Subway forcing franchises to sell discounted sandwiches, FTC probes $10B sale: sources

Publish date: 2024-06-10

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Subway will force its franchisees to sell discounted sandwiches despite many struggling to survive — and the new mandate could give added ammunition to federal regulators already looking to put the kibosh on the fast-food chain’s nearly $10 billion sale, The Post has learned. 

The family-owned company – which agreed in August to be sold to private equity firm Roark Capital, backers of Arby’s, Dunkin’ Brands and Jimmy John’s – will demand that all of its roughly 19,000 outposts honor digital coupons and promotions starting Dec. 28, sources with direct knowledge of the situation said.

In the past, promotions like Subway’s renowned $5 footlong deals were optional – with many franchisees refusing to participate. 

Making them mandatory could undercut Subway CEO John Chidsey’s argument that all store operators are independent as the Federal Trade Commission intensifies its antitrust probe, experts said.

“It’s puzzling to say the least that this is the time Subway is deciding to do this,” Georgetown Law Professor David Vladeck, a former director of the FTC’s Bureau of Consumer Protection, told The Post.

Many Subway franchisees do not want to honor coupons that cut prices. Getty Images

Vladeck said if he was reviewing this deal then this new edict would certainly cause him to raise an eyebrow if not more.

“There may be an economic justification but it’s hard to justify a requirement,” said Vladeck, who ran the Consumer Protection Bureau from 2009 to 2012.

Seth Bloom, a former General Counsel to the Senate Antitrust Subcommittee, also took issue with Subway’s decree.

“If consumers widely use these coupons, yes, forcing franchisees to accept them could impact the case,” Bloom told The Post.

Subway wants more customers in its restaurants with traffic declining in the third quarter and October. Getty Images

Subway declined to comment on the change in tactics.

Chidsey had tried to allay antitrust concerns shortly after accepting Roark’s bid of $9 billion, plus an extra $600 million if Subway hits certain financial targets in two to three years.

“The great thing about franchising is franchisees set their own pricing and consumers visit all kinds of quick service restaurant brands,” Chidsey told CNBC in a Sept. 7 interview.

“They are independent contractors,” he said. “They hire, they set pricing.” 

Last month, the FTC started a full investigation of the proposed merger, believing Subway could be a direct competitor with some of Roark’s chains, especially Arby’s.

The FTC is concerned that Arby’s may be a direct competitor to Subway complicating the proposed merger. AFP via Getty Images

Sen. Elizabeth Warren (D-Mass.) has also opposed the deal.

“We don’t need another private equity deal that could lead to higher food prices for consumers” she posted on the social media site X on Nov. 26.

Many franchisees have bridled over the looming mandate.

They say they are already having trouble making ends meet because the margins are so thin.

“It costs me $7 to make a turkey sandwich when you include labor and rent,” one multi-store Subway operator told The Post. “So I make a $2 to $3 profit.”

Subway gets an 8% royalty charge on all sales, regardless whether the restaurants make a profit.

It generates 17% of its sales through digital sales, Chidsey said at a Yahoo! Finance conference last month.

Many franchisees suffered declining foot traffic and sagging sales in the last fiscal quarter, according to financial data from businesses in one Southeast and one Northeast region shared with The Post.

FTC Chair Lina Khan is getting some fast food merger indigestion. REUTERS

The two regions, which have about 1,000 restaurants each, had traffic fall off by as much as 5% in the third quarter, the internal data shows.

Sales in both regions were up 2% in the quarter compared to last year – after growing at double-digit rates from mid-last year through the second quarter.

A Subway spokeswoman had a different take on the current numbers.

“The third quarter of this year represented 11 consecutive quarters of positive same-store sales growth with same-store sales for the top 75% of US restaurants – about 17,000 – up double digits with positive traffic, compared to the same period in 2022.” the rep said.

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