Subway's growth era fades as new competitors hobble expansion

Subway's US expansion has slowed in the past two years. Photo / Getty

After years of explosive growth turned it into the world's largest restaurant chain by number of locations, Subway Restaurants is in retreat.

The sandwich seller is adding fewer new locations, and US revenue fell 2.7 per cent to US$1.16 billion last year, according to a franchisee document that parent company Doctor's Associates Inc filed with the state of Minnesota in April. The company's cash balance also shrank, dropping by nearly half to $10.9 million as of Dec 31.

Subway, seeing mounting competition from newer fast-casual rivals, has tried to lure diners with guacamole and $6 sandwiches and has even experimented with putting hummus on its subs. Still, Americans are increasingly flocking to pizza chains and more modern places like Chipotle Mexican Grill. Subway also is facing fallout after its top spokesman, Jared Fogle, agreed to plead guilty to federal child-pornography charges.

"The sandwich business has generally gotten much more competitive than it was five years ago," said Ed Teixeira, founder of consulting firm FranchiseKnowHow in Stony Brook, New York. "There are more formidable competitors."

The changes come during a time of upheaval in the closely held company's management. In June, Subway named Suzanne Greco to the role of president as Chief Executive Officer Fred DeLuca, her brother and company co-founder, battles leukemia. DeLuca kept the CEO title. Tony Pace, Subway's global chief marketing officer, also said recently that he's leaving in September to start his own marketing consultancy.

Subway's US expansion has slowed in the past two years. It added 313 net restaurants last year, 638 in 2013 and 804 in 2012, the franchise document shows. All of the company's more than 27,000 US locations were owned by franchisees as of the end of last year.

Subway isn't focused on adding restaurants now and instead wants to boost sales at its existing ones. The company has seen "positive momentum" for same-store sales this year, said Kevin Kane, a spokesman.

"Development has not been a focus over the past few years and has been put on the back burner," Kane said. "We are still opening stores, but our current focus is on working with franchisees to improve store sales."

Last year, DeLuca said the Milford, Connecticut-based chain could add 7,000 or 8,000 more units, bringing the total to more than 33,000. He said it could take a decade to do so.

However, Teixeira said there already may be too many Subway restaurants.

"There's definitely oversaturation," Teixeira said. "It's become more and more difficult to be able to locate franchisees who are willing to open a Subway."

- Bloomberg