Fast food giant’s mandatory digital promotions leave Franchise owners in a bind

In a surprising turn of events, Subway, the iconic fast-food chain with over 50 years of history, is stirring up controversy as it faces the pressure to sell its sandwiches at discounted prices across all its outlets. The deal, valued at a potential $10 billion, saw the company being acquired by private equity firm Roark Capital, known for backing popular chains like Arby’s and Dunkin’ Donuts.

Ahead of the acquisition, Subway has implemented a new policy affecting all 19,000 locations, as revealed by an inside source reported by The New York Post. Starting December 28, every Subway franchise is mandated to accept all digital discounts and promotions.

Previously, individual branches had the autonomy to decide whether to participate in promotions such as the renowned $5 footlong deal. However, with soaring food costs, some franchises opted out of deals they found unsustainable.

A Subway manager from Iowa highlighted the challenges, stating, “Prices of turkey went up, bacon has gone up about 20 per cent since 2020, so every year it keeps climbing.”

Despite the ongoing inflation, struggling franchise owners are now compelled to accept all digital promotions by year-end, irrespective of potential impacts on their business. This move raises questions about Subway CEO John Chidsey’s assertion that all store operators are independent contractors who set their own pricing.

Chidsey previously emphasized this point on CNBC, stating, “Franchisees set their own pricing, and consumers visit all kinds of quick-service restaurant brands.”

While Subway claims the mandatory promotions will enhance profitability, franchisees express concerns about its impact on their already slim profit margins. With Roark Capital reportedly setting financial milestones before finalizing the deal, the mandatory coupon acceptance may be a strategic move to meet these targets.

Franchise owners, grappling with minimal profit margins, voice their concerns, with one multi-store operator revealing, “It costs me £7 to make a turkey sandwich when you include labor and rent. So I make a £2 to £3 profit.”

Adding to the challenge, Subway imposes an eight percent royalty on all sales, regardless of whether the restaurants turn a profit.

As Roark Capital tightens the financial reins, franchise owners fear the impending mandate could lead to further closures, continuing Subway’s trend of mass location shutdowns for the fourth consecutive year.