Subway steps up

27 February, 2009
It is recognised as one of the most successful franchises in the UK, but does Subway have what it takes not only to weather the downturn but grow through it? Paul Gander looks at the strategy behind its ambitious expansion
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With five outlets opening every week, any figure pinned on the number of Subway stores around the country is always going to be out of date before it is published. But by the beginning of February, the total in the UK and Ireland topped 1,400 - and the chain reckons it is firmly on course to hit its target of 2,010 stores by the end of 2010.

The number two in the British Baker Top 50 Bakery Retailers is outstripping its rivals in terms of size, and snapping at the heels of league leader Greggs. Last year, Subway overtook McDonald's as the fast food chain with the largest number of stores, and outpaced Tesco in sandwich sales.

Subway development agent Neil Black has seen the chain go through a dizzying and sustained growth spurt in his 10 years with the company. When he joined, there were no more than a dozen stores around the UK and Ireland.

So does Black believe companies can be driven to acquire shops for numbers' sake? "These new locations are thought through, when franchisees are making substantial investments in them," he replies. And what is his reaction to the news that Greggs is looking at opportunities in Ireland? "We welcome the chase," he says gleefully.

While the latest advertising dwells on customer choice, two additional strong supports for the brand - value and nutrition - are left more in the background.

The availability of value options, such as the £1.49 ham sub roll, is no doubt helping the chain in these more difficult times. But the relationship between Subway's success and the healthy-eating agenda is more subtle. On the one hand, low-fat options may influence some loyal customers. Then again, as Black puts it: "We're not going to say, 'Come to Subway and eat healthily.' If people want to eat indulgently, they can do that, too."

On one particular health issue, the chain has set itself a specific target. "We were stitched up by a Dispatches report on TV, which analysed the salt content of just two of our subs," Black says. "They didn't offer us the opportunity to talk about our healthier alternatives." Nonetheless, Subway has undertaken to reduce overall salt content by 15% by June this year, he says.

Undoubtedly, reduced bank lending is having an impact on franchise investments, he admits: "It's our number one challenge for expansion." On the other hand, increased numbers of people with redundancy packages are looking for manageable investments with a reliable, low-risk return, he reports.

On the product side, the Italian-style white bread sticks that form the backbone of the brand are sourced from Northern Ireland baker Evron, with support from a second German supplier. The frozen bread is then baked-off inside each store. Flatbread is being introduced later this year, and trials are currently under way with ciabatta bread. "We have a new range of muffins from our bread supplier, and bake-off cookies from Otis Spunkmeyer in the US," says Black. "But generally, I don't think we do as well from the baked goods area as we could."

Nevertheless, Subway is a great example of what a bakery-based retailer can achieve. In fact, the chain is probably one of the best advertisements worldwide for a franchise model.

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=== Analyst's View ===

At Planet Retail, analyst Beth Miles rates the chain's prospects highly. "From 2000 to now, it has expanded extremely fast. Who's to say it cannot carry on and hit its 2010 target?" She agrees that its healthier range gives it a head-start over traditional fast food. "But also, in the downturn, it is benefiting from consumers trading down from casual dining to fast food," she says. "It has consistently been voted the number one franchise opportunity by Entrepreneur magazine, can be small-format and relatively easy to operate," Miles adds.





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