Subway’s latest policy criticized by franchise owners

New York Post Finance 1 week ago

After three years of record closures, Subway appears to be putting measures in place to stem the bleeding, The Post has learned.

American’s largest fast-food chain, famous for the $5 footlong, has instituted a new policy requiring mom-and-pop franchisees who decline to renew their five-year leases to answer to a committee at Subway’s Milford, Conn., headquarters.

Subway says the new process, which starts with a one-page questionnaire, is intended to help fed-up franchisees find someone else to run their restaurants — and in doing so, slow the reputation-damaging rate of closings.

“The brakes are on to stop the closures,” a former territory manager said. “The company is coming to its senses and realizing that every store is valuable.”

After reaching a peak of 27,103 restaurants in the US in 2015, Subway last year recorded fewer than 25,000 eateries for the first time since 2011.

And while Subway says it welcomes the closure of troubled stores, it also doesn’t benefit financially from its dwindling size. Unlike McDonald’s, Subway doesn’t own any of its restaurants and relies solely on the fees it collects from franchisees, including an 8-percent annual fee from all sales.

Those fees have surely dwindled in recent years as Subway last year recorded 1,108 net closures — more than double the number of restaurants it had forecast. The rate of closures this year appears to be on pace with last year in parts of the country, sources said.

For their part, store operators claim Subway is looking to cause them trouble by enforcing their 20-year franchisee agreements for the first time in its history.

“I think the form means they are putting a stake in the ground and that they don’t want to see any more stores close,” a West Coast franchisee reluctant to fill out the form told The Post.

Subway has not previously made a fuss about franchisees breaking their 20-year franchisee agreements once their five-year leases expire. But it also was a booming business for most of its 54-year history. That started to change several years ago due to growing competition and scandals, including its former pitchman Jared Fogle pleading guilty to repeatedly having sex with minors in 2015 and outrage over yoga mat chemicals in its bread the year earlier.

Subway declined to say whether it’s looking to enforce 20-year franchisee agreements, which are generally still active once the typical five-year lease ends.

“Subway places a tremendous value on its network of small-business owners,” a Subway spokeswoman said. “And as such, aims to ensure viable Subway locations remain open. We help franchise owners find buyers for their restaurants whenever possible,” she said.

But franchisees point out that losing stores can be hard to sell. And with Subway refusing to provide them assurances that they can walk away from franchise agreements without hassle, some chain operators are bracing for trouble.

“I wouldn’t fill out the form,” one franchisee based in the South told The Post, adding he knows of another nearby franchisee who’s been asked to fill out the form and has so far refused.

“I don’t believe there is anything in the franchise agreement that gives them the right to fine us,” he said of store operators who refuse to fill out the questionnaire, which asks franchisees “to explain in detail what steps you have taken to try to make this shop viable.”

“What local marketing have you done to help increase sales?” it says.

“Subway is going to make franchisees lose more money,” the West Coast store operator predicted of the new procedure. “If you are a single-store owner, what are they going to sue you for? You are already destroyed and will probably close,” he explained. But “an owner with 20 stores may not want the hassle and will keep a losing store open.”

Subway has been accused before of playing hardball with its restaurant operators. Earlier this year, mom-and-pop franchises were accusing the company’s development agents of dinging stores for minor infractions, like smudged glass, in an effort to take over profitable locations.

As The Post reported at the time, Subway, took 718 actions against franchisees last year, mostly through arbitration, and is generally involved in hundreds more disputes with US franchisees each year than all of its major competitors combined.

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