Professionally, I write about the business franchise industry. While doing some research for an upcoming project, I had an observation: fast food is going through a transformation that may be unprecedented. My observation doesn’t really fit into the piece I’m writing there, so I decided to explore it further on my own time.
Look at what’s going on with Subway, for example.
“Eat Fresh” has been Subway’s motto for years. However, the nearly 50-year-old franchise has been wilting to a degree in the past year.
In 2014, Subway’s sales declined by just over 3% — faster than any of America’s top 25 food chains. Yes, an even steeper sales decline than the much-publicized sales falloff of McDonald’s. The fall is especially concerning considering the overall sandwich shop industry posted a nearly 2% gain over the same time period.
What’s going on at the home of “sandwich artists”? Some analysts hint to a strengthening economy in conjunction with a broader phenomenon of consumers as a whole are reassessing their thought processes on what they consider healthy. According to Darren Tristano, executive vice president of Technomic, a food industry researcher, “the ‘Subway fresh’ has lost its appeal with consumers, because to them fresh has evolved to mean something very different. More people have money to spend, and they’re choosing to spend a little bit more on better concepts where they get a better product.”
When it comes to Subway in particular, it didn’t help that a firestorm was ignited by a blogger calling its choice of ingredients into question. Vani Hari, a food blogger, started a petition in 2014 after learning Subway’s bread contained the food additive azodicarbonamide. The public reaction was similar to the “pink slime” saga McDonald’s and other fast food chains went through about five years ago with Hari and others slamming the company for using a “yoga mat material” in its food offerings. While the additive is approved by Food and Drug Administration for use in countless foods, including dough, the damage was done and Subway pledged to remove the additive as part of “bread improvement efforts.”
It hasn’t been smooth sailing behind the scenes either. Subway has also been contending with the health battles of one of its co-founders and the legal issues of its most popular spokesman. Plus, franchisees are also growing increasingly disenchanted with management.
Subway lags far behind category competitors in terms of franchisee satisfaction. Franchise review service Franchise Grade, which uses firsthand franchisee polls and independent research to compile a ranking of franchise systems, currently has Subway ranked 468, while industry competitors Capriotti’s Sandwich Shop, Firehouse Subs, Jersey Mike’s and McAlister’s Deli are ranked 99, 107, 108 and 134, respectively.
However, the chain’s rapid expansion may be at the heart of the matter. In addition to its positioning as a healthier alternative, part of the reason for Subway’s ascension has been its aggressive global expansion. At the end of 2010, Subway surpassed McDonald’s number of operating units worldwide, and kept its torrid pace up. As recently as last year, the company was still opening an average of two stores a day.
Did Subway grow too fast? “Subway’s strategy has only been to open more stores, and ultimately those stores just cannibalize each other,” says Tristano. In a recent Financial Post interview, Keith Miller, head of the Coalition of Franchisee Associations and Subway franchisee, said franchisees are under “extreme pressure” in terms of maintaining or increasing profits for their location(s) in the face of increased competition along with rising labor and food costs.
But it’s not just Subway. The fast food industry is in the midst of an identity crisis of sorts. Customer satisfaction with fast food chains is at the lowest level in five years, as measured by the American Customer Satisfaction Index Annual Restaurant Survey.
Perhaps it’s just customers viewing certain concepts as stale at the moment. In a September 2014 Bloomberg Business interview, Peter Saleh, senior research analyst at brokerage Telsey Advisory Group suggested that fast franchises may have met their saturation point in the United States. “Traditional fast food — McDonald’s, Sonic, Wendy’s, KFC, Taco Bell — are fairly well-saturated in this country with not a lot more room left for growth,” he said.
But it’s not all bad news for fast food. Fast casual will be a beacon in the storm for the industry. According to Euromonitor International, “Fast casual dining will drive much of the [industry’s] growth, although other fast food should increase its value sales steadily as some consumers look to it for value and others are attracted by the variety of healthier new products on offer.”
Whatever happens, it will be really interesting to see what happens with such a staple of American life.