Restaurant Business – What’s Next for Subway?

Getting the right CEO might not be easy without major concessions by ownership, including a sale, says RB’s The Bottom Line.
The Bottom Line

For the first time in its 50-year history, we don’t know who the next CEO of Subway will be.

The Milford, Conn.-based sandwich giant is searching for a new chief executive, following the announcement that Suzanne Greco would retire in June and be replaced on an interim basis by Trevor Haynes.

There are numerous potential candidates who could, in theory, be lured by the chance to turn around the world’s largest restaurant chain by unit count, with 44,000 locations around the world.

But, based on interviews and conversations with industry experts and executive search consultants, Subway might have a tough time attracting the type of candidate who could turn that giant ship around, at least without making major concessions.

Some believe, in fact, that the only solution for Subway at this point is to sell. A number of industry experts told me that the company might not be able to attract a top-notch CEO under current ownership—and many believe that current ownership could be willing to sell, three years after the death of co-founder and longtime CEO Fred DeLuca.

“I would,” says John Gordon, a restaurant consultant out of San Diego. “What if we head into a recession here? It’s not implausible. What if funding for deals dries up? What if the brand continues to atrophy?”

Subway will not be an easy fix. The company has struggled with traffic declines since 2012, when it shifted away from its popular $5 Footlong.

Greco had been groomed as DeLuca’s heir apparent and took over as CEO in 2015 following her brother’s death after a battle with leukemia. That coincided with a police raid at the home of Jared Fogle, the chain’s longtime spokesman who had turned Subway sandwiches into health food. Fogle is serving a prison sentence on child pornography and child sex charges.

The chain has struggled to recover from those problems. And franchisees, who already operate stores with low, $410,000 unit volumes, have started closing locations. They closed 400 in 2016 and another 800 in 2017, but many believe those closures are bound to accelerate.

System sales declined by 4.4% last year, according to Technomic’s Top 500 Chain Restaurant Report. And this year hasn’t started off much better.

According to data supplied by Technomic’s Transaction Insights, Subway’s sales and traffic have been down in the first three months of the year, despite the introduction of a controversial $4.99 Footlong offer and its new wrap sandwiches.

“I like Suzanne personally and wish her well,” says Keith Miller, a Subway operator in California and franchisee advocate. “Unfortunately, the results haven’t been there for franchise owners. It’s pretty simple: When results aren’t there, the accountability is at the top.”

At the same time, however, few executives could have stepped into the Subway job in 2015 and fixed the chain, not with the Fogle incident along with an increasingly competitive restaurant environment.

There has long been the sense that Greco didn’t quite get the support from ownership. Greco wasn’t a shareholder and didn’t have equity in the company she had worked for since her teens. One industry consultant said that’s a giant red flag that could prevent high-quality candidates from taking the job.

Subway’s shareholders include Peter Buck, the chain’s co-founder who provided the investment for DeLuca to open his first restaurant in 1965, as well as DeLuca’s family. Comments Buck made last year to the New York Post seemed to indicate a rift between the primary shareholders over the chain’s direction—and certainly a frustration with the chain’s recent performance.

Greco seemed to generate internal strife recently after saying publicly that the company will close 500 locations this year and shift away from a unit-growth strategy to a unit-volume-growth strategy. Some believe those comments led to her retirement.

But that’s exactly what Subway needs to do. The company added too many locations in the 2000s, and several operators have told me they had little choice but to add locations near existing restaurants because, if they didn’t, Subway would sell that unit to someone else.

“They need to bleed at least 5,000 units in the United States to get the overdevelopment done,” says Gordon, who notes that 5,000 was the number of locations Subway added between 2009 and 2016, when the chain began closing units.

Bob Gershberg, CEO and managing partner of the executive recruiting firm Wray Executive Search, says that Subway should find a CEO similar to the one that Chipotle just hired in former Taco Bell CEO Brian Niccol, who has made numerous moves quickly to put his stamp on the company.

“Look at how quickly he has attacked Chipotle,” Gershberg says. “He got his arms around it, made changes, put together a plan. That’s kind of what they need in those situations. Those are the types of people that are effective.”

The good news for Subway is that several highly qualified executives are currently available that could step in and have the credibility and know-how, both from a franchising and a branding perspective, to potentially fix the chain.

There is Cheryl Bachelder, for instance. Few executives were as universally loved by their franchisee base as Bachelder was by Popeyes operators before she left last year, after the chain was sold for a near-record valuation to Restaurant Brands International. Popeyes was a poorly regarded regional chicken chain before she took over and turned it into a major player in the chicken market.

Former Buffalo Wild Wings CEO Sally Smith took a little-known chain that served a once-discarded piece of chicken and turned it into a national powerhouse. Former DineEquity CEO Julia Stewart was once one of the most highly regarded CEOs in the industry before Applebee’s problems did her in.

There are also likely several up-and-coming CEOs from other large chains who might be attracted by the prospect of running their own, giant brand. One name mentioned was David Hoffmann, the president of Dunkin’ Donuts in the U.S. and Canada who also handles international franchising.

He’s widely viewed as the heir apparent to Dunkin’ Brands CEO Nigel Travis. But Travis appears in no hurry to leave, and some wonder if a recruiter could target Hoffmann with an offer too good to pass up.

Of course, all of this is predicated on whether Subway would do what it takes to get the right person on board. Gershberg says Subway could attract a strong candidate, provided that ownership gives that person control and lets him or her run the show. And, of course, pay that person a lot of money and probably equity in the brand.

A sale makes more sense, however. And there would be no shortage of buyers. Despite its problems, Subway is a cash machine: an efficiently run, asset-light brand that would likely attract a host of potential buyers willing to pony up billions for the world’s dominant sandwich concept.

Operators, for their part, would like to see someone come in and reinvigorate the brand. It’s the franchisees who have invested years and their own dollars, risking their personal finances. They’re the ones with the most to lose.

“I hope some new blood brings needed life back into the brand, with a focus on unit-level profitability,” Miller says. “Franchisees really do love the brand.”