Daybreak - Subway is slowly doing away with what makes it Subway. Choice.

Episode Date: February 4, 2025

*This episode was originally published on 17 September, 2024. Subway, the globally popular sandwich-eatery chain, is now grappling with sweeping changes in India—and not for the better. For one, the world’s largest quick-service restaurant (QSR) brand is moving away from the franchise model it has operated under for the past 25 years. In doing so, it’s also shedding the very thing that made it popular in the first place: choice.Tune in. Listen to 'One Billion in 10 Minutes', our new mini series based on The Ken's inaugural case competition. The Ken app - https://lnkd.in/gr5eGNZEApple Podcasts - https://lnkd.in/gqviPMAGSpotify - https://lnkd.in/gXWTrYSP

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. It's been more than two decades since India was introduced to the reigning king of sandwiches. Subway.

Two whole decades and I still feel pretty tongue-tied every time I have to place an order. and customize my sandwich. Honestly, that long way to get to the front of the queue can sometimes feel like walking the plank on a pirate trip. Choosing from all those different options of vegetables, sauces, breads, I mean, I can say with a certain amount of confidence that before Subway came along, most of us thought that there were two types of bread,

brown and white. But while ordering a Subway sandwich can sometimes feel like a Viva exam, you can't deny that the end product, that perfect sandwich, exactly to your liking makes it worth it. That's the beauty of Subway. But what if I told you that all of that, that whole experience, the things that make Subway Subway are changing? You see, Subway is slowly shedding the very thing that made it popular in the first place. Choice. So while back in the day, your sandwich was 100% customizable, meaning you could

pick any amount of veggies, any of the sauces. Now things are different. Eight franchisee owners from across India said that the options have come down to 70% of what they were. One of them lamented that the menu has changed at least three times in the last six months alone. Nothing like this has ever happened before. Now, this isn't just a run-of-the-mill revamp of the menu. You see, Subway India has been dealing with deeper problems since the pandemic. And it's gotten to a point where the US-based parent company has had to step in. And with that, there's been a massive restructuring of the business globally.

Like back in 2021, Subway signed an agreement with a private investment firm called Everstone Capital. Now, Everstone owns culinary brands, which runs a total of three F&B franchises here in India, Subway and two other coffee brands, Lavaza and Fresh and Honest. The company running the Subway franchise is called Eversub India Private Limited. So through Eversub, Eversone owns the rights to the master franchise. What all of this essentially means is that the company is moving away from the franchise model it's operated under for the past 25 years. Is that the answer to all of Subways was?

Well, it's complicated. But Everstone has a very clear target for Subway. It wants it to be India's next dominoes. Welcome to Daybreak, a business partner. podcast from the Ken. I'm your host Rahel Philippos and I'll be joining my colleagues Nygda Sharma every day of the week to bring you one business story that is worth understanding and worth your time. A little while ago, Palabi Guha visited her nearest subway on Park Street in Kolkata. She wanted to grab a sub of the day, which is one of Subway's oldest offerings.

What used to happen back in the day was that customers could choose between a wedge and a non-wed sub. barring the 17 kinds of protein, they could customize it by picking one or five types of bread and any amount of the nine vegetables and 12 sauces on offer. So when Palapi went into the restaurant that day, she was expecting that experience, the full subway experience. Unfortunately, she didn't get to do any of that. The attendant at the counter told her that there was a new policy in place.

So she could only get two sauces and two veggies on the bread of her choice. That left her wondering what the point even was. She was so put off by the whole experience that she even wrote a long post about it on Instagram. Spoiler, she ditched the sandwich and went out and had her role instead. And I can't say I really blame her. You see, the thing is, a lot of Subway classics have changed completely. In the name of innovation, Eversub has changed a bunch of different recipes.

At least that's what seven franchises told the Ken. One franchisee owner said that they had phased out a lot of premium ingredients like turkey and instead are going all out pushing things like chicken and cheese which are comparatively cheaper and easier to access. They've also rebranded a bunch of their sauces to keep up with the times. For instance, it has now started calling its cheese sauce super delight. Now, this likely has to do with what happened to McDonald's earlier this year where it got some bad press for using cheese substitutes instead of real cheese.

Like I mentioned before, Eversub's target is to be like Domino's, which for context is the largest food chain in the country by stock count and by sales. Domino's revenue was 5,000 crore rupees in FY23, which is about 5x the revenue of Subway. One Mumbai-based franchisee owner said a subway executive told him informally that they want the menu cheesier and more flavourful like Domino's. And that's exactly what they seem to be doing. Eversup has been introducing smaller and cheaper subs like cravers or cheesy alternatives like Hot and Cheesy. They are targeting college-going Gen Zs rather than office-going millennials or boomers,

the demographic that was typically used to its customizable options. The aim is to keep prices low and at the same time, Everstone also plans to open 2,000 subway stores in the next decade. Its store count currently stands at over 800, which is a 42% increase from 2023. That's going to have some serious repercussions for franchisee owners. More on that in the next segment. I have an unusual question for you. Let's say you are a quick commerce company in India and I give you a billion dollar budget that can make you win the race.

What is going to be your move? Two months ago, we asked some of India's brightest and most creative minds at the country's top business schools the same question. They had to pick which quick commerce company they wanted to role play and also define what winning meant to them. This was for the Ken's inaugural case competition organized in partnership with Zeroda. Big baskets can win by leveraging the Tata brand to collaborate with Tirana partners in a cost-efficient manner. Now, winning for us is simple yet ambitious, to make five-minute delivery the new normal.

So the basic core of our strategy is aggressive expansion. We don't see Flipkart becoming the Zomato, but the Uber eats of this space. If you're curious about what is going on, I am super thrilled to tell you about our latest limited edition podcast, 1 billion in 10 minutes, which is centered around the same case competition finale. Over six episodes, you will hear the top 10 strategies, all rooted in real world, and present it as game plans for five quick commerce platforms that have changed the way. way we shop.

Listen to the podcast series today on Apple or Spotify or the Ken app. And now, back to the episode. For the average subway franchisee owner, a lot has changed. Back in the day, if a new dish was to be introduced, franchises were first invited for food tasting sessions which were open to feedback. Now, Eversub announces the menu on a Zoom call and instructs them on how to introduce a new menu with no room for feedback. And that's not it.

You see, the pandemic changed a lot of things for the FNB industry and subway, of course, was no exception. So before the pandemic, 90% of their business was walking. But now one Mumbai-based franchisee owner says that has dropped to one-third, especially in metro cities, they are barely surviving. Another franchisee owner explained that if they could break even on monthly sales of 8 to 10-1-10-lack pre-pandemic, it now takes them to 12 to 15 lakh rupees.

On top of that, Subway collects 8% of their revenues as royalty. That and other costs rarely drive home gains and if they do, they're negligible. Now let's break that down. If an average subway order is 100 rupees, half the amount goes in fixed costs, including 33 rupees for food, $8 rupees as royalty, and $4.5 rupees in fixed advertising and marketing costs. Rent and salaries are another $4.5. So you can see that there's not a lot of scope for franchisee owners to make profits.

Plus, lately, they've been faced with another hot potato, which is uncanny audits. Subway is supposed to audit its stores for employee and food safety using third parties. Pretty standard stuff. Except now, small franchisees have reason to believe auditors are extra strict with them. Franchises are getting red marks more than ever, and they're getting them for things like broken kids. kitchen tiles, chip paint and even half-filled bottles of sauces. The chaos is so much that these franchises are just waiting for their agreements to end

so they can at least recover their costs. Some store operators now claim that their take-home pay drops by half every few months and as things progress, they assume it could possibly go down to zero in a year or so. So now what happens with Eversub swooping in and acquiring a lot of these franchisee-owned stores? Well, that isn't working out too well for the franchisee owners either. Because Eversub wants them to sell, but at lower than market prices and throw away deal terms. In some cases, Eversub has changed the terms of the agreement, making it impossible for them to sell to any external buyer. And even if the franchisees push through a sale, they end up losing.

Eversub sets up a whole new store in the same area and the new stores then cannibalize sales of existing ones. And it doesn't end there. You see, once it sets up these new stores, Eversup pushes predatory pricing. So it offers high discounts of up to 100 to 150 rupees on third party aggregators like Zomato and Swiggy. This again eats into their online share of revenues. Basically, sub-I-India's new owner wants to succeed at all costs.

But is it even worth it? Well, stay tuned to find out. Everstone is not new to the Indian market. nor is its game plan to open new stores near its competition. It used a similar strategy with Burger King, where it strategically opens smaller stores next to McDonald's and pushed sales through online deliveries. In fact, its Burger King strategy even paid off

because it eventually paved the way for the fast food chain's listing on the borses in 2020. But four years later, as things stand, the stock of restaurant brands Asia, which is the owner of the Burger King brand, has not done well in comparison to its peers. Not just Burger King with its other consumer brands like VLCC, it has had a tendency to focus more on the top line than the bottom line. So even with Subway, we can see that three years after the deal,

it is still figuring out a way to taste some success, which is why it has decided not to go down the Burger King route exclusively. Instead, it's trying to apply the Domino strategy. You see, Domino's India crossed the 2,000, store mark in June this year after three decades of operating in the country. And that's the way Eversub wants to go too, which is why it is aggressively opening outlets to do just that. But reaching its goal is going to be challenging. You see, the company has been seeing a leadership vacuum in the recent past.

And people familiar with Subway say that unreasonable targets had a big role to play there. But the biggest loser on all of this has to be the franchisee owners. Most of them, even though they're completely fed up, will have to continue selling subs until they are compelled to sell their own stores. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website.

Today's episode was hosted by Rahil Filippos, produced by me Snigda Sharma, and edited by Rajiv Sien.