Subway is the largest fast food chain in the world by store count, with over 40,000 locations globally as of 2021. But have you ever stopped to consider who actually owns this behemoth of quick, made-to-order sandwiches? The answer may not be what you expect.
Subway is Owned by Doctor‘s Associates Inc, a Private Company
Unlike most major fast food chains that are publicly traded companies, Subway is owned and controlled by a private entity called Doctor‘s Associates Inc (DAI). DAI was founded in 1965 by Fred DeLuca and Peter Buck, and remains under the ownership of the two founding families to this day.
The origin story of Subway and DAI has become the stuff of business legend. In 1965, 17-year-old Fred DeLuca was looking for a way to make money for college when a family friend, Dr. Peter Buck, suggested he open a submarine sandwich shop. Buck lent DeLuca $1000 to get started, and the first shop called Pete‘s Super Submarines opened in Bridgeport, Connecticut.
The store initially struggled, but after changing the name to Subway and tweaking the business model, DeLuca and Buck began opening additional locations. In 1974, they pivoted to a franchise model, which would fuel astronomical growth in the coming decades.
The Franchise Model Behind Subway‘s Global Dominance
Subway‘s franchise model has been the key driver behind its rapid ascent to become the most ubiquitous fast food chain in the world. But this structure is quite different from many of its corporate-owned competitors.
DAI doesn‘t own or operate a single Subway store. Instead, every one of the 40,000+ Subway locations worldwide is owned and managed by an independent franchisee. Subway is essentially a brand name, business system, and set of standards that entrepreneurs license to open their own sandwich shop.
Here are some key facts and figures about Subway‘s franchise system:
- Initial franchise fee: $15,000
- Estimated total startup costs: $116,000 to $263,000
- Net worth requirement for franchisees: $80,000, with at least $30,000 in liquid assets
- Ongoing royalty fee: 8% of gross sales
- Advertising fund contribution: 4.5% of gross sales
So in exchange for an upfront investment and ongoing fees, franchisees gain the rights to use the Subway brand name, products, and operating procedures. They get access to Subway‘s supplier relationships, marketing, and support infrastructure. But the franchisees own the business and are responsible for day-to-day operations, management, and financial results.
In contrast, let‘s look at the franchise mix for some of Subway‘s major competitors:
| Company | Franchise Locations | Company-Owned Locations |
|---|---|---|
| McDonald‘s | 93% | 7% |
| Burger King | 99% | 1% |
| Wendy‘s | 95% | 5% |
| Subway | 100% | 0% |
As you can see, Subway is the only major fast food chain that has zero company-owned stores. McDonald‘s owns and operates 7% of its locations, which allows it to test new products, technologies, and processes before rolling them out to franchisees. Corporate stores also give McDonald‘s more control over the customer experience and brand standards.
The downside for McDonald‘s shareholders is that they are exposed to the volatility and capital intensity of running restaurants. Subway‘s model offloads that risk and responsibility to franchisees. DAI makes money from royalties as long as Subway stores in aggregate are generating revenue, regardless of individual store profitability.
The Stunning Rise and Recent Challenges of Subway
Using the franchise model as a growth engine, Subway has expanded at a breathtaking pace over the last several decades. Here is a snapshot of Subway‘s total store count over time:
| Year | Number of Subway Stores Worldwide |
|---|---|
| 1974 | 16 |
| 1982 | 200 |
| 1990 | 5,000 |
| 1994 | 10,000 |
| 2004 | 25,000 |
| 2015 | 44,000 |
| 2020 | 40,000 |
At its peak in 2015, there were over 44,000 Subway restaurants operating in more than 100 countries. That means on average, Subway was opening 1,000 new locations every year for 40 straight years – a truly staggering pace of growth. More than half of all Subway stores are located in the United States, but the chain has a substantial presence around the globe, particularly in Canada, the UK, Brazil, Australia, and Mexico.
However, in recent years Subway has encountered some significant headwinds. Changing consumer tastes, the rise of fast casual competitors, and over-expansion have resulted in falling sales and net store closures. Since 2015, Subway has shrunk by over 4000 locations or nearly 10% of its peak footprint.
Here are some of the key challenges facing Subway:
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Shifting consumer preferences: Health-conscious consumers are increasingly seeking out fresher, higher-quality ingredients compared to Subway‘s more processed offerings. Chains like Sweetgreen, Chipotle, and Panera have capitalized on this trend towards more natural, customizable meals.
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Competition from fast casual concepts: The fast casual segment, which offers higher quality food and a more upscale atmosphere than traditional fast food at a slightly higher price point, has been steadily stealing market share for years now. Subway‘s "eat fresh" positioning has lost some of its luster with the rise of these competitors.
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Over-expansion and market saturation: In a race to blanket the country and globe with stores, Subway may have overextended itself. Store cannibalization is a real concern in mature markets like the U.S. Subway has likely reached a point where new stores are stealing sales from existing ones rather than expanding the overall customer base.
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Reliance on discounting: For years, one of Subway‘s main marketing pillars was its $5 footlong offer. This conditioned customers to expect heavy discounts and eroded franchisee profitability. As food and labor costs have risen, Subway has had to wean itself off the promotion, which has impacted traffic.
Despite these issues, Subway still maintains some important competitive advantages. It has incredible brand recognition built through decades of memorable advertising campaigns. Its franchisee network gives it unparalleled scale and access to prime real estate locations. And operationally, Subway has a strong reputation for speed, consistency, and franchisee support.
The Future of Subway‘s Ownership and Growth Prospects
Since the passing of co-founder Fred DeLuca in 2015, Subway has been in a transitional phase from an ownership and management perspective. DeLuca‘s 50% stake in DAI transferred to his wife, son, and sister, while co-founder Peter Buck and his son own the other half of the company.
In 2019, Subway appointed John Chidsey, formerly the CEO of Burger King, to lead the company. This was a signal that the founding families wanted to bring in an outside, professional manager to help guide Subway through its current challenges rather than keeping leadership within the family.
With the original founders no longer at the helm, there has been speculation that the two families may look to sell the company or take it public. Subway‘s massive global scale and brand recognition could be attractive to potential acquirers or public market investors.
However, a near-term sale or IPO seems unlikely given Subway‘s recent struggles. The families appear to be taking a long-term view to first allow Chidsey and his team to stabilize the business before considering strategic options. As a private company, Subway has the luxury to play the long game without the quarterly pressures of the public markets.
To jumpstart growth, Subway has been innovating its menu with new items like protein bowls, wraps, and Subway Melts. The company is also investing in remodeling stores, upgrading its digital ordering capabilities, and improving ingredient quality. Whether these moves will be enough to fend off competition and reignite growth remains to be seen, but Subway‘s unmatched scale provides quite a bit of cushion.
Conclusion
While Fred DeLuca and Peter Buck may no longer be with us, their legacies live on through the incredible sandwich empire they built. Subway‘s journey from a single Connecticut submarine shop to the world‘s largest restaurant chain is one of the great success stories in American business.
Through a laser focus on franchising, DeLuca and Buck democratized business ownership and gave thousands of entrepreneurs a chance to live the American dream as Subway owners. In many ways, Subway is the ultimate manifestation of the franchise business model – for better or worse.
The company now finds itself at a crossroads as it navigates changing consumer tastes, increased competition, and the transition away from its hands-on founders. But with over 40,000 locations worldwide, an army of dedicated franchisees, and an iconic brand cultivated over decades, Subway still has a lot going for it.
The next chapter of the Subway story has yet to be written, but the chain‘s impact on the fast food industry and the global business landscape is assured. And while the faces in the boardroom may change, the entrepreneurial spirit of the company‘s two founders will always be at the heart of what makes Subway unique. Because in the end, Subway isn‘t really a sandwich chain, it‘s a platform for aspiring business owners to turn their dreams into reality, one footlong at a time.
