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CSubAway SSandwEich Sh op1s

Success in the sandwich segment requires operators to work significantly harder

than they did just a few years ago. There was a noticeable slowdown in the opening

of new submarine sandwich shops in 1992, although the growth rate still

exceeds most other restaurant segments. Competition has intensified, with hamburger

chains such as Hardee's and Burger King experimenting with sub sandwiches

as menu additions. Subs seem to be a category anyone can participate in.

Subs offer easy entry into the foodservice business and a simple, low-cost route to

menu expansion, plus health appeal. Market data indicates that the sandwich is

firmly established as a nationwide food item and there is plenty of room for growth

in all areas. Many operators also see opportunities for sub-like concepts. For example,

one variety of sandwich shop that continues to expand specializes in Philadelphia-

style cheese-steak subs.

For sub shops, the Subway chain is the undisputed market leader, with 10

times more locations than any other competitor and more than 75 percent of all

United States sub chain outlets. As of mid-1993, Subway operated 7,825 units

worldwide, with about 7,750 units in North America. When it reached 8,400

stores in 1993, Subway was the No. 2 fast-food chain in the United States. By

opening its small sandwich shops at breakneck speed, Subway grew from $360

million in sales in 1987 to $2.2 billion in sales in 1992 (Figure 1-1), while income

increased substantially (Fig. 1-2). The former No. 2 was Pizza Hut, which operated

7,929 units in North America and expected to have 8,355 by the end of 1992,

However, in terms of sales, Subway ranks 12th among chains nationwide. Sales are

about 15 percent of McDonald's.

Subway is also looking to expand its nontraditional sites. The chain has about

150 outlets in colleges, convenience stores, hospitals, bus terminals, railway stations,

and convention centers. Other future areas of emphasis include improving business

during the dinner hour and late night and more marketing to children. About 4,000

"Subway Sub Shops," by William J. McDonald, reprinted from Cases in Strategic Marketing

Management, 1998, Prentice-Hall, Inc.

FIGURE 1-1 Worldwide Sales of Subway Sandwich Shops

Source: Estimated from various sources

FIGURE 1-2 Worldwide Income from Subway Sandwich Shops

Source: Estimated from various sources

Millions

Year

2500

2000

1500

1000

500

0

1987 1988 1989 1990 1991 1992

Millions

Year

200

180

160

140

120

100

80

60

40

20

0

1987 1988 1989 1990 1991 1992

outlets now feature kid's packs, which include food items and a premium gift. In

1994 Subway also made a concerted effort to spend marketing dollars against

teens and pre-teens.

However, Subway's rapid expansion has brought with it some problems. Franchises

are upset about the location of many new stores, claiming that these additions

are cannibalizing sales at existing units. Some disgruntled franchises have

also charged the chain with making unrealistic financial projections during sales

pitches. The Federal Trade Commission is looking into the complaints.

Among sub operators, Blimpie is running second to Subway in both unit totals

and expansion plans. The New York-based firm opened about 100 restaurants in

1992, for a total of 575. It planned to reach 1,000 units by 1995. Blimpie has broken

out of the Northeast over the past three years, with stores now open in 32

states, and it has begun to focus on international development.

Virtually all of Subway's competitors agree that the chain's main vulnerability

is its product quality. Whether their version is an upscale, quasi-deli restaurant

operation, or a more traditional, basic sub shop such as Blimpie, these other operators

stress quality advantages over Subway in their efforts to attract customers and

prospective franchises.

THE SANDWICH RESTAURANT INDUSTRY

Although sub and sandwich shops offer some of the best growth opportunities in

fast food today, there are signs that the category is not what it used to be. Subway's

rapid

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