The accelerating demise of Subway, the world’s largest sandwich chain, will one day be just another case study of how to run a once-magnificent business empire into the ground, as Americans quickly abandon five-dollar footlongs.
The New York Post recently uncovered new knowledge about the 52-year old sandwich chain, which has been in a sales slump since 2016, has hired the infamous consultant Bain & Company to “professionalize operations and position the company for a future sale.”
You may remember in the 2012 presidential election cycle, the abundance of campaign ads focusing on former Republican presidential candidate Mitt Romney, who co-founded Bain & Company, detailing the firm’s destructive path of stripping companies of wealth.
The truth about Subway’s fate, well, the capitalist vultures who ‘eat the carcass’ of companies are circling above - waiting to dive into their next feast: footlongs.
Take, for example, the 2005 leverage buyout of Toys ‘R’ Us via Bain Capital, KKR & Co., and Vornado Realty Trust. It has been 13 years since the group of private equity firms loaded up on Toys “R” Us with debt to take it private; however, the plan did not work too well, and the company ceases to exist.
Toys ‘R’ Us filed Chapter 11 bankruptcy protection in the U.S. on September 2017, and at the end of 1Q18 — announced that U.S. operations of the company were, after 70 years, going out of business and liquidated all 735 locations across the country.
What do the world’s largest toy store and restaurant chain have in common? Well, you guessed it, likely similar fates as the walk down Wall Street is not so random, after all.
While neither Subway, nor Bain, would confirm the reports, the New York Post cites two Subway insiders who confirmed the news of a restructuring plan, then the eventual sale of the company.
The recent downturn in Subway has sparked internal feuds with management, along with many of its struggling franchises.
Last month, Chief Executive Suzanne Greco, the sister of Fred DeLuca, the co-founder of the company, retired after 45 Years.
Trevor Haynes was named interim CEO. The Post said Haynes is on a listening tour of stores and franchise owners across America.
“I think hiring Bain signifies that the board needs a professional business organization to give advice so it can change its downward trend,” one Subway insider said.
“They are running out of options that might positively impact the company.”
For the first time in its 52-years of operation, the company contracted in 2016, shuttering 359 US locations, which was the most significant retrenchment in its history. In 2017, the company closed another 800+ U.S. locations, as details emerged that some one-third of shops in the U.S. could be unprofitable.
Same-store sales in May 2018 declined 3 to 4 percent y/y, according to John Gordon of Pacific Management Consulting.
The story gets worse, as consumer traffic collapsed 25 percent from 2012 to 2017, stated a November 2017 internal Subway memo.
Subway insiders told the New York Post that a recent $4.99 foot-long sandwich promotion failed to attract new customers, which was seen as an uncreative last-ditch effort to stabilize rapidly declining sales. In return, the failed promotion severely cut the margins of franchisees, sources explained.
“It’s business as usual, $4.99 and no imagination,” the source added.
“The promotion doesn’t work well in my stores,” one New York store owner told the New York Post. The shop owner has closed four of 10 stores over the last couple of years.
Subway’s 10-person board is comprised of the founder’s two children, who do not want to run the day to day operations and would like to see the company stabilize before the eventual sale, the source said.
“This [hiring someone like Bain] should have been done when Fred was dying,” Gordon said. “The system is worse off now than it was three years ago.”
A Subway spokeswoman said: “The shareholders have expressed their intentions to the employees of the company that they are investing in the future of the company, committed to the company and have no intentions of selling.”
Brand and crisis expert Dan Hill warned there is no hope left in turning around the failing brand from past PR nightmares.
“Subway’s derailment is attributed to many factors including the face of their brand being convicted of child pornography,” Hill, CEO of Hill Impact says, adding that he believes “there may be no way to get its sales back to where they were,” but it will be interesting to see what Bain can do.
As mentioned above, Bain Capital has a knack for throwing large retailer chains into bankruptcy. While that does not seem imminent for Subway, the accelerated demise of the sandwich shop has now been confirmed, with Bain’s vultures circling above ready for the kill.