From the January 2004 issue of Entrepreneur

This is the 12th year Subway has claimed the top spot on Entrepreneur's Franchise 500®, and company founder Fred DeLuca is taking the time to reflect on how both his company and franchising as a whole have changed over the past 25 years. Ranked No. 219 on our first Franchise 500® listing, with 134 franchises in operation, Subway has grown and by press time expects to have 20,000 franchises in more than 70 countries. It's truly a testament to the power of franchising. "When I look back at it, it was the only way we could've grown to become a national chain," says DeLuca. "And so I have very excellent thoughts about franchising and working with franchisees from around the country. A lot of really talented people all over want to own their own businesses, and the franchise concept really helps them bring a recognized name to their town."

When Entrepreneur published the first Franchise 500® in March 1980, DeLuca's company was still very new to franchising. Though he founded his company in 1965, he'd only been franchising since 1974. "We didn't really know the franchising business, and it's [a very] different business from the store operations business," he says. "Just because we knew how to run stores didn't mean we knew how to run a franchising company-at that point, we were in the beginning stages of learning how to be a franchisor."

Learning the franchising business was a continual process, says DeLuca. He recalls the early days of attending meetings with the larger franchise community: "When we started franchising, I didn't even quite realize there was a franchising community." He soaked up a lot of knowledge from the more experienced franchisors at those meetings, and he says, in general, he and his franchise system were welcomed and accepted by the franchise community. He learned that the objectives of the bigger franchisors were very different from those of the smaller ones-and Subway was definitely one of the smaller ones at the time.

In the early days, for example, DeLuca remembers how much time and money went into creating franchise disclosure documents for each state. So DeLuca wanted to discuss with his fellow franchisors the possibility of creating a uniform disclosure document for all the states. When he went to the meeting, the others were less than enthusiastic. "One of the guys pulled me aside and said, 'Fred, let me tell you how it works here. To send somebody to this committee meeting costs money-only the bigger companies send people. These disclosure documents cost a lot of money to prepare, but the big companies aren't so worried about it, because they've got big budgets. They've got other items that are important to them,'" recalls DeLuca, laughing. "So while the community has always been very welcoming and helpful to franchisors of all sizes, depending on the size and maturity of the company, they have different things that are important to them."

The franchising community continues to be very welcoming, no doubt because of franchisors like DeLuca. "Now, as a big franchisor, I really enjoy going to the meetings and talking to the new guys and helping them out," he says. And the diversity of franchise opportunities encourages an even greater sense of community. "If you went to a meeting and everybody was your competitor, you'd perhaps clam up a bit," he says, "but because there's such a diverse list of industries involved in franchising, everybody seems very welcoming and helpful."

The Franchisee Factor

Over the past 25 years, DeLuca has watched the pool of franchisees grow tremendously-today, Subway receives about 130,000 requests for franchise information per year, with 25 percent of those people applying for a franchise. The communication between franchisors and franchisees has improved as well. "Back in the early days of franchising, there was more of what I'd call downstream communication. The parent company would make a new policy and send that policy out across the system-that was pretty much the way franchisors did things," says DeLuca. "Over the course of time, many companies have involved the franchisees in the decision-making process."

Subway certainly has: It has meetings every four months with the system advisory council. The council encompasses the franchisee advertising group, the purchasing co-op, the development agents, the international franchisee group and the North American Association of Subway Franchisees. "That's very helpful, especially when you have a large organization that's geographically spread out with a lot of different people with different points of view," DeLuca says.

He often points to Subway franchisees as a main source of the company's success. "The important thing for me and for anybody in this business is to appreciate the abilities of the franchisees and what they can do to improve a company and help a company grow. Here are a lot of people with a lot of good ideas who are really devoting their energy to helping the system grow. It's important for a franchisor to have structure and systems to tap into that creativity."

With plans to continue expanding internationally and to increase average store profitability, Subway has seen the addition of more than 2,400 stores over the past year, which averages to about 47 new franchises per week. "It looks like the coming year is going to be equally strong," says DeLuca. "It's a really good time for our franchisees-I see a lot of excitement in the franchisee community."

Looking back over the past 25 years of franchising, DeLuca has seen where it's been and can't help but look toward where franchising is going. "Twenty-five years from now, the most successful franchise companies will have 50,000 outlets worldwide," he predicts. "Wherever franchise brands are today, they're just scratching the surface. There's a big opportunity for the future-especially for those companies [that] are able to develop not only the domestic market, but also an international brand."

Full Steam Ahead
Through the years, Subway has seen consistent growth in the number of franchise units it has operating domestically and worldwide, and that trend is expected to continue.
2003 19,238
1999 13,892
1994 9,240
1989 3,586
1984 360
1979 134
SOURCE: Entrepreneur's Franchise 500® (1980-2004)

 

Fred DeLuca's Perspectives on Franchising

Entrepreneur magazine: How has the reputation of franchising changed?
Fred DeLuca: I think it's improved quite a bit. Fifty years ago, people didn't know what it was. Twenty-five years ago, people knew what it was, but they were kind of uncertain as to how good franchising could be. And today, franchising is well-known and accepted.

Entrepreneur magazine: What year do you consider to be the golden age of franchising? Why?
Fred DeLuca: Actually, I think right now is the golden age of franchising, because there are a lot of choices out there for potential franchisees. There are a lot of opportunities in so many different industries ... and a lot of people who will be well-served by joining a franchise company.

Entrepreneur magazine: What one fact/event over the last 25 years improved franchising?
Fred DeLuca: The disclosure documents that are required. Back when we began franchising 30 years ago, there wasn't a required disclosure document. Sometimes there would be misunderstandings-people didn't get all the information they needed. [Those requirements] have been very helpful, because not only do franchisees get the detailed information they need, but there's also a cooling off period in the sense that they can't buy until they've had that information for two weeks. So that's been very healthy and positive for franchising.

Entrepreneur magazine: What one fact/event over the last 25 years hurt franchising?
Fred DeLuca: I don't think anything has actually hurt franchising. There has been growth in franchising-a lot of new companies have started franchising. And, as with anything, not all these new companies do well. But I don't think that's a negative. I think that's actually-netting out everything-a positive, because the innovation that that brings leads to better franchise concepts. Kind of like that Darwinian approach to franchising-the survival of the fittest. It's good for consumers and good for franchising.

On Target
A dozen no. 1 finishes is the magic number for Subway. See where they've placed since the Franchise 500� first began:
#1 12 times
#2 '92, '97, 2000
#3 '99
#4 '98
#25 '87
#73 '86
#90 '85
#124 '84
#130 '83
#170 '82
#308 '81
#219 '80