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Neck and Neck

Being No. 1 in the franchise race has its advantages, but there will always be others nipping at your heels.
January 1, 2004
URL: http://www.entrepreneur.com/article/66032

For so long, McDonald's has been known by millions of children, busy parents and working stiffs around the world as the king of franchises. Who'd have guessed that one day, another franchisor would consistently challenge the burger giant's title?

In 1988, Subway dethroned McDonald's as No. 1 in Entrepreneur's Franchise 500®, touching off a virtual tug-of-war for first place. Subway had done the unthinkable. And it soon became the only other franchise to prove it wouldn't give up the top spot so easily. For the twelfth time in the past 17 years, Entrepreneur has ranked Subway as the No. 1 franchise, once again keeping the crown away from McDonald's (which has only ranked No. 1 eight times). There's good reason for Subway's dominance. Its enterprising approach made Subway explode onto the franchising scene, and in 2004's Franchise 500®, it outnumbered McDonald's U.S. locations 15,874 to 11,533. Subway has risen to glory armed with an aggressive development plan that has let it capitalize on society's appetite for healthy dining and catapulted it ahead. But for every new victor, a contender waits in the wings.

Subway set out from the beginning to become No. 1 in 1965, when Fred DeLuca founded the submarine sandwich shop with a goal of 32 stores, because the only other sub chain had 31. "Goal-setting has always been important," says Don Fertman, director of development for Subway. "Besides being No. 1 in every market we serve worldwide, our main goal was to look at what the possibilities can [lead to]."

Subway's expansion has covered North America, and the chain has leapt overseas to 73 other countries. "It was a combination of 'if you build it, they will come,' and 'come one, come all to Subway,'" Fertman explains. "We'll teach you the business, and you make it work in your market."

Strong expansion and successful campaigns ultimately helped Subway overtake McDonald's top spot, possibly setting the mold for aggressive No. 2 franchises. Stephen J. Spinelli Jr., founder of Jiffy Lube International Inc. and director of the Arthur M. Blank Center for Entrepreneurship at Babson College in Babson Park, Massachusetts, weighs in: "They created an expertise in a method of franchising that was not effectively used by many franchisors prior to Subway: development agents. That put in place a franchise infrastructure that allowed for dramatic scaling of the concept and selling additional franchises as they came in, so they had this dual-pronged approach that was extremely effective."

And although Subway has long touted itself as the "fresh alternative" to greasy fast food, the successful Jared Fogle campaign took Subway's low-fat offerings and brought them to consumers' attention. "You can lose weight eating Subway's sandwiches!" everyone cried, and the rest was history. But Quizno's, another purveyor of the art of submarine sandwiches, has moved in and gained ground in the sub wars, and the battle is far from over.

Bread Winner?

Quizno's aggressive movements signal intentions similar to Subway's early ambitions. And as much as Subway "wrote the book on submarine sandwiches," as Fertman puts it, Quizno's (this year's No. 3 overall franchise) has taken strides to rewrite it. Awareness of Quizno's toasted sub rolls has become ingrained in anyone who has heard its radio or TV spots with the tag line, "Mmmm . . . toasty!" Gourmet offerings like the Black Angus steak sub entice a more upscale palate at a slightly higher price point, which Quizno's executive vice president Brooksy Smith says customers are willing to pay. Then there are the flavored sauces, part of Quizno's menu since its inception in 1981. Subway added flavored sauces and bread a few years ago, but not toasting.

With more than 2,400 locations in 13 countries, compared to Subway's 30,ooo-plus locations, can Quizno's be considered aggressive? "Not in the same way Subway is," Spinelli says. "Their aggressiveness is more targeted. They have opportunities to dominate specific trade areas or markets but don't have Subway's global view."

Smith concedes there are still sections of the United States without a Quizno's presence, but emphasizes the company's aggressive expansion effort has a new Quizno's opening every 16 hours. And for all existing Quizno's franchisees, the franchisor footed the bill for making overnight renovations in every store. Wood floors, softer tones and 6-foot-tall murals offer a more sophisticated ambience, while lower counters, pepper-and-sauce bars and improved views of the toasting process allow for an enhanced experience. "The older the store, the greater the impact," says Smith. "We've seen it in the bottom line." (Subway has also remodeled in fast-casual fashion with Tuscany-inspired décor.)

Despite being smaller than Subway, Quizno's has also been aggressive in its advertising, with offbeat, edgy humor that pushes the envelope and captures its audience's attention. "Our advertising agency set the tone that we take our food, the experience and our restaurant very seriously, but we don't take ourselves very seriously," says Smith. Because of budget limits, early spots were only 15 or 30 seconds long, but received a lot of attention from customers and media. Doubling their ad budget in 2002, Quizno's made its first commercial appearance during the Super Bowl and saw a spike in sales the following Monday. Quizno's premiered another ad during 2003's Super Bowl, featuring founding chef Jimmy Lambatos, a man so intent on creating the perfect toasted sub sandwich that he forgets to wear pants. Quizno's has also been a sponsor of Fox Sports Net's Best Damn Sports Show Period for the last two years, and Lambatos appeared as a guest, preparing some of his specialty subs with the hosts.

Cream of the Crop

Which are the best-performing franchisors of all time? Based on how often they've been ranked in the top 10 in our Franchise 500® listings, here's a look at franchising's all-star lineup:

  1. McDonald's
  2. Subway
  3. Burger King
  4. 7-Eleven
  5. Domino's Pizza
  6. Hardee's
  7. The UPS Store (formally known as Mail Boxes Etc.)
  8. KFC
  9. Jani-King
  10. Baskin-Robbins

SOURCE: Entrepreneur's Franchise 500® (1980-2004)

 

 

2 Is Better Than 1 . . .

It seems being No. 2 isn't so bad-there's the goal of reaching No. 1 and having greater liberty to be more aggressive with aspects like advertising than larger, established chains that have more to lose.

So is it better to be an aggressive No. 2? "I think it's better to be No. 1," Spinelli says. "No. 2 is on the precipice, and small mistakes can be big failures. In franchising, the name of the game is growth and size." But, he adds, "Ray Kroc [founder of McDonald's] said, 'Green and growing, or ripe and rotting.' It fits for most franchise companies-fighting to be No. 1 is important."

From a franchisee's perspective, being part of an aggressive chain can be exciting. Andy McCook, franchisee of three Quizno's in Las Vegas, was displeased with the lack of support from the franchise he had previously owned and decided to look into Quizno's. He opened his first location in July 2000. The aggressive No. 2 mind-set has been advantageous to McCook, who says the support has been tremendous. "We [frequently] get new sandwiches, they remodeled the stores and paid for it, and the advertising is great." McCook was so thrilled with the franchise that he opened his second location six months after the first and opened his third in December 2003. He now plans to open several more.

Can being part of an aggressive franchise have any disadvantages? McCook hasn't seen any, but Spinelli does. "Sometimes a franchise will get ahead of itself," he says. "And franchisors or franchisees or both will invest a fortune in rapid development, but the marketing impressions don't catch up, and the understanding of the menu doesn't catch up with the product offering. And there's a ramp up in the sales that can be painful." Though he cites Subway as successful in strategically managing increased sales with aggressive store development, he warns other franchises from trying to replicate its formula. "So many variables can create a problem. It's easy to outgrow your capacity to service franchisees, or for market demand to absorb those new stores. These pockets of failure can bring down the whole plan," Spinelli says. "My hat's off to Subway for pulling it off, but I don't think they're going to be the norm" Instead, Spinelli feels the better bet is on Quizno's approach of aggressively targeting regional growth.

The Slow Road

With all the discussion about submarine sandwich franchises, it should be noted that there's another sub chain taking a nonaggressive path toward the No. 2 spot. Started in 1964, Blimpie International Inc.'s Blimpie Subs and Salads franchises number nearly 1,600- plus stores in the United States and 15 foreign countries. Traditional stores were found in shopping centers, malls, free-standing buildings and downtown markets, but newer ones are found inside convenience stores, gas station food marts, colleges, office complexes, hospitals and sports arenas. Blimpie's food offerings are also sold through their "Grab 'n GO" refrigeration cases, carts, kiosks and vending machines.

However, even though Blimpie has been around for 17 years longer than Quizno's, it has a smaller store count and nowhere near the buzz of its toasty competitor. "It's one of the interesting strategies that some franchisors take," says Spinelli of Blimpie's quiet position. "If behavior indicates their strategy, theirs indicates what I call regional fortress-building. If they get a market presence in a specific geography, get the best sites, target local advertising, understand their franchisees, and succeed in building a competitive wall around this geography, they can win. That might not be their strategy, but that's been their behavior."

Doesn't sound too bad, so why isn't it a foolproof approach? "Three things can happen," says Spinelli. "You either intentionally break out, and it's difficult; you get acquired; or you get attacked by someone who will lay siege to the fort."

Perhaps after recognizing the stiff competition, between 1998 and 1999, Blimpie expanded its brands with Maui Tacos, a majority-owned subsidiary; Pasta Central; and Smoothie Island, which is franchised through Maui Tacos. Blimpie's attempts to expand through these new brands are furthered by co-branding Smoothie Island with Blimpie and Maui Tacos locations, proving that Blimpie isn't completely passive about its industry position. It has even ventured outside the food realm with BI Concept Systems Inc., an equipment and design services business catering to Blimpie franchisees as well as other restaurant and hotel concepts.

The Race Is On
Food isn't the only category with aggressive movers and shakers. Curves has demonstrated tremendous franchise growth. Ranked No. 2 in our Franchise 500® for 2003 and 2004, the women's-only fitness centers franchise has grown from 23 franchise locations worldwide in 1996 to more than 5,000, coming in at No. 1 in the "Fastest-Growing Franchises" category in 2003 and in the "Fitness Center" category for the last four years.

While a Curves can be found in nearly every city and town in the United States, Curves' marketing director Mike Raymond stalwartly maintains, "Our goal is not to be the largest. Our goal is to serve the needs of a market that has been ignored: women. It's because we're doing a good job of serving our market, and word-of-mouth has fueled tremendous growth." Curves continues to add locations in the United States and also plans to expand aggressively internationally.

Does Curves have aspirations of one day unseating the No. 1 franchise? "Not really," Raymond says. "This business was started by two founders who are motivated primarily by making a difference in women's lives."