Subway cracks down on franchisees as $8 billion in sales: sources
Subway is putting pressure on its franchise owners to shore up sales and profits as the struggling sandwich giant tries to lure a buyer, The Post has learned.
The nation’s largest fast-food chain is pitching private equity firms about a potential sale, showing them revenue and earnings that imply the company could be worth more than $8 billion, two people familiar with the matter said. direct knowledge of the process.
Privately held Subway claims last year it had an Ebitda of between $650 million and $750 million, or earnings before interest, taxes, depreciation and amortization, sources close to the discussions said. As a result, bids are expected to come in at 10 to 12 times that, resulting in a price tag of $7 billion to $8.4 billion, one source said.
However, to make up the numbers, sources say Subway has since begun forcing owners to foot the bill for expensive store upgrades, even as it has begun waiving fees for prospective owners. The chain is also cracking down on those looking to close money-losing locations.
A longtime East Coast franchisee with more than a dozen Subway stores recently wanted to close two unprofitable stores. Normally, that wouldn’t be a problem because its five-year license renewal options were expiring, the franchisee said.
Instead, Subway changed its policy on expiring leases, telling him he would have to sell all his restaurants — including the profitable ones, the frustrated franchisee claimed.
“Now they’re saying you can’t accept your options,” he said, requesting anonymity. “If you leave, they charge the average royalties you’ve earned per month over the last three years for the duration [20-year] agreement.”
Franchisees are even responsible for lease payments unless a money-losing store is resold, he added. If franchisees decide to sell, they can realistically only use the company’s self-appointed broker, ReInvest Capital, because all sales must be approved by Subway, the sources said.
“They want you to sell a store that’s worth $200,000 to $400,000 for $100,000,” one West Coast franchisee told The Post.
A Subway spokesman declined to comment.
According to the sources, Subway wants to consolidate ownership under a few large operators and move away from the majority of mom-and-pop owners, many of them immigrants. ReInvest touts large blocks of Subway restaurants on its Instagram page, including a package of 74 Carolinas restaurants and a 91-store deal in Florida.
“They clean house and make the brand presentable to a big investment firm,” said the West Coast franchisee.
To attract customers to new locations, Subway waived its $12,500 franchise fee, according to internal filings. Existing stores are being sold at very cheap prices, franchisees said.
“Someone just got two subways for a dollar a store and has a year to renovate,” he said said the East Coast franchisee. “This is an all-out corporate attack.”
Current subway owners must also invest thousands of dollars in mandatory upgrades or face fines — or even lose their stores with no compensation. In addition to store renovations scheduled for 2024, Subway is requiring operators in the next few weeks to buy new $5,000 ovens and $6,250 toasters if current models are more than seven years old, depending on the model. along with new digital cash registers.
Last month, the chain launched a plan to add meat slices, ostensibly to give shoppers the impression that deli meats are fresh, like at fast-growing rival Jersey Mike’s. Although the cutters are free, the franchisee will have to pay more in workers’ compensation insurance to operate them, the franchisees said.
“They want us to invest the money in the stores now before an investment company comes in and has to spend the money,” the West Coast operator said.
Meanwhile, Subway’s sales are disappointing. The East Coast franchisee said sales are slightly higher, largely due to increased prices, but are still half of their peak.
“Sales are flat even though they are 1% to 3% higher,” the West Coast franchisee said.
Subway, which does not own any of the chain’s roughly 20,000 U.S. restaurants and relies on franchisees to pay an 8 percent gross royalty fee, said sales rose 7.8 percent last year compared to 2021, exceeding its forecasts by more than $700 million.
Publicly traded competitors such as Restaurant Brands, which owns Burger King, trade at 16 times Ebitda — so buyers are on hold if they take Subway public, the thinking is on a lower multiple. Opening bids are expected next week. However, one potential private equity bidder noted that chains such as Restaurant Brands are seeing unit growth, while Subway is not.
“The first question is that there is no unit growth in the U.S. and the second is what is the stabilized level of earnings,” the investor told The Post.
Nearly a quarter of all Subway franchises have closed their doors between 2015 and 2021 as the company loses market share to rivals like Jersey Mike’s, according to public records. However, there are still more than 20,000 Subway restaurants in the US. The number continues to fall, while by comparison there are about 13,000 McDonald’s.
The growth of the unit, believes the source of private capital, must come from international openings.
Subway says in its filings that per-store sales fell 2 percent from 2010 to 2020, but have risen in the past two years so they are now at the same level as they were in 2012, the private equity source said. Inflation, meanwhile, in the last 10 years has increased by more than 20%.
“This is a real operational lift,” the private equity source said.