The Meat in the Sandwich

Fred Deluca is the billionaire founder of Subway, the world’s largest franchise with over 40 000 stores. But did you know it all began in 1965 when he was 17-years-old with $1 000 and a need to pay for college? These are his business lessons.

The Meat in the Sandwich

The context

When Deluca was a teenager his family friend, Dr Pete Buck, spoke to him about opening a submarine sandwich shop. They were inspired by the success story of Mike Davis, the franchisor of Mike’s Sandwich Shop, who had started with nothing and grown a chain of 32 stores in ten years. Buck invested $1 000 and Deluca set about making it happen with the same goal of opening 32 stores in ten years.

Being entirely green to business, Deluca found a vacant store in one weekend, rented it without a lease as the lawyer’s fee of $25 was too steep, and fitted it out with plywood counters without any building plans or permits. It wasn’t long before he started experiencing problems he’d have to
quickly address.

“Somewhere in the middle of construction, somebody came by and said, ‘What are you doing here?’ I said, ‘I’m building a sandwich store.’ They said, ‘You know, you can’t just build a sandwich store without getting some approvals. That mistake was a back-breaker.”

Upon visiting town hall, Deluca discovered that the store would need a special sink installed at a cost of $550 – more than half his total capital. He ended up having to borrow another $1 000 from Buck to keep going with the outfitting.

The lessonSandwich

The lesson for any newbie, whether it’s as an entrepreneur, franchisor or franchisee is to ensure that the necessary research has been conducted into the industry. What permits are required and what regulations need to be followed? What are the consequences of not meeting the regulations?

Deluca was fortunate that back in the 60s, all it took was some smooth talking and a few extra hundred bucks to get himself out of that jam: “I walked to town hall and said, ‘I have to get some kind of licence for the store I’m gonna open.’ The lady behind the counter asked for some kind of plans which I didn’t have. So I drew a sketch, gave it to her, she stamped it, and that was it.”

Today it isn’t that simple and the consequences can be devastating. So do your research.

“I put ads in the newspaper saying ‘Student needs refrigerator,’ and I’d buy old household refrigerators for $10 apiece. Then, on the first day of opening, we were really busy and when I came back from writing an exam, I saw Pete had a bag of knives. I knew they could be expensive, so when I looked in the bag I said, ‘Oh man, there goes the budget.’”

The lesson

Part of any business’s success is its ability to keep costs low and business lean. Deluca struck on a clever idea to get potentially expensive equipment on the cheap while building the business. But being lean requires everyone being on the same page.

When researching a brand, ask existing franchisees how well the franchisor is able to keep franchise set-up, running and revamp costs to a minimum. Then, pay a visit to your franchisor and ask them how they’re keeping costs down or able to pass savings on to their franchisees. Ask for specific examples.

“One time, my car broke down. This kid picked me up and we got talking. We passed by my store and he said, ‘That is a great place to eat. They make terrific sandwiches, and you get all the soda you want for free.’ Not realising I was the owner, he said, ‘You order some sandwiches, and when the kid turns around to make them, you just take a case of soda out of the cooler and sneak it out to your car.”

The lessonSubway-Franchise

What makes franchising such a successful model is that everything has been streamlined, smoothed out, and systems, processes and models have been tested. This was a rookie mistake that Deluca quickly recovered from by adjusting the store layout – in fact visit any Subway and your sandwich is made on a counter directly in front of you. It adds to the customer experience, but it also means eyes are always on the store.

“We thought, we can’t close because we’ve failed. We hadn’t met our goal of 32 stores. We decided to open more stores. By the end of the second winter, we didn’t have one low-volume store, we had three extremely low-volume stores and were continually on the edge.”

The lesson

When researching a franchise, first determine how big the company is and how experienced they are as franchisors. Do they have one successful store that they believe will be popular everywhere? Have they designed the business to be a franchise from the start? Does the brand have the resources to conduct proper market research and demographic analyses to ensure that subsequent stores will be equally successful?

“Our stores were doing pretty badly and we realised we needed to focus on visibility and marketing for the future success of the business. So we changed the name from Pete’s Super Submarines to Subway because it was long-winded and sounded like ‘Pizza Submarines.’”

The lessonClub-sandwich

Part of a brand’s strength success is market awareness and meeting customer needs. In the case of Subway, they had a great product at a good price, but no one knew who they were or what they were about, let alone why they should be loyal to the brand. When researching a prospective brand, look to its branding to see whether it aligns with your values, and how effective its marketing is. Today it doesn’t take a massive budget, rather creativity and ingenuity to create viral marketing.

Look through the franchisor’s disclosure document to evaluate their marketing budget, how much of it comes from franchisee contributions, and how effective they are with what they’ve got.

“Every Friday, my mom and I would drive to each of our suppliers to pay cheques. It was a little social call and very inefficient. We were never able to pay as much as we bought and balances always built up. But I’m positive we wouldn’t have built the kind of relationships that allowed them to be as comfortable with us had we not.”

The lesson

Relationships that are built with suppliers are critical to new and established franchises’ success. Does your brand have preferential supplier agreements in place? Is the negotiated price and supply between a supplier and the brand win-win for all involved? Is the preferred supplier able to keep up with growing demand as the brand grows, and if not, what additional suppliers can be brought into the fold?

“When we set out, we made a goal to open 32 stores in ten years. After nine years, even though we only had 16 stores operating, the goal never changed. We knew it was achievable because Mike had done it, and we wouldn’t have franchised if we didn’t have a plan.”

The lessonSubway-store

The lessons in this statement are multiple: As business owners, they needed to have a vision from the outset to help them build the brand and company.

They also knew a successful sandwich franchise was possible because of Mike’s track record. So, despite missing their goal of 32 stores in ten years, after nine years they’d developed a pretty well-oiled system that would allow for easy replication and growth – essential elements for franchise success.

The second lesson is in growing a brand’s footprint. Check into the your prospective brand’s growth plan. Is it organic, is there a planned roll-out? How have they come to their growth strategy. A well-considered growth strategy is a mark of business acumen on the franchisor’s part.

“In 1971 we drew up a business plan to make Subway a franchise chain. We didn’t really know about the franchising business and it was very different. Just because we knew how to run stores didn’t mean we knew how to run a franchise company.”

The lesson

As Deluca came to realise, running a franchise is very different to running your own business. The franchisee/franchisor relationship is long-term and needs to be nurtured, franchisees require training and ongoing support from head office, and the franchisor’s role shifts to growing the business rather than operating units.

When researching a brand, determine the franchisor’s level of experience and whether that will hinder your own success.

  • Are they transparent?
  • Would it be wise having no industry experience and pair up with an inexperienced franchisor?
  • Would your business experience benefit the franchisor and are they open to your suggestions?

Fast Fact

In 1974 the first franchised Subway opened and by 1982 they had grown to 200 US stores. Fast forward to 1995 the brand had gone international and hit the 8 000 mark. Today there are more Subways than McDonald’s.



Tracy Lee Nicol
About the Author
Tracy-Lee Nicol is the managing editor of Franchise Zone Magazine and deputy editor of Entrepreneur Magazine. She studied her Masters degree in Art History and Visual Culture at Rhodes University and spent the next two years working and travelling in Asia. Her love of people, business and teaching is reflected in telling the stories of entrepreneurs, franchisees and franchisors, inspiring others to take the leap to being their own boss and bringing about positive change in South Africa.

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1 Comment

  1. the 32 target became just a passing by target while near new target came. good story inspirational and encouraging to guys like me small business people.

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