Subway forces franchises to sell discounted sandwiches as FTC seeks $10 billion sale of fast food giant: Sources – New York Post

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Published December 4, 2023, 6:12 am ET

Subway will force its franchisees to sell discounted sandwiches even as many struggle to survive — and the new mandate could provide additional ammunition to federal regulators already trying to scuttle the fast-food chain’s nearly $10 billion sale to set, The Post has learned.

The family-owned company, which agreed to a sale in August to private equity firm Roark Capital, backer of Arby’s, Dunkin’ Brands and Jimmy John’s, will require all of its roughly 19,000 satellite locations to offer digital coupons and promotions starting Dec. 28 redeem. sources with direct knowledge of the situation said.

In the past, promotions like Subway’s famous 5-foot deals were optional — and many franchisees refused to participate.

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

“It is puzzling, to say the least, that Subway would decide to do this now,” 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 vouchers that lower prices. Getty Images

Vladeck said that if he were to review this deal, this new decree would certainly make him frown, if not more.

“There may be an economic justification, but it’s hard to justify a requirement,” said Vladeck, who led the consumer protection bureau from 2009 to 2012.

Seth Bloom, a former general counsel for the Senate antitrust subcommittee, also objected to Subway’s decree.

“If consumers use these vouchers on a large scale, it could impact the case if franchisees are forced to accept them,” Bloom told The Post.

Subway wants to have more customers in its restaurants as traffic declines in the third quarter and October. Getty Images

Subway declined to comment on the change in tactics.

Chidsey had sought to address antitrust concerns shortly after accepting Roark’s offer of $9 billion, plus an additional $600 million if Subway met certain financial targets in two to three years.

“The great thing about franchising is that franchisees set their own prices and consumers visit all types of quick-service restaurant brands,” Chidsey said in a Sept. 7 interview with CNBC.

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

Last month, the FTC opened a broad investigation into the proposed merger, suggesting that Subway could be a direct competitor to some of Roark’s chains, particularly Arby’s.

The FTC fears that Arby’s could be a direct competitor to Subway, which could complicate the proposed merger. AFP via Getty Images

Sen. Elizabeth Warren (D-Mass.) has also spoken out against 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 November 26.

Many franchisees are afraid of the impending mandate.

They say they’re already struggling to make ends meet because margins are so thin.

“It costs me $7 to make a turkey sandwich when you factor in labor and rental costs,” a multi-store Subway operator told the Post. “So I make a profit of $2 to $3.”

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

It generates 17% of its revenue from digital coupons, Chidsey said at a Yahoo! financial conference last month.

Many franchisees experienced declining customer traffic and sales in the most recent fiscal quarter, according to company financial data a southeastern and a northeastern region shared with The Post.

FTC Chairwoman Lina Khan Suffers from Fast Food Fusion Indigestion. Portal

Internal data shows the two regions, which each have about 1,000 restaurants, saw traffic declines of up to 5% in the third quarter.

Sales in both regions rose 2% in the quarter compared to a year ago – after growing double-digit from the middle of last year through the second quarter.

A Subway spokeswoman had a different opinion on the current figures.

“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 U.S. restaurants – approximately 17,000 – in double digits with positive traffic compared to the same period in 2022 rose.” said the representative.

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