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Meet the #1 Franchisor

Subway franchisor Fred DeLuca speaks out on everything from advertising success to Subway's secret weapon.

What's it like to be on top? We figured there's no one better to ask than Fred DeLuca, who has hit the top of our Franchise 500 10--count them, 10--times. Now, despite an economic slowdown, Subway has managed to not only make the #1 slot once again, but also to achieve an undeniably successful year. While others companies are buckling down, DeLuca is thinking about change and innovation. Here, in an exclusive interview, DeLuca shares his insights and strategies for the future.

On being the Franchise 500's #1 franchisor: "The [first time] was quite exciting. Once we lost the top position [Subway ranked #2 in 1997, #4 in 1998 and #2 in 2000], I said, 'I don't think we're going to be able to get back there.' Then last year, I was like really, really, really knocked out. This year I'm not quite as surprised, though. It's been a fantastic year for us."

On the keys to this year's success: "A couple years ago, we did a lot of work to improve our advertising and improve our food. Of course, the combined effort led to increased sales and better profitability for our stores. And the increased profitability has really been driving initial expansion by our current franchisees and people who join the system, too."

On the future of the Jared Fogle campaign: "I think we'll see more of Jared. The campaign's been evolving. Essentially, I guess it's really two campaigns we have going. We have one with Jared that really tends to focus on low fat and eating properly. And the second one talks about taste and freshness. Actually, some great spots have been produced that focus more on friends of Jared. Two of them should be previewing in January.

"And then, of course, the third part of the advertising is new product introduction. we're doing a lot of work on improving the bread-we're coming out with new breads and new sauces and new sandwiches. We just got back a bunch of new market research--the last couple of weeks the research came in--we're sort of embarrassed by a wealth of good news. We found three new breads are ranked higher than our best bread in the store, and four new sandwiches ranked better than our best ones. So we can't roll all these things out too much--we've got too much good news. We're making choices now as to what the strategy will be. We've got product introduction windows around the spring of [2002]."

On obstacles in the economic downturn: "We see the exact same sales trend after September 11 as before. That maintains franchisee confidence, so our current people are probably going to follow through [with opening new] stores they've had on the drawing board. We project next year we'll add about 1,500 outlets to the U.S. store count.

"We get research every week on the fast-food industry, and it looks like the industry is holding up pretty well overall. Maybe the sales for all the fast-food categories combined will be off only 1 or 1.5 percent. I don't know of any chains in fast food that are going to have any particularly big problems next year. If they were having problems before September 11, I think they have the same problems. But higher unemployment generally bodes well for franchising. People are looking for a new opportunity, and people who have jobs are a little less confident they'll always have a job. So just a small change in how the work force thinks makes a big impact on franchising."

On the saturation issue: "We have always had many more franchisee candidates than available locations. For instance, we track every week how many people are looking for locations who have purchased franchises already--right now we need about 750 locations domestically.

"In some markets, we don't have a lot of room to expand. We've done studies of store density and essentially found our more dense markets have more than one store per 15,000 people. But then we have many, many markets that we classify as lower density markets--markets where we haven't even reached the store density of one per 20,000 people yet--and those are starting to grow very fast. We have a color-coded map on our Web site: the higher density markets in green, the lower density in red and mid-density markets, where density is between one [store] per 15,000 to 20,000 people, are in yellow. And it's astounding to see how much red is in the United States. It's incredible. There are huge opportunities. Almost the entire state of California and the entire Northeast are red. Then there are large amounts of red throughout the country. Probably the highest penetration area we have is the Southeast."

On international expansion: "It's always a tough time for international expansion. International locations are really hard to get off the ground. The United States is a huge market, and once you get rolling, you can replicate that model over and over pretty easily. Your supply lines are taken care of. You don't have technicians to deal with. You've got your customer base. But as soon as you get into a new country, you've got to organize your supply line and equipment leasing, and when you open the store, you've got to start getting customers. So it's really a lot of hard work, and with 200 countries, you have to start over again in each one.

"But in our case, we've been pretty fortunate with international [expansion]. We've got, right now, about 2,600 stores outside of the U.S. Our biggest market is Canada, and another market that's very big for us is the Australian/New Zealand market. We've got another 750 stores scattered among about 70 countries. The appetite for expansion doesn't seem to have diminished. The franchise sales we're experiencing are exactly what we would've expected, and our international markets are very strong. So I don't think being an American company is going to have a big impact. In fact, I'm not even sure that, in some parts of the world, people even know we're an American company."

On Subway's secret weapon: "To continue to improve the company, we need to have all the key constituencies involved the process. Over the years, we've evolved into a pretty democratic organization. Twenty-five years ago, we started the franchisee advertising fund--which the franchisees run. Also, we have an independent purchasing co-op, which is a franchisee-owned cooperative to buy food at the best prices. We have the North American Association of Subway Franchisees (NAASF), which [discusses] franchising issues. We have our Development Agent Advisory Council, and, of course, the company people. So there are five groups that meet every four months to go over key initiatives of the company--new products, new advertising, any concerns anyone has. We walk out of that meeting with a consensus on how to go forward with the information. That's been an instrumental part of our company.

"Last year we made a lot of changes--to the bread, the meat, how we display things. The amount of change we made was probably more than in the previous five years put together. And we were able to accomplish that because of the system advisory council. Everybody got together, listened to what was happening, endorsed the changes. This is sort of our secret weapon to make the franchise organization work better."

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