business

Subway Owners Rebel Against New Rewards Program With Profits Falling

  • U.S. franchisees say store margins are being crunched
  • Company is searching for new CEO after Greco stepped down

An employee passes an order to a customer at the drive-thru of a Subway Restaurants location in Princeton, Ill.

Photographer: Daniel Acker/Bloomberg

Subway Restaurants, whose CEO is stepping down amid tumbling sales, is facing a backlash from store owners over its new customer-loyalty program.

Franchisees, who own and operate all Subway restaurants, say the company didn’t provide them with enough financial data to support the rewards program that the chain introduced this spring in the U.S. and Canada. They say they’re being charged a 1.9 percent royalty fee related to the program that hasn’t been financially justified.

The company “has not provided franchisees with documentation of a profitable business case to justify the additional expense,” franchisees said in a position paper obtained by Bloomberg News. For each restaurant in Subway’s network -- which at 26,000 locations is the largest in the U.S. by that measure -- the fee amounts to about $2,600 a year.

“If we are correct in our analysis, there will be a significant financial impact on every shop during a period of record low profits,” the owners said in the report. “Given the financial frailty of most franchisees, it is not the right time to gamble on an unproven program.”

Earlier this month, Chief Executive Officer Suzanne Greco said she was retiring, leaving the struggling Milford, Connecticut-based chain in the hands of interim leader Trevor Haynes. In its home market, Subway stores have been closing by the hundreds amid heavy fast-food discounting and competition from rivals such as Panera Bread who have been quicker to embrace mobile ordering and delivery. Subway’s system sales fell 4.4 percent in the U.S. last year, according to industry researcher Technomic.

New Program

“We conducted extensive research to develop the new Subway MyWay rewards program, including surveying existing Subway rewards loyalty members, franchisees, our customers, and customers of our competitors,” Kevin Kane, a company spokesman, said in an emailed statement. “The majority expressed excitement for our new program.”

Subway announced the new loyalty system in February as a way to help win back customers. Instead of just being able to earn free 6-inch sandwiches, diners now receive money to spend on any items, along with “surprise” rewards such as cookies, chips and possible sandwiches. At the time, the company said its goal was to get loyal Subway eaters to visit stores more frequently.

The chain says enrollment in the new program is exceeding expectations at 10 times that of its previous one. Subway also says it has invested “hundreds of millions of dollars in this new loyalty program, and the settlement fund reimburses franchisees for the cost of items customers redeem in their shops.”

“Individual restaurant results will vary, but based on our industry research and historical data from the Subway rewards program, we are confident that loyalty members will visit more frequently and spend more than non-loyalty members,” Kane said in the statement.

Subway had 25,908 U.S. locations at the end of last year, each of which generated about $417,000 in annual sales, on average, according to Technomic. To compare, the approximately 14,000 U.S. McDonald’s stores pull in $2.68 million a year on average.

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