{audio:0:00:01} Dave, it’s a pleasure to have you with us today. Could you begin by providing some context to when you first joined Subway?

{audio:0:00:10} My background is in marketing and advertising. I started working for an advertising agency, on the Kentucky Fried Chicken account and that’s how I really got into the food industry. I moved to Subway, in a field marketing role. That’s someone in the field, who works with the local marketing co-ops, with franchisees, on how they are going to spend their money, at a local level. I was working with them, for several years. Then our group took on a multifunctional role. We took on, not only field marketing, but we took on field operations and field development, which is unusual for a restaurant company, for one group to take on all three of those disciplines.

{audio:0:01:02} That’s how I got into the operations side and then got into the development side, as well. I had a territory of 2,000 to 3,000 stores, which grew to about 5,000 to 6,000. Then it was about 10,000, of our section of the country. Eventually, I headed up that team, across the US.

{audio:0:01:25} What is the biggest challenge when you’re in the field, running these co-ops, managing these budgets, managing loads of locations?

{audio:0:01:35} A lot of it is communication. Getting communication to every franchisee. Subway is a little bit different from many restaurant companies. We have over 10,000 franchisees. We’ve got about 24,000 locations, in the US. So whether it’s an advertising program, something about a new product, a new operational procedure, getting that communication to each location, each franchisee and then down to their staff, is one of the biggest challenges, across our system and, probably, most systems.

{audio:0:02:12} Moving on to look at franchisees, before becoming a franchisee, are there any wealth or other requirements, to become a franchise of Subway or any of those companies that you are aware of?

{audio:0:02:27} Normally, for most franchisees, there’s going to be some minimum financial requirements. One is your net worth. That’s what cash you have, savings, plus all your assets. If you own a home, own a car or any other real estate and then your stocks and 401(k) and those type of things. That’s considered your net worth. What that does is, it gives the franchisor an idea of your financial health. Is this person going to be strong in our system? Can they manage the money well? Are they going to be able to grow in the system? Franchisors look at potential franchisees, not for just one location; is this person going to be able to but three, four, five, 10 stores? Your financial health is at least a starting indication of that.

{audio:0:03:22} Then you’ve got a financial requirement for liquid assets meaning, what cash do you have on hand? Your checking account, savings, any stocks that you can get out of quickly and have that cash on hand for unforeseen expenses and those type of things, when you’re starting your business. No small business owner wants to go in with zero cash on hand. That helps the franchisor and gives them an indication of your financial health. This guy is going to be strong; he’s going to be able to start his business off in the right way.

{audio:0:04:00} What are the ranges we see from Subway to McDonald’s and others?

{audio:0:04:07} Subway, net worth, for all those assets, is about $80,000 to $100,000. On a cash on hand, it’s about $30,000. For a McDonald’s, you need to have a net worth of $1 to $2 million, because their expenses are much greater. You’re building a building, you’ve got so much equipment back there. You’ve got 30 to 40 people on staff, so there’s a lot of expenses there. For liquid assets, it’s around $700,000. Normally, to get a McDonald’s you’ve had to have some financial success prior to that. The benefit of a Subway is that our business model is a lower cost of entry, meaning it’s $15,000 franchise fee, so you don’t have to have as much net worth to get in. That’s because our cost structure is lower, as well. We have smaller stores, lower square footage, less equipment, less staff. Those who may not be on the level of a McDonald’s net worth, can still get into the Subway business, along with other franchises, in general.

{audio:0:05:31} Have the financial requirements changed, over the last decade or so and do you see them changing, going forward?

{audio:0:05:38} They have. They keep creeping up, just as costs keep creeping up, on equipment and on real estate; real estate increases, your leases increase. That net worth and that cash on hand is going to follow that same trend.

{audio:0:05:58} What’s the rough split in the industry, between those large management companies that manage multiple franchises, versus the mom-and-pop, one or two?

{audio:0:06:08} I would guess, around 50/50. I just read an article, recently, that the top 25 largest investment, financial groups, that own restaurants, make up about 45% of the total revenue, in the restaurant business. I estimate around 50% are the mom-and-pop, or individual franchises that may have five or 10 stores. Then you have your others that are 500 stores, 700 stores, up to 1,500. In the Subway system, it’s quite different. In Subway, about 90% are the individual owner, the mom-and-pop and maybe 10%, who have 50, 100, 300 stores. We’re a little bit different from some of the other restaurant companies.

{audio:0:07:08} I suppose, if you’re a franchisor, with a large base of franchisees, under those management companies, you have less bargaining power than you would over a smaller, mom-and-pop shop, in terms of fees and profitability, of the relationship?

{audio:0:07:29} No doubt. There’s pros and cons to both. The pros, on Subway’s side, having a lot of individual owners, is that they want to do well; they want to support the company and their financial risk is those one or two stores. While a management company who has 500 or 1,000 stores, they’re going to have more weight with the franchisor and influence them on various decisions. That could be from an operational standpoint, or from a marketing or advertising standpoint. With the large management companies, it’s less franchisees to work with, but they’re bigger and more influential franchisees.

{audio:0:08:15} Can we walk through the process of opening a franchise? Maybe looking, first of all, the initial costs and then we can take it from there?

{audio:0:08:22} If anyone is interested in a franchise, there’s so much information online, nowadays. You can just put in ‘franchisees’ and there’s tons of sites that will give you information on the restaurant industry and outside the restaurant industry, on franchises. If you go to Subway’s or McDonald’s or Burger King’s website, they’re going to have some general information for people who are interested in a franchise. They will, basically, try to sell you on why you should become a Subway or McDonald’s franchisee. There’s some general information and what they want is, they want you to sign up and say, hey, I want more information. You give your email address, your phone number, personal information. They will usually send you a brochure that has a lot of the details.

{audio:0:09:15} Those details are the initial cost, franchise fee – the averages – what’s involved in it, what the franchisor is going to do for you, as a franchisee. Then again, some average costs. Some franchisors talk about the profit potential; some wait for that until you are much further down the line and you can do your own investigation and talk to other franchisees. Once you sign up, you get information and if you continue with the process, you will usually talk to the franchise sales department of the franchisor. You’ll talk about your needs, why you want to be in the restaurant business; why Subway, for example? Then you will progress from there to the approval stage. That’s when they look at all your finances and, as we mentioned before, the capital and assets that you have.

{audio:0:10:24} If that all goes well, then they’ll move you forward with finding a location and helping you get set up with financing, which we can talk about more later. Once you find a site and you’ve signed a lease, you’re ready to go. Talking about initial costs, you’ve got your franchise fee. Every franchise company has their franchise fee. For Subway, it averages at $15,000. McDonald’s, I believe, is around $45,000, for that initial franchise fee. That’s a one-time fee. There’s costs on the franchisor to get you set up and that helps pepper some of those costs.

{audio:0:11:16} Then you have your actual build-out costs; you’ve got your equipment costs. You’ve got lighting and signage. If you have build-out costs like Subway, you’re usually in a strip center, lower square footage, so the site is usually already built out and you’re putting in your floor and putting in your equipment. For some Subway’s, we have freestanding stores; you’re actually building a building. Obviously, the cost for that is going to be much higher. For McDonald’s, it’s usually about $1 to $2 million for the total build-out costs. That’s the construction, equipment, all the signage, the furniture. For Subway, it’s about £150,000 to $200,000. Again, that includes your furniture and flooring. Most franchisors have a couple of options for furniture and a couple of options for equipment. Normally, if they’ve made agreements with equipment companies and flooring companies, you have to choose only one or two different options. You’re not going to be able to put in any floor you want.

{audio:0:12:25} Effectively, they procure the equipment and stuff for you?

{audio:0:12:31} What about the financing?

{audio:0:12:33} Once you get further in the process, you will determine what your costs are going to be, especially if you already have a site in mind. You’re going to know what your build-out costs are and how big the store is going to be, which will determine your costs. So you will know how much loan you need. How much am I going to put down, as a down-payment, and how much am I going to need for a loan? There are two or three options on the financing. One is that you can work directly with your own bank, for a loan. Or, in the US, we have small-business loans that are guaranteed by the government. That’s the Small Business Administration, so you will hear about SBA loans. That’s a loan that is given by the bank, which is backed by the government. If I’m a borrower of those dollars and I default on that loan, the government is going to work with the bank, to get them paid.

{audio:0:13:38} The benefit of that is, it’s low interest rates, it’s lower down-payment, lower collateral for the new franchisee, because that loan is guaranteed by the government. It’s less risk for the bank. That really is the best way to go. If you go to SBA.gov, there is lots of information on how to get set up, what that means and how to work with your lender, on getting one of those loans.

{audio:0:14:15} What’s the typical leverage or loan to value, that the franchisees have, on the buildings, if there are building costs, and the initial costs?

{audio:0:14:28} In a Subway, you’re talking about $100,000 to $150,000 that they’re actually getting a loan for. They’ve got to work out in their breakeven; over time, how long is it going to take me to pay that back.

{audio:0:14:43} They’re pretty leveraged then?

{audio:0:14:45} Yes. Obviously, for a McDonald’s, that’s going to be a lot more. But usually, someone getting in with a McDonald’s has a lot of cash on hand and you can put a bigger down-payment on that loan, going forward. As franchisees, as you get more locations, you’re going to have more collateral, more assets and you’re going to be able to borrow more, and much easier, than if I’m a first-time franchisee, with not a lot of assets.

{audio:0:15:15} If I’m a typical Subway or McDonald’s franchisee, as a mom-and-pop shop, how much of my revenue am I paying in interest, for the building and financing? Is it a large percentage?

{audio:0:15:39} It depends on the business environment at the time. Right now, it’s actually a great time to be looking into it. As the economy gets better, with lower interest rates, that’s a great time to get in. This is pre-Covid 19. But right now, there are a lot lower interest rates, that are backed by the SBA loans and then, most likely, franchisors are going to be giving some incentives for people to get in.

{audio:0:16:21} What sort of incentive do they give?

{audio:0:16:23} Most likely, on the franchise fee. They will give them a lower franchise fee, to get them in and that’s to really reinvigorate the development, in the business environment that we are currently in. If anyone is interested in opening a small business, whether it’s restaurant or not, I would start thinking about it now. Again, you can get loans much quicker, a lower interest rate, a bigger backing by the government on that, because they want people to continue to open up businesses. That’s just going to help the economy, going forwards. Now is really a good time to start that process.

{audio:0:17:05} How do you look at the leverage, at the franchisee level? For example, if we look at the traffic we’ve got now and the revenue that some of these plots are having, do you think that the leverage, at the franchisee level, is a major risk here?

{audio:0:17:19} Very much so. Especially on the 50% that is that mom-and-pop. The capitalization of franchisees is a pretty wide range. You’ve got that 50% of the big management companies and they’ve got enough capital and cash on hand, to keep them afloat for quite a while, to be able to weather the storm of a crisis, such as we’re currently in. A lot of the mom-and-pop shops are going month to month, and have enough capital in hand to go, maybe, through two months. That’s a pretty scary situation, being that most restaurants are down, maybe 70% to 80%, in sales. I think you’re going to see a lot of closures, down the line, especially as we emerge.

{audio:0:18:16} There’s a lot of forgiveness, right now. A lot of the real estate companies are giving some forgiveness, at least deferring payments, for their tenants. Then the banks are also deferring some payments and helping the real estate companies. But at some point, that all has to be paid. As we emerge from this, I think you’re going to see, really, where those mom-and-pops stand, from a financial standpoint. Honestly, it’s unfortunate, but some aren’t going to make it, because they have, maybe, a month or two of capital. If this goes on longer and longer, where they’re seeing 50% to 60% of sales decrease, it’s going to be really difficult.

{audio:0:19:05} What percentage of the mom-and-pop 50%, do you think are going to potentially close, over the next couple of years?

{audio:0:19:13} I’m going to say, maybe 15%. That’s a big number. That’s not just franchise companies, such as Subway or McDonald’s or Burger King. I also believe that’s for the mom-and-pop shops, such as Dave’s Subs or anything like that. The small restaurants are really struggling and you can see 10% to 15% of those close.

{audio:0:19:43} I guess the government and the payment schemes are kicking the can down the road, for all industry?

{audio:0:19:57} What is the typical working capital, or cash on hand, that some of these mom-and-pop shops have? Is it one, two months? Three months, maximum?

{audio:0:20:09} For a lot of them, yes. Especially a lot of the businesses that are truly the mom-and-pop shop. One store, it’s their own business. A lot of those have, maybe, one to two months, on hand. Even for some of your franchise companies, maybe three months, to keep them afloat. They still have to repay some of those loans. If you are a Subway franchisee, as an example, who has got 10 locations, as we start to emerge out of this, they may have to sell three of those locations, in order to have some cash flow, to make sure that their entire organization doesn’t go. Now they are down to seven, but they have enough cash on hand to keep those seven afloat, because you’ve got to pay employees, you’ve got to pay for food, you’ve got to pay your rent. Those things don’t go away. It’s a pretty scary situation, right now.

{audio:0:21:15} Moving on to look at the fees. Maybe, if you can start by just laying out or breaking down the fees that a franchisee has to pay to the franchisor?

{audio:0:21:31} Obviously, you’ve got your initial franchise fee, which is really the starting point, where there is likely some incentive these days, going forward. Maybe they will decrease their franchise fee, to get you in. Then once you are a franchisee, there are two big typical fees and then there’s a royalty fee. That’s a percentage of your sales, which would go to the franchisor. That is really to use their name, use their brand, especially a brand that has already been established. As opposed to Dave’s Subs, I’m buying the Subway name and that’s part of the royalty fee.

{audio:0:22:19} Then it’s also for all the services that the franchisor is going to give to their franchisee. That’s helping them to find a location, all the initial training, the operations, future development, grand opening costs and then the ongoing operations services, ongoing legal help. All those things that help run a company and that’s what the royalties will help fund. As an example, for me, working for the company of Subway, the royalties pay for my salary, to help all of our franchisees from a marketing and operations standpoint.

{audio:0:23:04} Then you’ve got your advertising fees. Again, a percentage of your sales will go into an advertising fund. Typically, that’s split into two. Firstly, those funds go into a national advertising fund and that’s usually the greater portion of those funds. That pays for the national TV advertising, national radio, all the creative production that goes into making commercials. Also, for your point of sale, your banners and window clings, that go in the windows that talk about promotions and things. That’s all paid for by your national advertising fee.

{audio:0:23:49} Then there’s a smaller portion that will go to local advertising. I’ll give you an example. In the Subway world, say in the Chicago area, we’ve got over 700 Subway locations, in the whole of the Chicago metro area. Those local funds will then go back to the local market, so those 700 locations can use those funds to advertise in Chicago. If Chicago has their own promotion, has their own product that they are promoting, they can use that to advertise. They can go into advertising mediums that maybe your national is not buying. Local radio, couponing, maybe add on to some of the national TV, do some outdoor advertising, those type of things. Normally, that’s what the advertising fund is used for.

{audio:0:24:45} Then, I would say, there’s really what we call local store marketing costs. That is, I am a local store owner, in a particular trade area, I need to do local store marketing, to the businesses around me, sponsoring the local Little League team or working with local schools. That’s usually an out-of-pocket cost, for the franchisee, over and above that advertising fee that you are paying to the franchisor. But that pays off greatly. It shows that you are part of the community, with donations and that type of thing. So although it is an out-of-pocket cost, it has high return.

{audio:0:25:32} How much of those fees are a percentage of revenue, for the franchisee?

{audio:0:25:38} For Subway, it’s 8% on royalties and then 4.5% for the advertising. That’s 12.5% that will go towards, basically, your royalties and your advertising fees. It varies by restaurant company. Some are a little bit lower; some are about average, with Subway. That will all be disclosed in the franchise agreement and the franchise information that you will get from the franchise sales department. That will help you determine, what are my costs, right out of the gate, before I actually receive any profit?

{audio:0:26:24} How have those fees changed, over the last decade or so?

{audio:0:26:30} Normally, the royalty fees stay pretty much the same. Subway has had 8% royalties for as long as I can remember. The advertising portion does change and it usually increases, because advertising costs increase. It costs more to buy an ad on TV; it costs more to make a commercial. Usually, that advertising percentage, especially over the last decade, has increased quite a bit. You’ll have to take that into account, as a new franchisee coming on. That will be disclosed in your franchise agreement that we reserve the right to increase franchise fees, going forward. Sometimes, there is a decrease, and that’s to give those funds back to the franchisees. As a franchisor, we would hope they would do more local store marketing, with those dollars. But sometimes, it’s really just to help their general expenses.

{audio:0:27:33} How do you think franchise fees will change, post-Covid?

{audio:0:27:39} Right now, I know with Subway and some of the other restaurant companies, they are deferring some of those royalty payments and the advertising payments. That’s so that those franchisees can take the cash that they have and put it back in their own business. Put it back into labor, staff, into their food, cleaning their locations, to all the new standards. They’re deferring that. As we emerge, out of this, I think royalty fees will probably stay the same but advertising fees may change. They could lower, just to help the franchisees out and make sure they continue to put that money back into their expenses, versus advertising. On the other hand, as we emerge from Covid-19, a lot of brands are, maybe, doing more advertising to get their brand out there, to make sure that they are top of mind and that we’re following all the guidelines. We are back in business; we are ready to go; we provide great customer service.

{audio:0:28:52} It will be interesting to see how that progresses, as we emerge out of this, not just for restaurant companies, but for all retail companies, in general.

{audio:0:29:04} Can the franchisees afford an increase in any of the fees, over the next two years, for example?

{audio:0:29:13} Probably not and that’s going to be a real hard sell, to be honest. Most franchise organizations have a franchisee union, for lack of a better term. Subway has one; McDonald’s has one; Burger King has one. It’s a franchisee-driven advocate group that works with the franchisor and that’s where you’ll see a lot of those discussions. Those franchisee groups will say, look, franchisor, we can’t afford an increase in advertising fees, right now. How about we try this; after a year, we give the option to increase 0.25%, as an example? Right now, we can’t increase. I think most franchise companies realize that and would it would be unlikely that they would increase those fees, in the next couple of years.

{audio:0:30:12} What’s your view on how long they will have to defer these fees for? Do you see traffic bouncing back in the next six, nine months, as expected and, therefore, they can start paying back required fees?

{audio:0:30:23} I would say, maybe by the end of the year, you’re going to start getting close to back to where those traffic levels were. One thing that will be interesting is, let’s say, within this next six months, what stores will close. Those customers then have to go somewhere else. That could help some of the existing businesses continue to see some more traffic. But I would say, at the minimum, six months before you’re seeing back to some normal traffic levels. Maybe even into 2021. For those deferred payments, they will need to do that for a few more months.

{audio:0:31:12} It seems as if it’s the only option?

{audio:0:31:15} You’re right. It does the franchisor no good to have closed locations and to have franchisees go out of business. I think what you’re seeing, not only with Subway, but I believe in other franchise concepts, is that we’re all in this together; a little more unity and partnership around, how are we all going to survive – the franchisor and the franchisee – how are we going survive and get through this and come out on the positive, once we open up? It doesn’t do anybody any good to have closed locations?

{audio:0:31:55} If I tell you that I’m closing my franchise, what do you do, as a franchisor?

{audio:0:32:02} There’s a couple of things. How can we help them, in the first place? Can we work with the landlord, to either defer more payments on their lease or reduce their rent? Maybe it’s to help them with local store marketing; we’re going to give you some funds to go out and advertise around your location, telling people we’re open for in-store dining, or curbside service, delivery. Some of it is just going to be inevitable. That’s the really unfortunate part; there are going to be some stores that just have to close because they don’t have the cash flow to pay employees or buy inventory.

{audio:0:32:51} Can we talk about delivery. How have you seen delivery impact the store economics?

{audio:0:33:00} I’ll talk about prior to Covid-19 and then as we got into Covid-19. Subway has been in what we call third-party delivery – so that’s the Uber Eats, DoorDash, Grubhub, those guys – for a little over a year and so we had national contracts with the top four delivery companies. I think, for most restaurant concepts, and even the delivery companies, they’re trying to figure out how to make this work effectively and efficiently, and profitable for everyone. That’s really the big key, right now. From a restaurant standpoint, pre-Covid, it was really incremental business. You’re getting someone who wasn’t going to come into your store, anyway. They want somebody to deliver, so they go online and go to Uber Eats and say, what do I want to eat today? They’re going to have somebody deliver it to them, so if Subway is on there and you can do an order through Uber Eats, as an example, that’s an incremental visit for you.

{audio:0:34:10} The sell-in, for us, to our franchisees was, get on board with this, because these are incremental dollars. You may not understand how it works and whatnot – and that was our job, to show them how it works – and it’s not a fad. This is really the future of business. It was incremental business but it was still maybe not as efficient as we would want it to be. We also saw that with customers and delivery companies, on average, the customer stays with the first delivery company that they ever use. I downloaded the Uber Eats at that’s what I continue to use today; I’m an Uber Eats guy, as an example. It’s the same for DoorDash and Grubhub and Postmates. I’m a DoorDash guy, so I only order from DoorDash. We were trying to encourage all the franchisees to sign up with as many delivery partners as possible. If I only sign up with Uber Eats, I’m not getting the DoorDash customers or the Postmates or Grubhub customers.

{audio:0:35:22} We found that it was exponential on sales and traffic. The more delivery companies that you signed up with, the more business that you are going to have, exponentially, because you’re going to grab all of those customers and cast a wider net. Some locations have, maybe, only Uber Eats available, in their geography or trade area; maybe some only have two. But certainly, in the metro areas, we encourage them to get with as many as possible. They were seeing the fruits of that. It was really working well and it was incremental business; an extra $1,500 a week, in sales. For Subway, that’s a good percentage. As we got into Covid-19, it became not just a, hey, this is a good thing to have; now it’s necessary. You’ve got to have that third-party delivery, for both sides. For the restaurant, how do we make it efficient?

{audio:0:36:20} I think the delivery companies were a little bit overwhelmed with all of the orders and a lot of new businesses signing up. A lot of the mom-and-pops were like, okay, I’ve got to figure this delivery piece out. I think it’s still not where it needs to be, from a profitability standpoint, for the delivery companies and the franchisees, as well as the efficiency.

{audio:0:36:50} Could you just share more about the profitability of the franchisees, in this delivery business?

{audio:0:37:01} There are fees with that. Obviously, the delivery company is doing you a service and you’ve got to pay them a fee for that.

{audio:0:37:13} Like what? 25% to 30%, isn’t it, for a delivery.

{audio:0:37:18} On average, it’s probably 15% to 30%. If you’re a big franchisor and you have a national contract, you’re probably under 20%. But if somebody owns three restaurants, on their own, they’re probably at 25% to 30%. The bigger guys can do that, because they have volume. That’s a big chunk out of the sale, right there. Then you’ve also got to pay royalties on that sale; you’ve got to pay your advertising fees on that sale. You’ve got your labor and your food costs, to make the meal and put it together. It’s a pretty tight margin on that but if it’s seen as incremental, and you’re taking away from somebody else’s business then, yes, at the end of the day, you need the delivery business.

{audio:0:38:18} I think, during Covid-19, it became a need; it’s not really incremental anymore, because all those people that would have been coming in are now doing the delivery business, so you’re cannibalizing that. It’s not as profitable. You still have to pay the fee to the delivery company.

{audio:0:38:41} What does that look like, then? If you could walk through an average order value, on a delivery for Subway, what is it? $20?

{audio:0:38:50} The average total delivery, what we call the total ticket, so the total bill, was around $15. That’s the actual food and drink that you purchased itself, plus the fees and then there’s a delivery fee that’s assessed to the customer; it’s usually around $15. Out of that $15, you’ve got to pay the delivery company their fee, you’ve got to pay for your food and your royalties.

{audio:0:39:19} So your 20% delivery fee, your 12% royalty fee?

{audio:0:39:26} It’s a smaller margin, but like you said, it’s incremental. The return on the capital employed is still pretty high?

{audio:0:39:34} Correct; especially if you start getting multiple orders. Getting that volume is really when it counts. It’s going to be very interesting, as we emerge out of Covid-19, as that delivery business normalizes, because you have so many customers that are getting delivery, that would normally go into the restaurant. Hopefully, those people will come back to the restaurant. It will be interesting to see how it normalizes. It’s really going to benefit the delivery companies because you had so many restaurant companies who, maybe, shied away from the third-party delivery companies. Now they need them and they see the benefit; they are more likely to continue to be signed up to those guys. I think the delivery companies are certainly going to benefit because, over a two-month period, they’ve probably doubled their business.

{audio:0:40:38} On the flip side of that is that it puts a strain on those businesses, because they have to have drivers, to pick up and deliver the food. That’s always a challenge because, for the delivery company and the franchisee, it all comes down to the person delivering the food. Most of the time, it’s a good experience but, as with anything, there are going to be some bumps in the road.

{audio:0:41:05} What did the franchisees think about the delivery companies, pre-Covid? Why were they skeptical?

{audio:0:41:16} Part of it was, in a lot of systems, you’ve got some older franchisees, who may not understand the technology. Why would I pay somebody to deliver food, when I can just get them when they come in the store? We had to tell them, again, certainly for the younger generation, they are paying for convenience. They are not going to come into Subway; they’re going to order online. They’re going to order from Subway, they’re going to order from McDonald’s or Burger King or their favorite local restaurant. But they’re not going to go anywhere, so you still need to capture that business.

{audio:0:41:56} One thing we told every franchisee is, go and download Uber Eats or DoorDash or Grubhub, on your phone or on your computer, and make an order. You see how the process works, see what the fees and see how it’s delivered and see how it’s picked up, at your restaurant, just so you can see how it actually works. It was really the unknown, as with any new technology and new business program. There is some fear of the unknown. You’ve got to pay fees, so that’s paying something else, on top of all the other costs that I have. What you do is, you get some franchisees who have had great success with it, take those testimonials, get some more franchisees signed up and it just snowballs from there. At Subway, we got about 11,000 locations signed up, in about a three-month period, which was unheard of, in the industry, pre-Covid. I think Subway is around 15,000 locations now, that are signed up for delivery, if not more, because of Covid.

{audio:0:43:22} Do you think the fee of around 20% is too high?

{audio:0:43:34} It is high, knowing the restaurant set of the business and all the costs that go into that, already, just to make a meal and have it delivered. I don’t know a lot about the cost structure of the delivery companies and what their margins are, on that. I do know that most of the delivery companies either haven’t turned a profit yet or have turned very little profit. I don’t see those fees lowering. I think they are, right now. Everybody is doing, no delivery fee or reduced rates and those type of things. But they’re going to go back to normal, at some point. I don’t foresee the delivery companies lowering those fees. Even though they’ve had increase in business, they’ve had increase in expenses, as well. They’ve got to pay their drivers and those type of things.

{audio:0:44:34} Do you see the franchisor leveraging some bargaining power. As you said, Subway have now got 15,000, 16,000; they have a bit of power in the relationship now?

{audio:0:44:42} Definitely. They will continue to negotiate with those delivery companies, to lower the fees. Even do promotions, as Subway did. We did a promotion with Uber Eats, where for these two weeks, it’s free delivery and free incentive. So the delivery company is paying for part of that fee, for the customer. That gets the customer involved in Uber Eats, seeing the Subway experience and then it goes back to the normal fee. As you get more locations, whether it’s Subway or McDonald’s or Burger King or Pizza Hut, you’re going to have more leverage with the delivery companies. Now, instead of 500 stores, they’ve got 2,000 stores or 5,000 stores signed up and it’s guaranteed volume for them, so they’re going to give them lower fees. It certainly gives them some negotiating power.

{audio:0:45:37} Again, I don’t know what the expense side is, for the delivery company and how much wiggle room they have, to lower their fees.

{audio:0:45:47} Like you said, they’re definitely not earning any accounting net profit or cash flow, in that sense. But as you said, the volume is crucial to that game and getting to critical mass. Companies like Subway and McDonald’s have bargaining power, in that relationship.

{audio:0:46:14} How do you see different approaches between Uber, DoorDash, Postmates, those that Subway use?

{audio:0:46:24} It’s interesting that, not only can you leverage the size of the Subway, with an Uber Eats, individually, but as well, you can leverage against the other companies. This is because, hey, Uber Eats is offering this. We’re doing a big promotion with Uber Eats, because they’re helping defer some of our costs, in paying for some of the costs of the promotion or the advertising. We can use some of that leverage, with some of the delivery companies.

{audio:0:47:01} Certainly, as we emerge out of this, it comes down to the nuts and bolts of the actual delivery itself, and that’s where I come back to effective and efficient. It still needs to be picked up on time, it still needs to be delivered on time and to have a good experience with your driver. That’s the functional piece that still has to improve, I believe. That onus is on the delivery companies. As a franchisor of a Subway or McDonald’s, they can put pressure on those companies to say, you’ve got to up your service. You’ve got to hire quality drivers or you’ve got to have shorter delivery times.

{audio:0:47:47} But also, it’s the promotional piece. Before Covid happened, for March Madness – that’s the NCAA college basketball tournament, in the US – we were going to have a third-party delivery promotion, for some of our providers. Of course, that didn’t happen, but that’s how you can leverage those partnerships. You can say, we’re really going to blow out this promotion and we want to be with you, delivery provider. So what can you give us? That doesn’t help the individual franchisee, because they are still paying those delivery fees, but it helps the brand, overall. It helps more business come, which directly helps the franchisee, with more sales. The bigger the brand gets, the more awareness that you have, on delivery, the more it’s going to help the franchisees, overall.

{audio:0:48:49} From the franchisor’s point of view, it’s interesting how there’s not really an incentive to go exclusive, with one of the delivery companies. You want to use all of them.

{audio:0:49:02} Right. So Subway took a different approach on that. McDonald’s, first of all, made a big agreement with Uber Eats and KFC actually bought a stake in one of them – it was DoorDash or Grubhub. But that’s limiting, because maybe you have lower fees and get some more out of that delivery company, but as I mentioned before, you’re losing business from the other companies.

{audio:0:49:33} Because the customer is sticky to the app?

{audio:0:49:36} Correct. Pre-Covid, I think it was 75% of customers were still with the original delivery company that they started with. I’m an Uber Eats guy; I stay with Uber Eats because that’s the first app I downloaded and that’s the one I know how to use, so I’m going to stick with them. If I’m a DoorDash or a Grubhub user, I’m never going to be able to use McDonald’s because they have an exclusive agreement with Uber Eats.

{audio:0:50:06} From the consumer’s point of view, they might keep Uber, if they downloaded Uber first, but it’s pretty easy to download a DoorDash to have a look at what’s on there. It seems as if, for the supply side of those marketplaces or the restaurants, all the restaurants are going to be in all of them, in the end, most probably?

Restaurant Franchisees & Online Food Delivery

Former Senior Director, Business Development at Subway

inpractise.com/articles/subway-franchisees-delivery

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Dave Barton

Former Senior Director, Business Development at Subway

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Restaurant Franchisees & Online Food Delivery(June 4, 2020)

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