Subway Business Information, Profile, and History

Company Perspectives:

We are committed to customer satisfaction through offering high quality food with exceptional service and good value. We take great pride in serving each other, our customers and our communities. We seek continuous improvement in all that we do. We value a sense of urgency and emphasize an innovative, entrepreneurial approach to business. We expect fairness and mutual respect in all our activities. We know our success depends upon the initiative we take individually and our ability to work as a team.

History of Subway

The 1999 ad campaign for Doctor's Associates Inc., the franchiser of the Subway chain, proclaims, 'Subway, the way a sandwich should be.' Apparently, millions around the world concur. With more than 14,085 Subway outlets in 73 countries (nearly 12,000 in the United States alone) and in such exotic locations as the Bahamas, Bolivia, Cyprus, Iceland, Paraguay, Russia, and Venezuela, Fred Deluca and Peter Buck's collaboration has become the largest and most successful submarine sandwich franchise in the world. As the second largest international restaurant chain behind McDonald's, Subway touts its menu as a healthy alternative to fast food and has captured a significant share of the market with fresh low-fat sandwiches and several other signature made-to-order subs.

Evolution of a Sub Sandwich: 1960s-70s

Fred DeLuca was born in Brooklyn in the late 1940s, a time when Harry S. Truman was president, Arthur Miller's Death of a Salesman had won a Pulitzer Prize for drama, and Rodgers and Hammerstein's South Pacific was a hit on Broadway. Although there were not many ways a kid his age could earn money in the 1950s, DeLuca did--returning two-cent bottles found around the neighborhood, in his case, the Bronx housing projects where his family was living. The family moved upstate to Schenectady, and young Fred delivered newspapers, gradually increasing his clientele until his route covered some 400 patrons on Sundays. Originally planning to study premed in college, DeLuca was faced with the daunting challenge of raising tuition money. It was 1965 and DeLuca was 17.

Concentrating on his immediate future, he worked in a hardware store, earning little cash ($1.25 per hour) but possessing plenty of ambition. He was looking for another job, something paying more than minimum wage. While attending a summer barbecue, DeLuca struck up a conversation with family friend Dr. Peter Buck. Buck was a nuclear physicist, and he talked about a popular sandwich shop near his hometown the community had come to embrace. Buck wondered aloud if DeLuca should open a shop serving submarine sandwiches, a food item gaining considerable popularity. Over the next four hours, the two drew up a business plan; with a $1,000 start-up loan from Buck, the two became partners.

DeLuca moved quickly, looking for a location the very next day. On August 25, 1965, Pete's Super Submarines opened in Bridgeport, Connecticut, serving fresh made-to-order sandwiches, with a choice of toppings and condiments, though oddly, without lettuce (it appeared on the menu later). The shop location was not ideal, but was only a short distance from the hardware store where DeLuca had worked. There was little fanfare and few customers, but Buck and DeLuca met regularly in the latter's family home, discussing strategy over homemade pasta. The new enterprise, however, did not stop DeLuca from beginning his freshman year at the University of Bridgeport in September (he later graduated in 1971 with a B.S. in psychology). Juggling his studies and the sandwich shop, weeks turned into months, and the business never soared as each had hoped. Yet rather than give up, they persevered, and instead of abandoning the partnership, decided on another gambit&mdashø open a second location in 1966. Surely increased visibility and name recognition would steer some of the populace to Pete's Super Submarines. Then they decided to take their gamble a step further, and they opened a third location.

The third time was the charm; the old adage proved right on the money as the third store--in a highly accessible and visible location--began to take off. Not particularly superstitious, DeLuca and Buck did consider 'three' their lucky number and later emphasized positive numerology in their corporate marketing campaigns. As the business progressed, the partners found the name cumbersome and thought it sounded like 'pizza marine.' So Pete's Super Submarines was renamed Subway, taken from New York City's early underground railways built after the turn of the century. The shop's name was emblazoned in yellow, and the inside decor consisted of faux newspaper articles heralding the new mode of transportation.

In 1974, as the partners approached the tenth year of their alliance, they were supposed to have had 32 submarine shops according to their initial business plan. Instead, they had half this number and decided to explore another option: franchising. DeLuca believed that franchising was the wave of the future, and soon he had convinced a friend to become the first franchisee. The new store opened in upstate Wallingford. The move, though a sound business decision, was a profound risk. The world was experiencing inflation, the dollar had been devalued twice in two years, an energy crisis had forced Americans to cut back on power and fuel usage, and unemployment was on the rise. Yet DeLuca and Buck seemed to have the golden touch; the franchised Subway did well, as did its successors (another 14 or so within the year). Although franchising was an excellent way to expand a business, DeLuca and Buck tinkered with the system for years before finding a formula with which they were completely happy. Yet both had discovered an incontrovertible truth: new business owners needed to invent a product, and then entice an ever growing number of customers. Doing both was demanding, but with franchising, the idea and product were already established so the new business owner simply had to bring in a clientele and keep them happy.

From Nowhere to Everywhere: 1980-94

By 1983 there were 200 Subway shops and DeLuca and Buck discovered one of the largest hurdles was keeping their brand consistent in all locations. This was when the partners decided to have each location bake bread on the premises. As the first fast-food chain to bake bread at each location, Subway's sales steadily increased. The bread became a signature product, with its ingredients and oven time trade secrets. Just two years later, in 1985, after 20 years of partnership, DeLuca and Buck had 596 Subway stores in the United States and abroad; by 1987, the number had more than tripled to 1,810 shops.

Subway's phenomenal growth continued unabated throughout the remainder of the 1980s and into the 1990s. In 1989, there were 4,071 stores; by 1992 there were 7,327. As more and more Subway franchises popped up across the nation as well as outside the United States, the partners had created the 'University of Subway,' an intensive two-week course at headquarters. Prospective franchisees learned the ins and outs of the Subway business, from the standard decor to bookkeeping, from baking the signature bread to the varied ingredients that made up the chain's popular sandwiches. Another key to Subway's ongoing expansion was innovation and taking convenience a step further than its competitors. Subway stores began appearing in unusual locations, catering to consumers where they might not expect a sandwich shop--at convenience stores and truck stops. These 'nontraditional' locations were a hit with traveling consumers and by 1993 some 50 such shops dotted the nation, with more on the way. Although these uniquely placed shops were a tiny fraction of Subway's 8,450 locations worldwide, the nontraditional shops thrived and would come to make up a fifth of the company's global sales in coming years.

In 1994 Subway was nearing the 10,000 mark and DeLuca was determined to take on the world's largest fast-food chain, McDonald's Corporation. Although Subway was aggressively targeting the leader, the burger giant, founded in 1948, had nearly 20 years on the upstart Subway. No slough to ingenuity, McDonald's had stores in such nontraditional locations as Wal-Mart stores and Chevron and Amoco gas stations. A key to the success of both chains was consistency: customers counted on McDonald's decor and menu to be virtually the same from town to town; the same was true of Subway. Each chain, of course, made menu concessions in some countries--for Subway it was no pork products in areas with large Muslim populations; lots of salmon at the Norway shop; chicken salad with curry in British Subways; chicken satay with peanut sauce in Australian locations.

A Global Leader: 1995-98

By 1995 Subway had sales of nearly $2.6 billion and 11,420 locations. DeLuca and Buck became increasingly active in charity, giving to a variety of groups including the Girl Scouts of America, Habitat for Humanity, Junior Achievement, the Muscular Dystrophy Association, the Yale-New Haven Children's Hospital, and many others. The company also held several business associations (Better Business Bureau of Western Connecticut, the Connecticut Restaurant Association, the International Franchise Association, the Milford Chamber of Commerce) and even turned to environmental issues. In this vein, Subway introduced the Chocolate Brazil Nut cookie this year, chock full of Brazilian nuts harvested from the Peruvian rainforests, which in turn employed some 250 people and helped keep the rainforest alive.

In Subway's history, 1996 turned out to be a stellar year--the company's revenues increased nearly 25 percent to $3.2 billion, an incredible financial spurt by any standard. Part of the leap had come from further expansion to 12,516 locations, much of it in nontraditional locations. This was backed up by the numbers in 1997, when nontraditional shops reached 2,700, or about 20 percent of the chain's locations. The company had explored a myriad of unusual possibilities, including railway and bus stations, airports, casinos, amusement parks, arenas, hospitals, museums, and department stores. Subway shops in high schools, colleges, and universities were especially successful for both the company and the schools, as students stopped leaving campuses for lunch, bringing profits and jobs back into these establishments. Yet another major coup had been the exclusive agreement with NEXCOM (Naval Exchange Commission) to put Subway stores on naval bases worldwide.

Further civic involvement came in the form of Micro Investment Lending Enterprise (MILE), founded by DeLuca in 1997 to provide small business loans to budding entrepreneurs. The MILE organization opened several chapters in Connecticut, hoped to spread throughout the United States, and created a web site called www.mile.org. In late 1997 and early 1998, numerology was back in Subway lore. Stories circulated about the chain's luck with the number 13, and the many fortunate combinations of seven and six. Not only had Subway gone over the 13,000 mark in 1997, but Total Food Service magazine of Greenwich, Connecticut, composed a list of factoids touting Subway's good luck. Beginning with DeLuca's birth on the third of October, there were a myriad of interesting and goofy figures revolving around six, seven, and 13: the menu's seven six-inch subs with six grams of fat or less; three international locations opened on the 13th of the month (Guam, September 13, 1989; South Korea, July 13, 1991; Morocco, December 13, 1997); 13 optional toppings for any sandwich; and consumers ate more than 13 million pounds of steak and almost 13 million pounds of roast beef for the year.

By the fall of 1998, Subway had more than 13,229 shops worldwide and initiated a family-oriented advertising campaign to bring parents and kids into the stores. The company teamed up with Nickelodeon and its popular children's show 'Blue's Clues' for a Kids' Pak toy tied to the animated television show. Coining the term 'Mutual Agreement,' an agreement between parent and child to eat better meals, Subway hoped to capitalize on parents' quests for healthier alternatives to deep fried chicken parts and french fries or greasy hamburgers. Just as Subway had touted low-fat sandwiches for health-conscious adults, the Mutual Agreement was designed to capture the ten-and-under age group. Although sales for 1998 did not climb significantly ($3.4 billion, up from $3.3 billion the year before), Subway was still in solid financial shape.

1999 and Beyond

Still targeting McDonald's in 1999, which had more than 25,000 locations worldwide and 40 percent of the U.S. fast-food market, Subway had managed to overtake Burger King as the second largest international restaurant chain, the latter having just less than 11,000 stores (although it remained the number two burger chain). To maintain its second-tier berth and expand further, Subway introduced its own brand of bottled water, a 16.9-fluid ounce container with the slogan 'Refreshing a Thirsty World' on the label, and stepped up national advertising. Its advertising campaigns had proved quite effective in the past, and the company itself had become a cultural icon. Subway shops were featured in major motion pictures (Lethal Weapon, Ace Ventura--When Nature Calls, Ransom, Kissing a Fool, and others) and popular television shows (the WB's huge hit 'Felicity,' among others), as well as on the Internet with its own frequently visited web site featuring an interactive game, contests, employment applications, franchise information, an entertainment guide (reviews of music, TV, movies, video games), restaurant locator, menu and nutrition information, and special promotions on Subway products.

As the new century approached, Subway's development plans were impressive: to have opened 950 shops annually until 2005, including new locations in India, Germany, and Scotland; and, eventually, to have Subway shops in every country in the world. Subway was still chasing McDonald's as the industry's fast-food leader, but in the submarine sandwich marketplace both Blimpie (ranked second to Subway) and Quizno's (ranked third) were gaining ground. Although the New York-based Blimpie International had 2,000 shops by the end of 1999 and the Denver-based Quizno's Corporation had only 600 in the United States, Canada, and Japan, each chain had ambitious plans mirroring those of Subway&mdashø expand and conquer in 2000 and beyond. In addition, there was the entry into the market of another specialty sandwich chain, Schlotzky's Inc., an Austin-based company. Schlotzsky's was nearing 800 deli stores in 1999 and, though it did not consider its 'sub' sandwiches the success of the company, which experienced 40 percent growth from 1998 to 1999, was certainly eating into Subway's bottom line.

Yet perhaps the biggest question plaguing DeLuca and Buck was speculation about whether the privately owned company would ever go public. The response was generally the same--not an unequivocal denial, but a carefully evasive statement. 'We think that going public could take the focus off developing the business for our franchisees,' was what DeLuca told a reporter for the Winston-Salem (N.C.) Journal in 1997. But this was nothing business analysts and consultants had not heard before; anything was possible.

Principal Competitors: McDonald's Corporation; Tricon Global Restaurants, Inc.; Blimpie International Inc.; Schlotzsky's Inc.; The Quizno's Corporation.

Chronology

• Key Dates:

• 1965: Partners Fred DeLuca and Dr. Peter Buck open Pete's Super Submarines.
• 1974: First Subway franchise opens in Wallingford, Connecticut.
• 1984: First international Subway opens in Bahrain, Saudi Arabia.
• 1995: Company celebrates 30th anniversary by opening 11,000th Subway.
• 1999: Subway's 14,000th store opens.