"I grew up with Subway and I wanted to be part of the team. Like Fred, Subway is in my blood." —Suzanne Greco, president and CEO of Subway
Suzanne Greco was seven years old when her big brother, Fred DeLuca, opened what became the first Subway restaurant in Bridgeport, Connecticut, in 1965. "I stayed in the background while everyone else was working," Greco said, "but I aspired to be a worker, too. Fred and our mother gave me little chores, like sweeping the floor and drying dishes."
Today, Greco is Subway’s president and CEO and she has one very big chore—putting the world’s largest restaurant company (45,936 units in 113 countries) back on course after her brother’s illness and death from leukemia in 2015.
In 2016, Subway closed more stores in the United States than it opened and the average unit volumes of its 26,741 U.S. stores dropped to $421,000, while rivals like Jimmy John’s, Jersey Mike’s and Firehouse Subs gained units and reached AUVs of $650,000 or more, according to the 2017 Restaurant Review by First Tennessee Franchise Finance.
Over the last decade, Subway did not stay relevant and now needs a major transformation, said Joe Tripodi, Subway’s new chief marketing officer. "Suzanne must lead changes that make Subway better at every touchpoint," he said.
DeLuca’s launching of a single submarine sandwich shop with a $1,000 loan from co-owner Peter Buck is legendary. He and Buck spent nine years growing to 12 units before they discovered the power of franchising. Subway quickly became a franchising machine, adding up to 100 new stores a month in the United States, then roaring into the rest of the world.
And DeLuca was always in the driver’s seat. "I called him the master," said Jan Risi, president and CEO of the brand’s Miami-based Independent Purchasing Cooperative (IPC) that she and DeLuca formed 21 years ago. "I loved Fred, but he was the founder and could get away with anything. For example, during one of our meetings, Fred announced he wanted to switch from yellow to red onions on all our sandwiches, and he wanted this done in two months. I said that’s impossible because there aren’t enough red onions in the world to fill our orders. The farmers will have to grow them first."
DeLuca’s hands-on management style became unwieldy as Subway grew, said Tripodi, who has served as a turnaround CMO at five major corporations. He never met DeLuca, but was watching Subway from the sidelines as he wound down his stint as CMO of Coca-Cola in Atlanta. "Subway was ripe for change and I really liked its healthy handle and global footprint," Tripodi said. "I thought my skills could help them, so I reached out to Suzanne."
Tripodi arrived at Subway’s headquarters in Milford, Connecticut, just three months after DeLuca’s death. "Everyone was in a period of mourning and shock," he said. "They had lost the founder and leader they’d relied on for 50 years. That takes a long time to get over."
But Subway’s problems needed a timely response. DeLuca always talked about Subway as a family business and while he was ill he named his sister as his successor.
Greco, who is 60 today and 10 years younger than DeLuca, said she started working officially at Subway restaurants "as soon as I was old enough, at 14 or 15. I was a ‘sandwich artist,’ and loved dealing with the customers."
After college, Greco returned to Subway in 1987, this time at the corporate office. "No one ever forced me to be here," she said. "I grew up with Subway and I wanted to be part of the team. Like Fred, Subway is in my blood."
Greco tried out several positions but gravitated to new products. "My first project was a cleaning products program. Before then, all Subway franchisees cleaned their restaurants with whatever they bought at the local discount store," she said with a laugh. Later, her post evolved into heading up the chain’s research and development department. "I really latched onto innovation, how to improve our food and make it healthier and more nutritious."
The IPC’s Risi, who worked closely with Greco for many years, said, "Fred’s leadership style was right for that time. Suzanne is different and her style is right for this time.
Suzanne is straightforward, she doesn’t play games. She has such tremendous knowledge, she didn’t have to play catch-up when she took over. She’s got the food down.
But she never acts like she has all the answers. "
In some of her first moves, Greco hired a team from Accenture to create a new division called Subway Digital and, Risi said, "invested heavily in seasoned, qualified people to come into the brand. It’s so refreshing to learn from these people." In addition to Tripodi, Greco hired Karlin Linhardt away from Accenture to be the brand’s senior vice president of marketing and used recruiters to help her fill other key positions.
"When I took over, we decided to make the largest investment in brand history to build an infrastructure with highly experienced talent to support our franchisees," Greco said. "It is our strategic plan to improve every consumer touchpoint, beginning with the look and feel of the restaurant. Our new Fresh Forward design brings to life what we have always had—healthy, fresh vegetables. We are integrating new technology to make us more accessible to the consumer and leveraging all of this into a new image."
Don Fertman, Subway’s chief development officer, was hired by DeLuca in 1981. "The first time I met Fred, he was wearing a big white suit with a dark shirt. I thought he looked like the Godfather. During my first few days Fred taught me about his goals for growing the brand. I called it my ‘Fred-ucation.’ Once he was confident I understood the job, I did not have to discuss every little thing with him."
Back then, DeLuca’s mother, Carmen, was Subway’s receptionist and Fertman said, "I first knew Suzanne as a photo on her mother’s desk. When she came into the company years later, and we met face to face, we hit it off and had a great working relationship. As our CEO, Suzanne’s style is more collaborative; she encourages her team to work together. I actually look forward to weekly strategy meetings."
‘As tough as Fred’
Don Rottinghaus, who owns 392 Subways in the Midwest, Texas and Louisiana with his brother Dennis, said, "I’ve gotten to work with Suzanne over the years on brand initiatives. When you get down to the nitty-gritty, she’s as tough as Fred was, but she has more style and is a bit more hands off."
Other large franchisees give Suzanne high grades for the Fresh Forward store redesign that she championed. So far, it’s been rolled out in about a dozen stores including one in Knoxville, Tennessee, owned by 92-unit franchisee and development agent (for 458 units) John Dell. "In our first seven months," Dell said, "sales are up by double digits, customer feedback is high and complaints are down. We’re even attracting younger customers who are using the remodel’s self-order kiosks."
Sales are up 8 percent at the Chula Vista, California, Fresh Forward location opened by brothers Rohit and Raghu Marwaha. Like many franchisees, the brothers are second-generation operators of a substantial family business.
"Our father opened his first Subway in 1995 and my siblings and I worked in it as teenagers," Rohit Marwaha said.
"Today we own 150 locations and oversee 1,230 more as development agents. Subway is a family enterprise from the top to the bottom. Suzanne comes from a similar story and she has a vision that will take us into the next decades."
Many of Subway’s smaller franchisees are less optimistic. Steve Sager, a franchisee with 13 stores in south Florida, said, "You have to remember that Subway’s reported annual revenues of $420,000 a year are an average. A couple of my stores are taking in almost twice that much, which means other franchisees may have revenues as low as $250,000 a year. Some franchisees are hurting really badly." It’s hard to know how many are hurting because Subway has no Item 19 earnings claim in its franchise disclosure documents. The 2017 FDD does disclose that Subway filed 693 lawsuits against franchisees last year, mostly for not paying their royalties. The document also lists 1,002 franchisee closures in 2016, the most in the brand’s history, and 727 new openings.
Another 1,412 units transferred ownership in 2016 and, according to an exhibit to Item 20 in Subway’s 2017 FDD, 225 of these units had "multiple ownership changes" during the same fiscal year. Over half of those with multiple owners (136) were reacquired by Subway corporate and sold again to other franchisees and four more were sold again by the development agents that had sold them in the first place. Another 71 are listed as "outright sales."
Hundreds of Subway restaurants are for sale at any time. According to the 2017 FDD, the cost to open a new Subway ranges from $147,050 to $320,700. In early September, 277 Subways were listed for sale on the BizQuest site alone. While the majority were priced between $150,000 and $200,000, a dozen were available for far less.
You can buy a Subway on Chicago’s northwest side for $29,000, for example, one in Tonawanda, New York, for $40,000 or stores in Massachusetts and Georgia for $50,000. Gross revenue reported for all the lower-cost units ranged from $120,000 a year to $325,000, and almost all the stores for sale had sales numbers below the $421,000 average.
Manoj Tripathi, a Subway franchisee since 2001, said he once had 40 stores open in the San Francisco Bay area; now he has 24. "My revenues have been dropping by 5 percent each year while my costs have gone up significantly," Tripathi said. "Our food is not drawing people to us. People’s expectations evolved and Subway dropped the ball."
Reno-based Ranbir Chhina said he opened his first Subway in 2003 and grew to 11 stores before closing five of them in the past four years. "I blame my downfall on the over-saturation of stores," Chhina said. "For a long time corporate wanted their development agents to open stores on every corner," reducing the revenue of existing franchisees. And when stores fail, he added, the area developers take them over, "building their own empires."
Tripathi said that last September, he and almost 100 other franchisees sent a letter to Greco "complaining about the practices of a specific development agent. We got no response."
"There’s a disconnect between the franchisees and corporate," said Chhina. "We learned about the new store design from an article in Nation’s Restaurant News," Tripathi said
The 6,800-member North American Association of Subway Franchisees, in Fairfield, CT, did not respond to our requests for an interview, but executive director Illya Berecz sent a statement that said in part: "NAASF is working hard to ensure that as Suzanne and her management team chart the course for Subway’s future, they are considering the input of the franchisees first and foremost, because it is those franchisees who have invested their livelihoods into building Subway into the world’s largest franchise and restaurant chain."
To listen and improve
Greco said better relations with franchisees is one of her goals. "Fred started with one restaurant and I know what our franchisees are going through. I want to listen to their challenges and help improve their businesses," she said. "Some of the best ideas in our industry come from the field. We sit in corporate knowing that a good idea can come from anywhere—from our suppliers, franchisees, sandwich artists or customers." The Corned Beef Reuben sandwich Subway rolled out as a limited time offer last November was created in one of franchisee John Dell’s Tennessee stores, for example.
Compelling new products are coming, IPC CEO Risi promised. But just like those red onions, it will take some time to assemble, or even grow, their ingredients.
And DeLuca’s domestic franchise growth machine is losing momentum as the brand expands into other world markets. "We will no longer just be adding more and more restaurants in the U.S. and Canada," said CMO Tripodi. "We want to make sure those existing restaurants are in the right place and the development agents and franchisees are profitable and their business is sustainable."
A more open question is whether the DeLuca family’s legacy will follow Subway into the future. Subway is a private company owned in trust by the DeLuca and Buck families. Fred’s widow, Liz DeLuca, and their son, Jonathan, are members of Subway’s board, as are Peter and Christopher Buck, but none is involved with the company on a day-to-day basis. Greco has two daughters who are still in school and said, "I can’t predict the future of my children. It would be nice if other family members were engaged, but I don’t think it’s critical for Subway’s survival."
"The greatest tribute we can pay to Fred," Tripodi said, "is to reinvent and transform Subway into a winning 21st century concept with 21st century leaders." Suzanne Greco, for one, would strongly support that statement.