This Subway franchise report was written by Brian Bixler.
Whether they are stacked on top of the heap as Subway franchise owners, layered at the bottom as franchisees of beleaguered Quiznos, or sandwiched somewhere in between, investors continue to be interested in feeding America’s hunger for meat, cheese and toppings pressed between some sort of bread.
“The sandwich and sub store franchises industry has managed to excel during the past five years, despite facing a weakened economy and rapid rise in unemployment,” states an IBISWorld market research report updated in October 2013. “Keeping consumers’ appetites satisfied, sandwich and sub store franchises have developed new menu options that capitalize on society’s increasing awareness of the health risks associated with a high fat diet.”
The report also notes that industry leaders have changed. While Subway is by far No. 1 in the field with some 41,000 locations worldwide, the once-second-biggest player in the sector, Quiznos is in trouble. The Wall Street Journal reported this month that the company is drowning in debt of $570 million and is on the verge of filing for bankruptcy-court protection, leaving its franchisees steaming. After losing more than 50 percent of sales and closing more than half its locations during the last five years, Quiznos now has just 2,100 stores in operation.
Meanwhile, there are plenty of other chains vying to replace Quiznos in rank, including Jimmy John’s Gourmet Sandwiches and Jersey Mike’s Subs.
While Subway dominates the sector, smaller chains such as Jimmy John’s, Firehouse Subs and Jersey Mike’s are gaining ground. All three have undergone rapid growth and increased their market share during the past five years by chasing a defined segment of the market, according to IBISWorld. During the next five years, it expects the number of establishments to increase at an average of 1 percent per year to 36,335 in 2018.
Meanwhile, restaurant consulting firm Technomic Inc. looked at consumer behavior to gauge the strength of the sandwich franchise industry. Participants surveyed for the research firm’s 2012 Sandwich Consumer Trend Report said they were eating sandwiches more often than those who responded just two years earlier.
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“More than two-fifths of today’s consumers (43 percent) say they eat at least four sandwiches each week, compared to just 39 percent of consumers polled in 2010. Additionally, consumers report that half (49 percent) of the sandwiches they consume are purchased at restaurants or other food service locations, up from 44 percent in 2010,” the Technomic report states.
The sub store franchise industry is experiencing consistent growth despite a struggling economy. And revenue continues to grow, although at a slower pace than it has in the last five years. IBISWorld expected industry revenue to grow at an average annual rate of 3.5 percent to $19.6 billion by 2013. It attributes the overall sunny forecast for the sandwich sector to three things:
- A rise in disposable income resulted in consumers dining out more frequently.
- The industry has emphasized choices perceived to be much healthier than fried foods served up by other fast food restaurants.
- The industry offers products at price points that consumers see as affordable and having value.
On top of that, the variation and diversity of menus are expected to contribute to revenue growth of 2.7 percent per year on average to $22.3 billion in 2018.
The IBISWorld report gives Subway much of the credit for leading the sector with smart strategies and marketing.
Subway created the perception of sandwiches being a healthy choice when it started using a college student named Jared Fogle in its ads in 2000. Now a recognizable icon for the brand, Fogle lost a significant amount of weight by following what would come to be called the “Subway sandwich diet.” After he was done melting away on the diet, Fogle was able to abandon old pants that measured 62 inches in the waist.
But Jared has taken a backseat in the company’s advertising since Subway introduced its Five Dollar Footlong promotion in 2008. IBISWorld reports that the promotion pulled revenue numbers up for the entire industry. The report even attributes Quiznos’ decline to the success of Subway’s price-based strategy. Quiznos responded first by offering a similar price point, but it’s use of higher-quality, more expensive ingredients ate away at profits. However, as a result of Subway’s campaign, many other sandwich franchises avoided the declines that the rest of the quick service segment experienced.
Many analysts note that Subway may be reaching saturation in the United States, but the company points to its success in non-traditional spaces, which it will continue to pursue, opening more stores in spaces like airports, retail stores, amusement parks, stadiums, colleges, hospitals and other venues. In fact, Subway is the trendsetter with the practice as its competitors follow suit.
Subway was also the first to put focus on the breakfast daypart by introducing breakfast items to its menu in 2010. The following year, it began testing a new restaurant concept called Subway Cafe, which offered customers the regular Subway menu as well as items like coffee, smoothies, panini, muffins and other pastries. A new Subway Cafe will open in Kansas, the first in that state, later this year and the company announced it is also pursuing the concept in India.
Moving forward, the sandwich and sub franchise industry is expected to continually introduce new healthy food alternatives and augment their menus with additional product lines. Major operators will try especially to expand revenue and profit by offering alternatives to red meat.
Technomic notes that chicken breast is the most preferred option for protein in a sandwich, followed by roast beef, which is favored by about two-fifths of consumers and keeps competitors such as Arby’s in the picture. Like Subway, other operators will continue diversifying into new areas, such as cafes and breakfast menus, which have become increasingly more important with chains as evidenced by recent menu additions at Starbucks and Taco Bell for that daypart.
Franchises such as Jimmy John’s and Jersey Mike’s, with higher-priced gourmet options, will continue to gain market share as the economy recovers and consumer spending grows. Other competitors are also developing mini-sandwiches, wraps and sandwich “thins” that can be eaten more like a snack in between meals, rather than something perceived only as a meal for lunch or dinner. Such options also help to perpetuate the perception of them being a healthier choice for consumers.
Some sandwich franchisors may continue with the trend of offering more high-profit items such as coffee beverages and smoothies to increase revenues.
With Subway capturing 62 percent of market share and being No. 3 among all franchise companies on Entrepreneur magazine’s 2014 Franchise 500, competitors have a lot of catching up to do.
Jimmy John’s Gourmet Sandwiches
With Quiznos virtually out of the picture, this chain is poised to retain the No. 2 spot among the top sub/sandwich franchises after Subway. Jimmy John’s cracked Entrepreneur’s Top 10 for the first time this year, taking the No. 5 spot on the overall Franchise 500 list. “The company has distinguished itself in the highly competitive sandwich market through its extraordinary service, its delivery program and a fun, hardworking culture,” Entrepreneur reported.
IBISWorld estimates Jimmy John’s market share to be 6.8 percent. It has increased locations by about 100 each year since 2008 and will likely announce this year that it has reached 1,700 units system-wide. The chain has not only enhanced brand awareness with it “freaky fast” service and comical advertising campaign, its average sales per restaurant are among the highest in the industry. Entrepreneur reports that the company added 275 stores in 2013 and another 330 are scheduled to open this year.
Celebrating its 20th anniversary in 2014, Firehouse Subs, as the name suggests, was founded by two firefighter brothers, Robin and Chris Sorensen. It continues to be a leader and innovator in the sandwich category, landing among Entrepreneur’s 2014 Top 100 with the No. 65 spot. With nearly 650 units in the United States and Puerto Rico, the chain expects to enter Canada this year and has reportedly considered Mexico for future international expansion.
The company has reported record-breaking, rapid growth in recent years. The number of units has more than doubled since 2008 and the company’s long-term goal is to reach 2,000 restaurants by 2020. IBISWorld estimates that Firehouse Subs has 1.5 percent market share.
The brand stresses differentiators such as using high-quality meats and cheeses which are steamed to release optimal flavor. Other differentiators include portion sizes, with sandwiches stuffed generously with ingredients, and rolls made fresh from a “private recipe.”
Jersey Mike’s Subs
Just three spots below Firehouse Subs on Entrepreneur’s Top 100 is Jersey Mike’s Subs at No. 68. IBISWorld estimates Jersey Mike’s market share to be about 1.8 percent.
The chain takes a different tack than Firehouse in competing with Subway. Distinguishing its products as “East Coast-style,” other key differentiators are higher quality ingredients at a slightly higher price point, but still offering value. The company has also achieved growth by targeting multi-unit, multi-brand franchisees that can open stores much quicker than single-unit operators, due to existing financing, employees and infrastructure, IBISWorld says.
The company is also known for strong leadership. For his efforts to push the brand west from the Atlantic to the Pacific, founder and CEO Peter Cancro was named Entrepreneur of the Year by the International Franchise Association in 2013 for his guidance of the growing franchise.
This brand obviously capitalizes on the industry’s emphasis on healthy menu choices. As Franchise Chatter noted in 2011, Pita Pit is Subway without the bread. In place of the high-carb bread used by many of its competitors, Pita Pit differentiates itself by serving Lebanese-style pita (white or wheat) stuffed with grilled meats, vegetables, toppings and sauces.
The company started in 1995 in Ontario, Canada, and is now American-owned. Today, the Pita Pit brand is expanding across the United States and Canada with more than 400 units in operation.
By including the breakfast daypart in its menu choices, the brand was an early leader of that trend. Also attractive to potential franchisees, the total investment required to become an owner is on the lower end when compared to other fast food franchise opportunities. As the company puts it “You’ll need less bread to open a Pita Pit franchise.”
The company has also employed some innovative marketing techniques, such as a “pop up” restaurant on the streets of New York, which included serving breakfast pitas to passersby on Fridays while Fox News conducted interviews.
Quiznos could learn a lesson from Schlotzsky’s which has been able to rebound from bankruptcy after shuttering many of its units. Schlotzsky’s is considered to be one of the great comebacks in franchising. Less than a decade ago, the iconic brand that has existed since 1971, was in bankruptcy. A change of ownership and a re-branding initiative has resulted in a turnaround for the company, which stands at No. 138 on Entrepreneur’s Franchise 500 this year. There are nearly 430 units in operation.
Known best for its oven-toasted sandwiches prepared on round rolls, the menu also includes a selection of salads, soups and pizza. Another bright spot for the franchise system: In 2013, Schlotzsky’s announced a 170-unit franchise agreement with one partner to cover a territory that includes Ventura, Los Angeles and Riverside counties in California.
Schlotzsky’s is now owned by Focus Brands, which is also parent of such brands as Moe’s Southwest Grill, Carvel, Cinnabon and Auntie Anne’s.
Another company under the Focus Brands umbrella is McAlister’s, which was also in Entrepreneur’s Top 200 this year. With some 320 existing units in 24 states, the fast-casual chain is known for its sandwiches, baked potatoes, soups, salads and its “famous” sweet tea.
It recently announced a partnership with Buxton to help quantify its growth potential and optimize locations for new and existing restaurants. That news comes on the heels of McAlister’s very solid performance in 2013, during which it announced its 13th straight quarter of positive sales growth.
According to Restaurant News, McAlister’s announced the opening of 12 new restaurants in 2013 as well as the signing of 11 development agreements representing 63 future locations, including new markets such as northern New Jersey, Buffalo, N.Y., Orlando, Salt Lake City and Boise, Idaho.
Capriotti’s Sandwich Shop
This chain has raised its profile in the industry during the last few years. Franchise Chatter named it one of the Top “Under the Radar” franchises of 2012. It was also named one of Fast Casual magazine’s 2013 “Top 100 Movers and Shakers.”
Founded in 1976, the chain has built its brand around its tradition of slow-roasting roast beef and whole, all-natural turkeys in house nightly. The turkeys are used to create a Thanksgiving-style sandwich called the Bobbie, stacked with stuffing, cranberry sauce and mayo. It has been voted “Greatest Sandwich in America” by thousands of readers, as reported by AOL.com.
The sandwich menu also includes hot and cold creations, cheese steaks and other signature dishes. The company is closing in on having 100 stores open with recent expansions in Utah and the Washington, D.C., market.
The sub/sandwich franchise industry is in the growth phase of its life cycle, although some segments of the industry are slowing and approaching saturation point, IBISWorld notes. While revenue, employment and establishment numbers are all expected to grow at a slower rate over the next five years, the industry is still robust for investors interested in the industry’s upper crust, a Subway franchise, or one of the many other up-and-coming brands.
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