Subway is putting the squeeze on its franchise owners to shore up sales and profits because the struggling sandwich giant attempts to reel in a buyer, The Post has learned.
The nation’s largest fast-food chain is pitching private equity firms on a prospective sale by showing them revenue and earnings that imply the corporate may very well be value greater than $8 billion, two sources with direct knowledge of the method said.
Privately owned Subway claims last yr it had between $650 million and $750 million in Ebitda, or earnings before interest, taxes, depreciation, and amortization, sources near the talks said. Accordingly, bids are expected to are available in between 10 and 12 times that, leading to a price tag of $7 billion to $8.4 billion, one source said.
To make its numbers, nevertheless, sources say Subway has meanwhile begun forcing owners to foot the bill for expensive store upgrades, whilst it has begun to scrap fees for prospective owners. The chain can also be clamping down on those that want to close money-losing locations.
Bids for Subway could fetch a price tag of $7 billion to $8.4 billion, sources said.Bloomberg via Getty Images
To draw buyers at latest locations, Subway has waived the $12,500 franchise fee.Getty Images
One longtime franchisee within the East Coast with greater than a dozen Subway stores recently desired to shut down two unprofitable stores. Normally, that wouldn’t be an issue since his five-year options to renew the licenses were expiring, the franchisee said.
As an alternative, Subway modified its policy on expiring leases, telling him he would must sell all his restaurants — including the profitable ones, the frustrated franchisee alleged.
“Now they are saying you may’t take your options,” he said, requesting anonymity. “Should you walk away they charge average royalties you earned per thirty days during the last three years for the length of the [20-year] agreement.”
Franchisees are even accountable for lease payments unless a money-losing store is resold, he added. If franchisees do determine to sell, they will realistically only use the corporate’s self-appointed broker ReInvest Capital, as all sales should be approved by Subway, sources said.
“They’ll have you ever sell a store that was value $200,000 to $400,000 for $100,000,” a West Coast franchisee told The Post.
A Subway spokesperson declined comment.
Last month, the chain rolled out a plan so as to add meat slicers, ostensibly to present shoppers the impression that the deli meats are fresh like at fast-growing rival Jersey Mike. Getty Images
In line with sources, Subway desires to consolidate ownership under a couple of large operators and shift away from the vast majority of mom-and-pop owners, lots of whom are immigrants. ReInvest is touting large blocks of Subway restaurants on its Instagram page, including a 74-restaurant Carolinas package and a 91-store deal in Florida.
“They’re cleansing house and making the brand presentable to an enormous investment firm,” the West Coast franchisee said.
To draw buyers at latest locations, Subway has waived the $12,500 franchise fee, in line with internal documents. Existing stores are being sold for very low cost prices, franchisees said.
“Someone just got two Subways for $1 a store and so they have a yr to rework,” the East Coast franchisee said. “That is an all-out assault by the corporation.”
Current Subway owners must also invest 1000’s of dollars in mandated upgrades or face fines – and even lose their stores with no compensation. Along with store renovations which are due in 2024, Subway is requiring operators in the subsequent few weeks to purchase latest $5,000 ovens and $6,250 toasters if the present models are greater than 4 years old, together with latest digital money registers.
Last month, the chain rolled out a plan so as to add meat slicers, ostensibly to present shoppers the impression that the deli meats are fresh like at fast-growing rival Jersey Mike. Although the slicers are free, the franchisee might want to pay more in employees’ compensation insurance to operate them, the franchisees said.
Sources say Subway has begun forcing owners to foot the bill for expensive store upgrades.Getty Images
“They need us to speculate the cash within the stores now before an investment company is available in and wishes to spend the cash,” the West Coast operator said.
Subway’s sales, meanwhile, are underwhelming. The East Coast franchisee said sales are a bit higher, mostly because of increased prices, but are still half off their peak.
“Sales are stagnant, if anything they’re 1% to three% higher,” the West Coast franchisee said.
Subway, which owns not one of the chain’s roughly 20,000 US restaurants and relies on franchisees to pay an 8% gross royalty fee, said sales rose 7.8% last yr compared with 2021, exceeding its projections by greater than $700 million.
Publicly traded rivals like Restaurant Brands, which owns Burger King, trade at 16 times Ebitda – so buyers are in for a windfall in the event that they take Subway public, the pondering goes for a lower multiple. Opening bids are expected next week. Still, one prospective private-equity bidder noted that chains like Restaurant Brands are showing unit growth, while Subway just isn’t.
“The primary query is there isn’t any unit growth within the US and the second is what’s the stabilized level of earnings,” the investor told The Post.
Nearly 1 / 4 of all Subway franchises have closed their doors between 2015 and 2021 as the corporate loses market share to rivals like Jersey Mike’s, in line with public records. Nevertheless, there are still greater than 20,000 US Subway restaurants. The number keeps decreasing while, by comparison, there are about 13,000 McDonald’s.
The unit growth, the private equity source believes, has to come back from international openings.
Subway is saying in its pitch materials that sales per store were down 2% from 2010 through 2020 but have risen the last two years so that they at the moment are at the identical level as they were in 2012, the private equity source said. Inflation, meanwhile, during the last 10 years has grown greater than 20%.
“It is a real operational lift,” the private equity source said.
