Subway Franchisees Claim They're Being Forced to Give Up Their Stores

Friday, June 28, 2019

Subway franchise owners are being forced out of business due to the chain's questionable management practices, according to multiple lawsuits and a scathing expose in the New York Times.

Buying a Subway franchise used to be a fantastic opportunity for aspiring small business owners who didn't have much capital. Licensing fees are only $15,000, and according to the company, you can open a U.S. store with a total investment as low as $116,000, with financing available from Subway partners. No wonder more than 21,000 franchisees operate Subway stores around the world. In the U.S., buying a Subway franchise has provided a path to a better life for countless immigrants and other owners who started out with little money but a willingness to work hard.

In recent years, some franchisees say, that dream of a comfortable life turned into a nightmare as Subway's odd business practices allowed rivals to force them out of their stores. They were left to watch helplessly as those rivals snatched up the businesses they'd worked hard to build.

The issue lies with how the company oversees individual Subway locations. Admittedly, Subway is the world's largest fast food chain by store count, with more than 24,000 stores in the U.S. alone. Overseeing all those locations is quite a management challenge. The company meets that challenge by designating what it calls development agents in each of more than 100 small regions. These development agents are responsible for ensuring that stores within their territories meet Subway's quality and cleanliness standards. The development agents approve buyers for existing stores and--most significantly--send "field consultants" to inspect each store on a monthly basis, according to the Times. If a store is written up for failing to meet those standards too many times, the company can take back the store and close it or transfer it to someone else.
A rival and a boss at the same time.

The problem is that most development agents are also franchisees who operate one or several stores of their own within the territories they supervise. If another Subway franchise in the same territory is doing particularly well, or is drawing business away from their own stores, it would be natural enough for that development manager to wish he or she owned the competing store. Development managers could be tempted to deliberately force out competing franchisees by ensuring that they repeatedly fail their evaluations over minor infractions, such as cucumbers not sliced thin enough, until the franchisees are forced to give up their stores--which the development managers then snap up.

According to the Times and to multiple lawsuits and franchisee complaints, some development managers are doing just that. They're using trumped-up or overblown infractions to grab the stores they want. Two former field consultants who both worked for the same development manager in California told the Times that they were instructed to find or manufacture reasons to give certain stores bad evaluations. In several cases, when franchisees lost their stores, the field manager wound up owning them.
Asked for comment, a Subway representative sent this statement to Inc.:

    We have a responsibility to the millions of guests who visit our restaurants every day around the world. Subway guests expect, and deserve, to have their favorite menu items served in a clean, comfortable environment when they visit their local and independently owned Subway restaurant. It is our responsibility to make sure each restaurant is operating to highest possible standards.

And Chirayu Patel, the development manager and owner of multiple Subway stores who was accused by the two field consultants of rigging evaluations denied those accusations to the Times. He said the stores in question had legitimate problems and that he took them over because the previous owners asked him too.

There are at least two sides to every story. But the built-in conflict-of-interest in Subway's management system, combined with the multiple lawsuits and official complaints from franchisees who say they're being forced out, suggests there's some truth to these allegations. Then there's the fact that Subway initiated 702 arbitration actions against store owners in 2017, compared to, say, McDonald's, which initiated just one. Arbitration actions result from multiple infractions and usually lead to a store's owner losing the franchise.

All this is taking place against the backdrop of a company that's been struggling to find its way since the death of founder Fred DeLuca in 2015. In the years since, the chain has faced declining sales and the total number of stores has decreased by more than 2,000. Some observers say Subway has been slower than competitors to catch up to current consumer preferences for things like mobile apps and ultra-fresh, locally-sourced produce, and also that it faces competition from other national sandwich chains, such as Jimmy John's and Quiznos, that didn't exist when DeLuca first began franchising in 1974.

Add it all up, and a Subway franchise just doesn't look like the great investment it used to be.

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