Millennials, Gen X, my generation, we were excited to go in and get a sandwich that was perfect for us, not one that was perfect for our parents or grandparents. And the vision worked. By 2002, DeLuca's vision of becoming the largest restaurant chain in the world was reached. They passed McDonald's and had 13,000 locations, but they weren't stopping there. It was growth at any cost. And during this period of the decade, there were moments where Subway, get this, was opening a new restaurant every 8 hours. And they rode this hypergrowth aggression at all costs to, by 2011, they had 44,000 subways across the world. Just incredible. But we talk a lot in this channel about how the things that create your business are usually the things that end up killing it. And besides all these trends, at the core was Fred DeLuca's ambition and his vision to grow as big as possible. And ultimately that caused him to make a lot of decisions that would become the chain's downfall in the years to come. But in the meantime, things kept going right for Subway. In 2000, they got what was basically a gift from the gods. A young student named Jared Fogle got famous because he came out and announced to everybody that he had lost over 200 pounds. 200 pounds by eating exclusively Subway sandwiches. And it was the perfect way to announce to the world that, hey, we are Subway. We are the affordable yet healthy option. And here's proof. This dude lost 200 pounds. Then in 2008, a franchisee in Miami went out and tried an experiment on his own, and he introduced the concept of the $5 footlong promotion. The idea being that we would offer footlongs at this stupid cheap, cool price, sell people some chips and soda along the way, and drive a ton of business. And remember, this is a culture that is growth at all costs for Subway. Whatever it takes, we're going to grow as quickly as possible. Uh, when it heard of this promotion, which didn't worry too much about how much it was costing the franchisees to deliver those $5 sandwiches, they jumped all over it. And they did. In the year after they announced and brought out the $5 Foot Lock promotion, sales at same-store stores jumped 20 to 25%, depending upon the market. Just an incredible amount of growth from one single promotion. And it worked so well that by 2011, the chain peaked at $11.5 billion in annual sales. That's a lot of sandwiches. And the first thing that go wrong for the chain was that the unwavering and Fred's unrelenting determination to grow at all costs, it was starting to bite the chain in the bud. And that was happening because they were opening too many stores. You see, it works well to grow at hypergrowth when there's still green space and your stores that you put in are not going to compete with your existing stores and cannibalize them. Well, eventually you get so many stores, there's no room and no new business to go after. So the business you do get when you install new stores is stealing business from your existing franchisees. Disease. So rather than competing with competitors and try to take their business, by building so many stores so close to each other, the chain was competing with itself. And DeLuca's growth at all costs kind of attitude started to hurt. And you started to see that in 2012. For the first time across the chain, store sales for existing stores, they started to fall, which is not something you want to have when you own a restaurant business. But Subway did something that was kind of crazy in that scenario. They kept opening stores in a year when same-store sales went down. They opened 800 new stores. Well, why would they do something that insane? Like, clearly that's, that's crazy. Well, if you think about the dynamics of a franchise system like this, when chains start to suffer, you don't feel it at headquarters, right? It's the franchisees that are feeling the pain because they're the ones that are actually worried about the bottom line. You as a franchisor, you make your money on royalties and new franchise fees. So as long as the revenue keeps growing across your whole chain, your books look pretty darn good. If, on the other hand, you as a restaurant chain own every location and all of that profit and loss falls up to you, well, it's pretty easy to see that you wouldn't do something as crazy as continue opening stores when your existing ones are not doing very well. In this case, Fred and the gang had set themselves up so much for hypergrowth that They just weren't able to be impacted by what was going on with the franchisees and the entrepreneurs that they had partnered with. And this shouldn't have been a surprise to Subway because as early as the 1990s, governmental reports, including those done by Congress, had said that they considered Subway to be the poster child for predatory franchisor systems. People who are going out and setting up franchisees potentially to fail. And a lot of facts came to light in some of that stuff, one of which was Subway's total targeting of recent immigrants, many of whom were signing up for the franchise system without even knowing what the contracts meant. And when you looked at the numbers of Subway in some markets, 30% and up to 50% of folks signing up to be franchisees in the system were recent immigrants. And in Fred's quest for super hypergrowth, he had done something that was really unique and creative. He had created these people who were territory representatives. They were, in effect, people that sat between the Subway business and the potential franchisees. These were people that basically owned a territory somewhere in the United States, and they got incentivized heavily to sell new franchises and get the revenue and royalties from those types of things. So when it was time to understand that there was a lot of pain in the franchise system, it had to go through multiple layers for Fred and the folks in headquarters to actually even know they were being predatory. And remember those super low franchise fees that Subway was charging to bring in a lot of people? Well, part of the way they made up for that was by charging high fees on the royalty side. Subway would typically charge 8% plus a 4.5% marketing charge on top of that for a total of, let's say, 12.5%. And to put that in comparison, a typical McDonald's or another kind of more sustainable franchise might charge 4 or 5% for their royalty, just putting the franchisees in a, well, behind the 8-ball situation from day one. With those kind of fees. And during this time in the early 2010s, the $5 footlong promotion started to come back to bite the Subway chain. To remind you of how successful it was, the additional sales from the $5 footlong promotion were $3.8 billion in 2009 for the chain. You're like, whoa, that seems like a lot of money. Well, that is the total sales of what Domino's did that year. Like they did an entire additional Domino's in sales just by doing the $5 footlong promo. Incredible. And this was great, but it was kind of like putting crack cocaine into your restaurant. It was a quick hit, but it didn't last because what it did was the $5 footlong promo trained every customer to come in thinking they deserved a discount and a supreme value. They weren't thinking, hey, this is a good, like, upscale restaurant. I'm getting good quality for my money. I'm going to get a tasty thing. No. The $5 promo taught customers, if I want dirt cheap calories, I go to Subway. And in the end, that starts to box in the chain over the coming years. We'll talk about that a bit more as the story goes on. Then in 2015, the next horrible thing happened to Subway, and this is something they probably could have avoided. It turns out that Jared Fogle, you know, the guy that had lost 245 pounds exclusively eating Subway sandwiches, well, he was arrested in 2015. And the arrest was for child pornography and involved underage kids. That is not what you want if you are Subway and you are trying to position yourself as the healthy, wholesome alternative to greasy hamburgers and fries, to have your main spokesperson that you had relied upon for the past 15 years to be arrested and convicted as a pedophile. And this is a danger you run in a business if you tie your entire brand to an individual who's outside of your control. And in this case, it was the worst possible outcome for a big brand like Subway. And it basically tarnished it forever. You see, I told my family, a lot of whom are in their 50s and 60s, I was doing this video today and about Subway. The one thing they remembered, Jared Fogle. They said, are you going to talk about that? And I said, I'm definitely talking about that. It's a key part of the story. But more kept going wrong for Subway. In the 2010s, we saw a shift in how people started to think about what healthy actually meant. You know, back in the '80s and '90s, healthy had been low fat, high food pyramid, high carb, breads. That was all great for you. Eat some grains, you'll be great. But people kept getting fatter. And we as a society in the 2010s started to change how we thought about what healthy, wholesome eating is like. And it wasn't bread and processed meat anymore that was going to be the healthiest thing for it. It was fresh ingredients. And you started to see chains like Chipotle who would come in and be like, hey, we're gonna make stuff fresh in the store and make avocados and guacamole and all that stuff right in front of you. Meanwhile, like Subway is not even cutting their own meat in their stores. They're having it shipped in pre-cut and full of chemicals. And it tasted like it. And other competitors entered as well, directly in the sandwich space. Jersey Mike's, a popular chain. Came in at precisely this time in the early 2010s, and they did something pretty smart. They came and tried to grab the top of the market from Subway, and they brought in basically higher quality sandwiches. They would get higher quality meat, higher quality bread, charge you a little bit more, and you know what? A lot of customers defected to that kind of stuff. They didn't want bottom of the barrel, cheap as I can get calories in Subway, and it showed in the numbers. Your typical Subway store at this time was doing $425,000 in top line sales. Well, a Jersey Mike's would be doing almost 2.5 times that at $1 million per store. Customers were showing Subway exactly what they wanted, and it wasn't what they were offering. And remember earlier in the story how McDonald's had been passed by Subway when Subway became the largest restaurant chain in the world? Well, McDonald's didn't get to be as big as they are by being pushovers, and they saw the opportunity that Subway was missing. Which was there's plenty of ways to deliver, quote unquote, healthy food in a fast food setting. So they started to roll out things like snack wraps, grilled chicken, all that kind of stuff with the idea of coming after the market that Subway had so dominated for so long. And so now you're in a situation where basically from the bottom, the value shoppers are being carved up by Taco Bell and McDonald's who are doing value members, try to get your low spenders in there. And then from the top down, you have folks like Chipotle Sweetgreen, and Jimmy John's who are coming after the customers who are willing to spend a little bit more. It basically creates a nasty sandwich, pun intended, for Subway where they're getting attacked on all sides. And just as the chain started in a crisis mode with same-store sales declining, uh, the worst possible thing that could happen to the chain happened, which was founder Fred DeLuca, who had been the heart and soul and driving force behind the business since its inception, Well, in 2013, he got diagnosed with leukemia and it was bad, and he was forced to start stepping away from the day-to-day. And Fred stepping away exposed a hole in the business that nobody had seen coming. And at this time, remember, the chain was owned by these two families. They were in control of it. They could run it any way they wanted to, and they still run it very much like it was just a big small business, which meant Fred was the dictator, heart and soul of the company. And a ton of things that were going on with the business, well, they just kind of ground to a halt or didn't get done right. There was nobody to to solve big problems once Fred got sick and had to start stepping away. And all this happened at the worst possible moment. With Fred sick and the way he had set up the company, there was nobody around to make the necessary big changes it required to keep it and get it back on the right path. So remember how early in the story we talked about their structure insulated headquarters from things going poorly? Well, eventually that insulation kind of wore down and there was no way to hide what was going on. Uh, sales were down. And that meant that franchisees who had felt alienated and many of them screwed over by the franchise contracts they'd signed with high fees and lots of competition around them and store cannibalization, all that kind of stuff. Well, they started to leave. And so in the year 2017, they started to see record numbers of stores closing. 359 stores closed in that year alone. And to show how acrimonious the relationship was between the chain and the franchisees, Uh, I ran across a number that basically tracked how often the franchisees got into lawsuits with Subway Corporation, and it was 29 lawsuits per 1,000 franchisees, uh, with them. To put that in perspective, like a McDonald's or Wendy's or KFC, their number would be 1.4 per 1,000. You were nearly 15 times more likely to be in a lawsuit if you were a Subway franchisee than if you were somebody with one of the other chains. Just incredible disregard for these franchisees. And I'll give it to management at the time in the late 2010s, they tried a bunch of different stuff, some of which really worked. Um, they tried to renovate a number of their stores. There was a lot of pushback on that because frankly the franchisees didn't have money, but that helped. Uh, they started to do things around closing unprofitable stores, reducing ones that were cannibalizing other business. Uh, they started to try to reposition the, the brand as well. Bringing in things like carved turkey and steak and stuff like that, some of which worked, but a lot of it which the new customers or the existing customers who had been weaned on $5 footlongs, they weren't interested in $14 steak sandwiches. And franchisees, a lot of them just refused to sell that stuff. And perhaps a decade too late, in 2023, Subway finally bought them— bought the equipment to allow the franchisees to slice their own deli meat. Inside the stores. Uh, it would have been great if they did that like 15 years ago, but I guess it's better late than never to admit your mistake and try to fix that. But they also did the mistake that a lot of struggling businesses do, which is if things aren't working now, just go back and do more of what didn't work in the past. And CEO John Chisney, uh, in the late 2010s— I think it was 2019 exactly— did something awful. He brought back the $5 footlong. Except, you know what? Compared to 2008, when the $5 footlong came out and was kind of close to profitable for franchisees, things had changed. Inflation had hit and $5 footlongs, they were money losers for franchisees. And his solution? Well, let's just do more of what isn't working for our chain and we'll just make it up on volume. Franchisees did not like that. So in 2023, the Buck and DeLuca families have been involved in this business for Nearly 60 years. I'm not part of those families, so I don't know, but I have to only imagine they were just tired by this point. And after Fred departed and died in the 2010s, they went through this number of professional managers, and then it was just time for them to get out. And they put the chain up for sale in 2023. They were hoping to get $10 billion for it. They did not get that, but they did manage to get a bidder who was pretty close to that. It is a private equity firm called Roark Capital. and they specialize in franchise systems, and they paid nearly $9 billion for the chain. And Roark's first move was to clean house. They fired existing management. They brought in experienced folks on their own and started to try to turn things around. It will be interesting at this point, just 18 months in is where I'm recording this now, to see if they make it and how it goes. But the good news is they have 37,000 locations still, and that is a hell of a foundation to try to build upon. As I look back on Subway, the big lesson that you heard over and over again is the danger of growth at all costs. If you're going to grow aggressively, which is totally fine, you got to just make sure you're doing it in a sustainable manner. And everything from the franchise fees to how they went about overgrowing and cannibalizing their stores to their branding, it was all just done too quick and too haphazardly. And to me, I think growth is good. Every business should be growing, You know, they're— that's just their natural state. But in this case, Fred and the families, they pushed it too far and put the company in a bad place. So, oh, and I promised to tell you why I did the hook for this video in front of Rotamo Park, the failing horse track at the beginning of the video. Well, it turns out back in the 1990s, during the uber duper hypergrowth period for Subway, they actually opened a Subway inside of the horse racing track. And, uh, I was just like, a crazy type thing showing how they were just growing in every possible way they could. And in this case, they put it in a horse racing track. Just weird. If you're interested more in the franchising side of the Subway story, check out this video right here from my friend Connor Gross.