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Subway Hits the Spot

The No. 1 franchise on our 30th Annual Franchise 500® marks some milestones of its own.

This story appears in the January 2009 issue of Entrepreneur. Subscribe »

When Fred DeLuca and Peter Buck opened their first eateries in Bridgeport, Connecticut, 44 years ago, they debated whether to call their offering an Italian sandwich or simply a sub. They opted for the latter, and the rest, as they say, is history. Across the globe, the Subway sandwich, modeled after the classic Italian offering shaped like a submarine, is as ubiquitous as the hamburger. Subway even has seven outlets in Italy, the land of pizza and pasta. The privately held company has a total of 2,500 locations throughout Europe, and Asia. Latin America and the Middle East are also growth zones.

What about recession woes? In late 2008, the company surpassed the 30,000-restaurant mark. It has 1,600 stores scheduled to open this year. Another 2,400 franchisees have bought in and are waiting in line to open. And it's on pace to overtake the king of fast food, McDonald's, in outlet numbers within five years. CEO DeLuca, speaking on the phone from Amsterdam, says 2008--a time of stock market plunges, real estate busts and bank failures--was Subway's "best year ever."

"We work hard to be extremely efficient," he says. "We give great value for our franchisees: They can build a store for well under $200,000. And we have extremely simple operating systems. The preparation is mostly done in front of the customer. That simplicity is really what attracts our Subway franchise. You see it, and you can do it".

Steven Greenbaum, chairman of the International Franchise Association, says DeLuca "has done an incredible job of finding that value sweet spot" for franchisees and customers alike.

Indeed, Subway has found sweet growth in a sour economy. Companies like Starbucks suffer when customers get the jitters about paying for premium coffee, but people still "gotta eat," says Hardeep "Hardy" Grewal, who runs Subway's Los Angeles and Orange County, California, territories. And when consumers can get a foot-long sandwich for a buck or so more than the price of a Starbucks caramel Macchiato, Subway takes the very dollars other companies are losing. "The downturn works for certain businesses like ours," Grewal says. "In fact, our franchisees want to open more stores."

If anything, there's a bottleneck in Subway's growth, with many franchisees still searching for a storefront. The real estate bust and frozen credit have slowed some openings, DeLuca says. But the Subway boom still has some owners moaning about other locations opening too close. "There are complaints about encroachment issues--concerns that they're putting too many units close together," says franchise consultant Jeff Elgin, CEO of FranChoice. "But I think Subway has done well over the past seven years because there's absolute genius in the business model. The hardest thing, today, for Subway operators is finding labor."

On the eve of interviewing DeLuca for Entrepreneur's 30th annual Franchise 500® issue, I stepped into a Subway landmark: the franchise's 500th store in Los Angeles County, which resides in a new Bell Gardens, California, strip mall. Before the door even closed behind me, someone called out, "Good morning. Welcome to Subway." The construction of fresh bread, meat, cheese, veggies, toppings and dressing went by in less than three minutes, toasting included. This particular franchise--in Los Angeles' Latino Eastside--displays bowls of avocados, sells creamy chicken chipotle soup and employs bilingual "sandwich technicians." Everything, down to the timer on the men's room light fixture, is deliberately economical. Steve Verduzco, a 36-year-old maintenance worker who says he comes here at least once a week, praises the place: "Everything is fresh; it's pretty good and it's pretty cheap."

Subway is constantly trying to grab such repeat customers while luring new ones. Marketing is paramount. Select locations are testing ever-fluid LCD screens--promotions can change weekly, even daily--that might replace part of the traditional menu boards. In the Chicago suburb of Crystal Lake, iMan Wireless has paired up with a franchisee to offer on-demand coupons to customers via mobile phone. All eaters have to do is text "Subway" to a code presented on signs at the location. John Maier, president and founder of iMan, hopes to expand the program to a so far receptive Subway network.

Indeed, one of Subway's strengths is its upward flow of ideas. Some of the chain's game-changing marketing concepts--from Jared Fogel, the pitch man who lost more than 240 pounds on the "Subway diet," to the "$5 footlong"--sprang from single stores. The $5 promotion started in late 2007 in Fort Lauderdale, Florida. In April, Subway took the discount nationwide, just before a spring and summer of astronomical gas prices. Good timing.

"There's only one headquarters, but there are more than 30,000 stores," DeLuca says. "Those ideas that come up in the various stores might look little, but we see some with real promise." Another promising idea was to put the Italian sandwich on a domestic assembly line and let diners point to the ingredients they desire.

DeLuca's parents emigrated from Italy, so the evolution of the sub into an American fast-food icon is personal for him. "Of all the things I could have done," the 61-year-old says, "Subway is a real point of pride. We have influenced the way people eat. The customer has a lot of choice and control. If someone wants to eat healthy, they can do that and get the sandwich exactly right. I'm so pleased we're able to influence so many people and their eating habits."

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