Doctor's Associates Inc.
Doctor's Associates Inc.
325 Bic Drive
Milford, Connecticut 06460
Telephone: (203) 877-4281
Toll Free: (800) 888-4848
Fax: (203) 876-6695
Web site: http://www.subway.com
Incorporated: 1965 as Pete's Super Submarines
Sales: $468.4 billion (2004 est.)
NAIC: 722211 Restaurants, Fast Food
With more than 22,000 worldwide locations, Subway–owned and operated by privately held Doctor's Associates Inc.—is almost as ubiquitous as McDonald's, which it overtook in 2001 as the United States' largest fast-food chain. Subway shops are increasingly visible worldwide with shops in 77 countries including the Bahamas, Bolivia, Chile, Cyprus, Germany, Hungary, Iceland, Iraq, Paraguay, Russia, and Venezuela. Fred Deluca and Peter Buck, the partners who control this $7 billion (in systemwide sales) private empire, have no immediate plans to take their goldmine public. Their collaboration has become the largest and most successful sandwich franchise in the world. Subway's claim to fame continues to be its freshly made-to-order sandwiches, several of which have seven grams of fat or less—made famous by Jared Fogle, the college student turned Subway poster boy who claimed to have lost 245 pounds eating Subway subs.
Evolution of a Sub Sandwich: 1960s–70s
Fred DeLuca was born in Brooklyn in the late 1940s, a time when Harry S. Truman was president, Arthur Miller's Death of a Salesman had won a Pulitzer Prize for drama, and Rodgers and Hammerstein's South Pacific was a hit on Broadway. Although there were not many ways a kid his age could earn money in the 1950s, DeLuca did—returning two-cent bottles found around the Bronx housing project where he lived. When his family moved upstate to Schenectady, young Fred delivered newspapers, gradually increasing his clientele until his route covered some 400 patrons on Sundays. Originally planning to study pre-med in college, DeLuca was faced with the daunting challenge of raising tuition money. It was 1965 and DeLuca was 17.
Concentrating on his immediate future, he worked in a hardware store earning little cash ($1.25 per hour) but possessing plenty of ambition. He was looking for another job, something paying more than minimum wage, when he struck up a conversation with family friend Dr. Peter Buck at a barbecue. Buck was a nuclear physicist, and he talked about a popular sandwich shop near his hometown. Buck wondered aloud if DeLuca should open a shop serving submarine sandwiches, a food item gaining considerable popularity. Over the next four hours, the two drew up a business plan; with a $1,000 start-up loan from Buck, the two became partners.
DeLuca moved quickly, looking for a location the very next day. On August 25, 1965, Pete's Super Submarines opened in Bridgeport, Connecticut, serving fresh made-to-order sandwiches with a choice of toppings and condiments, though oddly, without lettuce (it appeared on the menu later). The shop location was not ideal, but was only a short distance from the hardware store where DeLuca had worked. There was little fanfare and few customers, but Buck and DeLuca met regularly in the latter's family home, discussing strategy over homemade pasta. The new enterprise, however, did not stop DeLuca from beginning his freshman year at the University of Bridgeport in September (he graduated in 1971 with a B.S. in psychology). Juggling his studies and the sandwich shop, weeks turned into months for DeLuca and the business never soared as planned. Yet rather than give up and abandon the partnership, Buck and DeLuca decided on another gambit—to open a second location in 1966. They hoped that increased visibility and name recognition would steer more customers to Pete's Super Submarines. They then decided to take their gamble even further, by opening a third location.
The third time was the charm. The old adage proved right on the money as the third store—in a highly accessible and visible location—began to take off. Not particularly superstitious, DeLuca and Buck did consider "three" their lucky number and later emphasized positive numerology in their corporate marketing campaigns. As the business progressed, the partners found the name cumbersome and thought it sounded like "pizza marine." Consequently, Pete's Super Submarines was renamed Subway, taken from New York City's underground railways built in the early 20th century. The shop's name was emblazoned in yellow, and the inside decor consisted of faux newspaper articles heralding the new mode of transportation.
In 1974, as the partners approached the tenth year of their alliance, they were supposed to have had 32 submarine shops according to their initial business plan. Instead, they had half this number and decided to explore another option: franchising. DeLuca believed franchising was the wave of the future and had soon convinced a friend to become the first franchisee. The new store opened in upstate Wallingford. The move, though a sound business decision, was a profound risk. The world was experiencing inflation, the dollar had been devalued twice in two years, an energy crisis had forced Americans to cut back on power and fuel usage, and unemployment was on the rise.
DeLuca and Buck, however, seemed to have the golden touch. The franchised Subway did well, as did its successors (another 14 or so within the year). Although franchising was an excellent way to expand a business, DeLuca and Buck tinkered with the system for years before finding a formula with which they were completely happy. Yet both had discovered the incontrovertible truth that new business owners needed to invent a product and entice an ever-growing number of customers. Doing both was demanding, but with franchising, the idea and product were already established so the new business owner simply had to bring in a clientele and keep them happy.
From Nowhere to Everywhere: 1980–94
By 1983 there were 200 Subway shops and DeLuca and Buck discovered one of the largest hurdles was keeping their brand consistent in all locations. This was when the partners decided to have each location bake its own bread on the premises. As the first fast-food chain to bake bread at each location, Subway's sales steadily increased. The bread became a signature product with its ingredients and oven time trade secrets. Just two years later, in 1985, after 20 years of partnership, DeLuca and Buck had 596 Subway stores in the United States and abroad; by 1987, the number had more than tripled to 1,810 shops.
Subway's phenomenal growth continued unabated throughout the remainder of the 1980s and into the 1990s. In 1988 Subway earned the top spot on Entrepreneur magazine's Franchise 500 as the number one sandwich franchiser in the United States (a title it would hold for four years in a row). By 1989 there were 4,071 stores and by 1992 there were 7,327. As more and more Subway franchises popped up across the nation as well as outside the United States, the partners had created the "University of Subway," an intensive two-week course at headquarters. Prospective franchisees learned the ins and outs of the Subway business, from the standard decor to bookkeeping, from baking the signature bread to the varied ingredients that made up the chain's popular sandwiches.
Another key to Subway's ongoing expansion was innovation and taking convenience a step further than its competitors. Subway stores began appearing in unusual locations, catering to consumers where they might not expect a sandwich shop—at convenience stores and truck stops. These "nontraditional" locations were a hit with traveling consumers and by 1993 some 50 such shops dotted the nation, with more on the way. Although these uniquely placed shops were a fraction of Subway's 8,450 locations worldwide, they thrived and came to make up a fifth of the company's global sales in coming years.
In 1994 Subway was nearing the 10,000 mark and DeLuca was determined to take on the world's largest fast-food chain, McDonald's Corporation. Although Subway was aggressively targeting the leader, the burger giant, founded in 1948, had nearly 20 years on the upstart. No slough to ingenuity, McDonald's had stores in such nontraditional locations as Wal-Mart stores and gas stations. A key to the success of both chains had been consistency. Customers counted on McDonald's decor and menu to be virtually the same from town to town; the same was true of Subway. Each chain, of course, made menu concessions in some countries—for Subway it was no pork products in areas with large Muslim populations; lots of salmon at the Norway shop; chicken salad with curry in British Subways; and chicken satay with peanut sauce in Australian locations.
A Global Leader: 1995–99
By 1995 Subway had sales of nearly $2.6 billion and 11,420 locations. DeLuca and Buck became increasingly active in charitable causes, giving to a variety of groups including the Girl Scouts of America, Habitat for Humanity, Junior Achievement, the Muscular Dystrophy Association, the Yale-New Haven Children's Hospital, and many others. The company also held several business association memberships (Better Business Bureau of Western Connecticut, the Connecticut Restaurant Association, the International Franchise Association, the Milford Chamber of Commerce) and even turned to environmental issues. In this vein, Subway introduced the Chocolate Brazil Nut cookie in 1995, full of Brazilian nuts harvested from the Peruvian rainforests, which in turn employed some 250 people and helped keep the rainforest alive.
We are committed to customer satisfaction through offering high quality food with exceptional service and good value. We take great pride in serving each other, our customers and our communities. We seek continuous improvement in all that we do. We value a sense of urgency and emphasize an innovative, entrepreneurial approach to business. We expect fairness and mutual respect in all our activities. We know our success depends upon the initiative we take individually and our ability to work as a team.
In Subway's history 1996 turned out to be a stellar year—the company continued to dominate Entrepreneur magazine's Franchise 500 (regaining the title in 1993 and holding on to it into the early 2000s), and revenues increased nearly 25 percent to $3.2 billion, an incredible financial spurt by any standard. Part of the leap had come from further expansion to 12,516 locations, much of it in nontraditional settings. This was backed up by the numbers in 1997, when nontraditional shops reached 2,700, or about 20 percent of the chain's locations. The company had explored a myriad of unusual possibilities, including railway and bus stations, airports, casinos, amusement parks, arenas, hospitals, museums, and department stores. Subway shops in high schools, colleges, and universities were especially successful for both the company and the schools, as students stopped leaving campuses for lunch, bringing profits and jobs back into these establishments. Yet another major coup had been an exclusive agreement with NEXCOM (Naval Exchange Commission) to put Subway shops on naval bases worldwide.
With Subway's ongoing success and rapid expansion, Wall Street and franchisees alike wondered if DeLuca and Buck would ever take their privately owned company public. The response was usually vague—not an unequivocal denial, but a carefully evasive statement. "We think that going public could take the focus off developing the business for our franchisees," DeLuca told the Winston-Salem (N.C.) Journal in 1997, leaving the possibility open.
By the fall of 1998 Subway had more than 13,229 shops worldwide and made changes to both its marketing strategy and its menu. A family-oriented advertising campaign was launched to bring kids into the stores, while three "wraps" (using tortillas instead of bread) were added to the menu for health-conscious adults. The wraps, which had gained popularity in restaurants as a healthy alternative to bread, had been tried on a limited basis and proved successful enough to be added to the menu permanently. Although sales for 1998 did not climb significantly ($3.4 billion, up from $3.3 billion the year before), Subway was still in solid financial shape.
Having overtaken Burger King as the second largest international restaurant chain (it had less than 11,000 stores, though it remained the number two burger chain), Subway continued to target McDonald's, which still owned the lion's share (more than one-third) of the sandwich market. In 1999 McDonald's had more than 25,000 locations worldwide and 40 percent of the U.S. fast-food market. Subway planned to topple McDonald's by opening 950 shops annually until 2005, including new locations in India, Germany, and Scotland, and eventually to have Subway shops in every country in the world.
In the submarine sandwich marketplace, however, both Blimpie (ranked second to Subway) and Quizno's (ranked third) were gaining ground. Although the New York-based Blimpie International had 2,000 shops by the end of 1999 and the Denver-based Quizno's Corporation had only 600 in the United States, Canada, and Japan, each chain had ambitious plans mirroring those of Subway—to expand and conquer in 2000 and beyond. In addition, there was the entry into the market of another specialty sandwich chain, Schlotzsky's Inc., an Austin-based company. Schlotzsky's was nearing 800 deli stores in 1999 and, though it did not consider its "sub" sandwiches the primary success of the company (which had experienced 40 percent growth from 1998 to 1999), the competitors were certainly eating into Subway's bottom line.
The Jared Phenomenon: Early 2000s
An Indiana University college student named Jared Fogle revolutionized Subway's marketing when he claimed to have lost 245 pounds eating Subway sandwiches with six grams of fat or less, low-fat chips, and diet pop. Fogle's remarkable transformation made the college newspaper, the Indiana Daily Student, in April 1999, and both his and Subway's fortunes changed forever. Living in an apartment next to a Subway shop, Fogle was amazed when the store's sales picked up and he became a local celebrity. Men's Health magazine covered the weight loss story and Subway executives heard about it from Jared's mother, who wrote to thank them. Fogle was brought on board as a spokesman in January 2000, the year of Subway's 35th anniversary.
In addition to the Jared Fogle ads touting its low-fat sandwiches, Subway upgraded its menu with better meats, new items (Subway Selects with flavored breads and gourmet sauces), and additional advertising to broaden its customer base. For years Subway ads had targeted adults who wanted a quick yet healthy meal, and children who enjoyed the Nickelodeon-themed toys available in kids' meals. In the 2000s, Subway added teenagers to their lineup, attracting the highly fickle and yet lucrative market of 13- to 17-year-olds, who were generally more concerned with good taste than fat content. The gambit worked, and Subway pulled in an increasing number of teens and adults who favored delicious, made-the-way-you-want-them subs.
Partners Fred DeLuca and Dr. Peter Buck open Pete's Super Submarines.
The first Subway franchise opens in Wallingford, Connecticut.
Subway stores surpass 130 locations.
Subway stores number more than 3,500 worldwide.
The company celebrates its 30th anniversary by opening the 11,000th Subway.
Subway's 14,000th store opens; wraps become part of the permanent menu.
Jared Fogle makes his first commercial; gourmet breads and sauces are added to Subway's menu.
Subway surpasses McDonald's as the United States' largest fast-food chain; the 15,000th Subway opens.
Systemwide Subway sales have reportedly reached $5 billion worldwide.
Subway surpassed 22,000 stores worldwide; Atkins-themed wraps are added to the menu.
Subway celebrates its 40th year in business.
By 2001 Subway had 15,000 stores, with sales reaching $4 billion and an estimated customer base expanding to more than 725 million. The company credited menu additions and upbeat advertising campaigns featuring the increasingly popular Jared Fogle. Other sandwich franchisees, however, were gaining ground. Quizno's had grown to 870 stores and had gained significant market distinction by touting its toasted subs, while Blimpie had opened few shops (only about 100 in two years), concentrating instead on raising individual store sales rather than rapid expansion. Two other franchises were earning reputations as well, the East Coast-based Jersey Mike's Subs and Cousins Subs, based in the Midwest, though each chain was considerably smaller than its competitors.
Subway sold a record 2,000 franchises in 2001, besting previous years by a large margin. The chain had stores in 76 countries including new stores in France, Finland, and Poland, despite slower sales for the fast-food industry as a whole due to the terrorist attacks of September 11 and a weakened economy. These factors, however, did not prevent Subway from overtaking McDonald's as for having the most fast-food stores in the United States. Subway had 13,247 outlets by December 31, 2001, compared to McDonald's 13,099 according to Nation's Restaurant News (February 11, 2002). As McDonald's struggled with market saturation, some questioned whether Subway's growth could continue without facing the same perils, despite its burgeoning sales of nearly $5 billion for 2001 (compared with McDonald's sales of $40 billion for the same period).
In 2002 Subway wore its new title—as the nation's largest fast-food chain—proudly and decided to revamp its shops and image. Stores were redone in muted colors and a more sophisticated "Tuscan" design, leaning toward a casual and not strictly fast-food dining experience. The upscale image was implemented, as well, to help new franchisees locate in better locations, such as trendy shopping or business areas. By mid-2002 a new bilingual (English and Spanish) advertising campaign featuring Subway poster boy Jared was launched, touting new gourmet sandwiches such as Red Wine Vinaigrette and Chicken Teriyaki.
As Subway expanded internationally to further compete with rival McDonald's, the question of going public continued to plague everyone but its owners. Commenting to Business Week Online (August 19, 2002), DeLuca said he and Buck considered the idea briefly, finding the benefits did not outweigh the risks in their case. "Do we want a bunch of additional people—shareholders—to distract us from our mission? We did the calculations and decided we didn't have to go public."
Onward and Upward: 2003 and Beyond
In 2003 and 2004 Subway continued its growth both domestically and abroad. New international locations included India, Chile, and Iraq (through the Army-Air Force Exchange Service to provide service men and women fighting in Iraq "comfort food"), with additional stores opening in Germany and the United Kingdom (which reached 200 outlets). Sales for international locations, including Canada, topped $1.1 billion for 2003, while domestic sales reached an astonishing $5.7 billion for the same period. In addition, Jared continued to pop up in commercials, and his story inspired others to try the "Subway diet." The company frequently received letters from successful dieters, crediting their weight loss to Subway's fresh, low-fat sandwiches.
Subway continued to tweak its menu by adding salads and Aktins-friendly wraps (following the Atkins diet, which blamed carbohydrates for weight gain). Subway also entered into a long-term deal with the Coca-Cola Company by signing a ten-year contract to serve Coke products in its stores. The contract was a major coup for Coca-Cola, considering Coke products had been available in only a fraction of Subway's 22,000 stores, with the vast majority selling Pepsi offerings. The new contract covered all Subway stores, both domestically and worldwide.
As Subway approached its 40th year, there were few signs middle age would slow the sandwich chain down. In a January 2004 interview with Entrepreneur magazine (after topping the magazine's Franchise 500 for the 12th time), DeLuca discussed the importance of franchisees in the decision-making process and the future: "The important thing for me and for anybody in this business is to appreciate the abilities of the franchisees and what they can do to improve a company and help a company grow." DeLuca believed most franchise chains had only "scratched the surface" of their potential. "Twenty-five years from now, the most successful franchise companies will have 50,000 outlets worldwide. There's a big opportunity for the future—especially for those companies able to develop not only the domestic market, but also an international brand."
McDonald's Corporation; Tricon Global Restaurants, Inc.; Blimpie International Inc.; Schlotzsky's Inc.; Quizno's Corporation.
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