Subway hopes for short attention spans on Jared
Subway executives must be wishing that pudgy Jared Fogle had stayed in his Indiana University dorm room and ordered pizza instead of losing weight by eating their sandwiches. Fogle, who had been the company’s spokesperson since 2000, pleaded guilty this summer to paying for sex with minors and possessing child pornography. He will be sentenced to up to 12 1/2 years in jail on November 19.
So far, the impact on the Milton, Connecticut-based sandwich chain has been slight, but experts say that could change if more allegations surface.
'Public memory is short'
Weston Anson, chairman of CONSOR Intellectual Asset Management in La Jolla, California, a business that puts a value on the reputation of companies, said, “Jared’s plea bargain was good for Subway,” because a trial would have kept him “popping up again in the news. The brand is also fortunate they had not used Jared in any store promotions or TV ads for almost a year.” Recent Subway ads, Anson said, feature athletes. “The public’s memory is short and once football season starts, people will forget about Jared’s association with Subway.”
John Gordon, principal of Pacific Management Consulting Group in San Diego, said he, too, expected the Jared scandal to have no lasting impact on Subway’s sales. “We hear about so many human foibles now that customers recognize Jared is not the brand. If this had occurred a few years back when Jared was central to their marketing campaign, it would have been far worse.”
Franchisees we contacted would not say anything at all. “Subway sent out a very blunt email telling franchisees not to make any comments about the Jared situation,” a former franchisee in California said. A Chicago-area former franchisee who asked that his name not be used said, “We sold our units because Subway allowed way too many stores and you can’t make a decent profit margin. My friends who still own stores have not noted anything negative as far as sales go now, because they were already experiencing negative trends.”
According to the Franchise Times 2015 Top 200+, Subway’s worldwide sales fell by 3.2 percent last year, while competing brands had sales increases. Chicago-based research firm Technomic reported 2014 average unit volume for Subway’s 27,000 domestic units was $475,000, while rivals Jimmy John’s hit $879,000; Firehouse Subs was at $701,000; and Jersey Mike’s was $667,000.
Subway’s 2015 franchise disclosure documents say a new store costs between $116,000 and $263,000. Many established franchisees are selling their units for much less. Last month 267 Subways were listed for sale on the BizQuest website; the lowest price was $42,000 for a store in New Jersey with gross annual revenue of $120,000.
By the time you subtract Subway’s 8 percent royalty and 4.5 percent ad fee, plus 28 percent for labor and 31 percent for the cost of sales as calculated for quick-serve restaurants by accounting firm BDO’s August 2015 Benchmarking Update, you would have $33,000 left to cover rent, utilities, insurance, debt service, maintenance and all other expenses.
Subway’s sales were higher before all the competition arrived and Jared starred in its advertising. Subway’s former Chief Marketing Officer Tony Pace often said in interviews that Jared was likely responsible for one-third to one-half of Subway’s growth during his years as pitchman. In a 2013 article, Advertising Age magazine reported same-store sales fell by 10 percent in 2005 when Subway temporarily replaced Jared with another spokesperson.
Two weeks after Jared’s Indiana house was raided by the FBI in July, Pace announced he was leaving Subway. A few weeks later, former Subway franchisee Cindy Mills told Business Insider, a New York-based news website, that she had alerted Jeff Moody, then CEO of the Subway Franchisee Advertising Fund Trust, and two other trust executives about Fogle’s behavior in 2008. Mills, who said she had an affair with Fogle after meeting him at a company event, said Fogle had told her about “trysts with child prostitutes between the ages of 9 and 16 years old in Thailand and the U.S.” and sent her sexually explicit texts.
But Moody allegedly told Mills he wasn’t concerned because he had dealt with similar complaints in the past, and Jared was getting married again to a schoolteacher “who will help keep him grounded.”
When asked about Mills’ allegations, Subway sent Franchise Times a statement saying, “Jeff Moody did not work for Subway’s corporate offices and was never a member of the Subway management team. If he, or any of this staff, ever received complaints about Jared Fogle, he did not escalate them to Subway’s management team.”
After its own investigation, Subway acknowledged it did have knowledge of one complaint in 2011 about Fogle, and issued this statement about him: “The harm he caused so many is inexcusable and we continue to extend sympathies to his victims and their families.”
Moody, who is now CEO of Rita’s Italian Ice in Trevose, Pennsylvania, sent a statement saying, “ I was not aware of Jared Fogle’s criminal sexual conduct with minors and, like any decent human being, am repulsed by his reprehensible criminal conduct.”
Jeff Anderson, the director of valuation and analytics at CONSOR, said there is no proof Subway was aware of the scope of Jared’s actions. “We’ve seen many examples recently where cover-ups generated 10 times more media coverage than if the individuals had come out and said they did something wrong.”
“Who knows what the details are and how deep this investigation will go?” said Dennis Lombardi, foodservices strategist for WD Partners in Dublin, Ohio. “What’s sad about all this is that if it starts hurting the brand a lot of innocent franchisees will feel the pain.”
Minneapolis attorney Dennis Monroe, chairman of Monroe Moxness Berg, said additional revelations might hurt selling new franchises. “But Subway’s international sales won’t be affected and the biggest challenge to domestic sales is competition, not Jared. “
“This should be a good lesson for all franchise companies to see the impact public figures can have on their businesses,” said Justin Klein, of Marks & Klein, Red Bank, New Jersey.