Buying a Subway Franchise? Why You May Want to Reconsider

SubwayIn 2010, Subway overtook McDonald’s to become the world’s largest fast-food franchise chain. Subway now has around 25,000 locations worldwide, about 10,000 more than its closest competitor McDonald’s. So being the number one fast food chain in the world, and the fact that they are well-branded and make good, healthy food, why wouldn’t you want to buy a Subway franchise?

Here’s the problem. Being number one can be a double-edged sword. Yes, they are the best-known sandwich shop in the world and most locations are busy during a typical day, but to become #1, they have bordered on cannibalizing themselves. Here is an example of what I mean.

In the town close to where I live, there is a population of roughly 25,000 people. In that town, they have four Subways. And in one particular area, there is a Subway inside of a Walmart, and another standalone Subway just down the street. This type of situation is typical – most medium-sized towns have multiple Subway locations, more than is needed to support the demand.

Market Competition Eating Away at Margins

Another problem when you are the world’s #1 fast food chain is everyone is gunning for you. Subway really came into their own in the late 1980s, and from that time until just a few years ago, they had expanded rapidly. However, for the first time in years, the number of Subway locations declined in 2016.

One of the major problems Subway is having is heavy competition from the likes of Jimmy John’s, Jersey Mike’s, Firehouse Subs, and Which Which. Because consumers have so many other choices out there, Subway has seen customer traffic plummet by 25% over the past five years. This, combined with rising minimum wages in many areas of the country has resulted in much slimmer profit margins.

How bad is the problem for Subway? Just the other day, the New York Post reported that Subway is in the midst of a franchisee revolt over their upcoming $5 foot-long promotion. For the past several years, Subway has run their $5 foot-long promotion for the first two months of the year. The company believes they need to keep this promotion going to compete with McDonald’s, which has its own 2-items for $5 menu, and even a 2-items for $3 menu.

Many franchisees, however, do not see it that way. More than 400 Subway franchisees signed a petition protesting the $5 foot-long deal that is scheduled to start in January. They contend that the national promotion has “decimated” franchisees and left many of them “unprofitable and even insolvent.”

So what is the solution to Subway’s woes? Many franchisees say they need to be much bolder with their menu. As a consumer and occasional Subway customer, I tend to agree with this. Subway is way too conservative with its menu offerings, and they haven’t done nearly enough to introduce newer and more exciting food choices in recent years. This, I believe, has earned them a reputation of being kind of bland. Yes, Subway is a “safe” choice for lunch or dinner, but they don’t really have much on the menu that makes people want to come in and give them a try.

Should You Buy a Subway Franchise?

So is it a good idea to get into a Subway franchise? Well, maybe. They are still a very well-established brand, and a lot of their locations are profitable. If you have the capital to invest, they might be worth the risk with the thinking that the company will “right the ship” in the near future and profits will rise again. In fact, if you believe this and you have the money, now might be a great time to grab a franchise or three at a bargain price. There are, however, many potentially better ways to direct your capital.

These days, there are numerous franchise opportunities not just for fast food, but in many other industries as well. And some have great profit potential with much lower barriers to entry. For example, you could start a senior care or cleaning franchise for far less capital than a food franchise, with the same (or better) profit potential.

Which franchise is right for you? The answer to this question is different for everybody. For some, a Subway franchise might be the right fight. Others might want to get into automotive, children’s services, or something else. The important thing is to find out what type of business you think you would like to be in and speak with someone who can help you find what you are looking for.

At National Franchise Business Solutions, we have access to over 600 franchise brands across a wide range of industries. Through a multi-step process, we provide free, unlimited consulting to match candidates with the business model that best suits your passion, skills, and budget. If you are looking for a franchise business to get into in the New Year, we invite you to contact us and let us help you find the business that fits you best.

 

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What are the Best and Worst Franchises to Invest In?

These days, there are hundreds of franchise business models to choose from. And as franchise consultants, we strongly advocate choosing the franchise opportunity  that best fits your passion, skills, and budget. Becoming a franchise owner will require a major investment of time, talent, and treasure. You will be putting in long hours (especially during the startup phase) getting everything set up and guiding your new business to profitability. If you are not passionate about the business you start, it will be a difficult road to prosperity.

All that said, it is also important to find a franchise business model with a strong track record of success. If the company you work with does not have a successful track record, you are in for an uphill climb. No matter how enthusiastic you are, you must ensure you are part of a winning brand. Otherwise, you will have a very hard time making the business work.

Our friends over at FitSmallBusiness.com have compiled a list of the 50 best and 50 worst franchises over the past 16 years (from 2000 to 2016). The data is pulled from the Small Business Administration (SBA). SBA loans are a major source of financing for franchise startups, so it is useful to examine the SBA loan default rates of various franchise models to help determine which franchisees are making it, and which ones are going under.

Here are the top 10 from each list:

Top 10 Best Franchises Based on SBA Loan Default Rates

  • Straight Shot Express Delivery: 0% Loan Default Rate
  • Farmer Boys: 4.35% Loan Default Rate
  • InstyPrints: 6.25% Loan Default Rate
  • Comfort Keepers: 6.25% Loan Default Rate
  • Zeppe’s Pizzeria: 8.7% Loan Default Rate
  • Buffalo Wild Wings: 8.89% Loan Default Rate
  • Jet’s Pizza: 9.09% Loan Default Rate
  • Visiting Angels: 9.52% Loan Default Rate
  • Complete Nutrition: 9.68% Loan Default Rate
  • Great American Cookies: 10.53% Loan Default Rate

Of the top 50 performing franchises on the SBA default list, more than 75% had paid their loans in full between 2000 and 2016, indicating strong potential for revenue generation and profitability.

Top 10 Worst Franchises Based on SBA Loan Default Rates

  • Wings-N-Things: 88.89% Loan Default Rate
  • Noble Roman Pizza: 88% Loan Default Rate
  • Image Sun Tanning: 83.33% Loan Default Rate
  • 24Seven Vending: 81.08% Loan Default Rate
  • La Paletera: 76.47% Loan Default Rate
  • Orangetheory Fitness: 76.47% Loan Default Rate
  • Juice Zone: 75% Loan Default Rate
  • Wireless Toyz: 72.50% Loan Default Rate
  • Play N Trade: 72% Loan Default Rate
  • Executive Tans: 72% Loan Default Rate

All franchises on the 50 worst list had loan default rates exceeding 50%, and 7 of those on the top 10 list had failure rates that exceeded 75%. You can view the entire list and accompanying article here.

Some thoughts regarding this data:

The Franchise Brand is More Important than the Industry

On both the best and the worst lists, there are lots of food franchises. Of course, food covers a wide range of brands and models, and some will obviously perform better than others. But one thing about food franchises sticks out to me — there is a wings franchise in the top 10 on both lists. Buffalo Wild Wings comes in 6th on the top 10 list, and Wings-N-Things is #1 on the worst list.

Both companies serve wings, so what makes the difference? The difference is the franchise brand itself; the marketing methods, brand reputation, and support offered to franchisees. These factors all need to be taken into account before you invest your hard-earned money partnering with a franchise brand.

Senior Care is a Major Growth Industry

For several years, I have been very high on the senior care industry. With 10,000 Americans turning 65 each day and the Baby Boomers entering full retirement, senior care franchises are going to be a hot business for at least the next few decades. The SBA default data helps confirm this view. You will notice that in the top 10 alone, there are two senior care franchises: Comfort Keepers (#4) and Visiting Angels (#8). Overall, there are three in the top 50, with Home Instead Senior Care coming in at #32. By contrast, not one senior care company shows up on the top 50 worst list.

If we drill even deeper, we will find that all three of these franchises provide non-medical care to seniors; meaning they provide meals, companionship, grocery shopping, light housekeeping, etc. There are other senior care franchise models that provide health care administered by licensed nurses. This model is a bit more difficult because the owner needs some knowledge of medical care, and the in-home caregivers must be nursing professionals.

So from this data, we can conclude that in-home senior care is a strong business model for those who have a passion to serve the elderly population in their community and want to make a good living doing it. That said, you still need to be careful to choose a brand with a strong track record of success.

Cleaning Franchises are a Good Option

Though there were none in the top 10, Merry Maids (#17) and Molly Maids (#25) showed up in the top 50 best franchises. And like senior care, no cleaning franchise ended up in the 50 worst list. Cleaning has another thing in common with senior care; low overhead. Both franchises can be operated out of a small office (or even a virtual office) as the services are performed at the location of the client.

Pizza is Still a Favorite, but be Careful

Two pizza franchises are in the top 10 best franchises; Zeppe’s at #5 and Jet’s Pizza at #7. Some better known names such as Little Caesar’s and Papa Murphy’s also make the top 50 list. On the flip side, there are some pizza franchises on the bottom 50 list as well. Most notably, Noble Roman Pizza is rated the second worst franchise with a default rate of 88%. What is clear from this data is pizza is still a favorite food among American consumers. However, the startup costs are high (in the low to mid six figures at least), and competition is heavy. For this reason, choosing the right brand and location is extremely important.

Think Twice about Tanning and Golf

Two industries that had plenty of representation in the bottom 50 were tanning and golf. Two tanning franchises showed up in the top 10 worst (Image Sun Tanning at #3 and Executive Tans at #10). There were also three golf franchises in the bottom 50 (now defunct Pro Golf of America #19, Golf Etc. at #36, and Golf U.S.A. at #40). No golf companies show up in the 50 best, and only one tanning franchise makes the list (Tanworld at #22).

Tanning and golf are two industries that are often mentioned when people talk about “following their passions.” The challenge with these industries, however, is their seasonal natures — at least in many regions of the country. For example, golf season in the northern U.S. lasts only 4-6 months. Tanning, on the other hand, is hardly in demand at all in the southern U.S., and only popular in the north during the winter months. These factors must be looked at carefully before getting into this industry.

What’s Your Next Move?

We hope you found our thoughts on the 50 best and 50 worst franchises helpful. While it is always important to choose a franchise model in an industry that best suits your passion, skills and budget, this data shows that you must also pick a franchise that is in a viable industry and one that has demonstrated the ability to succeed in that industry.

At National Franchise Business Solutions, we work with over 600 of the top franchise brands across a wide range of industries. Through a proven multi-step process, we help match aspiring entrepreneurs to the right franchise brand. Our services are unlimited and completely free, and there are never any additional fees if you end up purchasing a franchise through our services. For more information, please contact us by filling out the form at the bottom of this page.

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How Minimum Wage Increases Affect Some Franchises

It started in Seattle, overtook California, and it seems to be imminently-nationwide phenomenon: the $15 minimum wage. And while economic data out of Sea-Tac airport and the Seattle metro area is showing that it’s probably not the massive economic catastrophe that some predicted, there are definitely some sectors that are seeing challenges in the near future as wage floors rise. Many of those sectors are prime territory for franchises — the most obvious of all, fast food, or otherwise known as quick-service restaurants (QSRs).

McJobs and McWages

The QSR sector is one of the most competitive in the food industries, with slim margins. The average McDonalds runs about a 6% profit margin; Papa Johns is 9%…on the other hand, the average Blimpies just barely lands in the black at 1%, and the average Quizno’s runs a 0% profit margin. Yep, signing up to Quizno’s is basically flipping a coin where one side means insolvency.

Keeping in mind that McDonalds’ typical labor cost is 20% of its gross income, and the vast majority of those employees work for the minimum wage, if the wage floor rises to any meaningful degree, the profitability of running a McDonalds franchise is going to start to compare unfavorably to Quizno’s. The same logic applies to any and every franchise that relies on a plethora of quick-to-train, high-turnover minimum-wage employees in their workforce.

Riding the Minimum Wage Wave

Some will come back with the “new economics” logic that says “won’t the people making all that new minimum wage money be able to spend a little more to buy your burgers, then?” But that’s not how it works — because McDonalds, Subway, and similar QSRs have spent millions of marketing dollars over the last decades establishing themselves as the cheap, fast option. To try to sell their audience on the kind of across-the-board price increase they would need to make to stay pleasantly profitable would be a tough gig.

That doesn’t mean the “new economics” reasoning is flawed, however — it’s just not likely to benefit McDonalds and their direct competition. It totally will benefit franchises that are offering products and services geared toward college students, young families, and in fact anyone in the lower half or so of wage earners, as a raise in the wage floor will see a ‘ripple effect’ nudging wages upward for a good number of people.

Franchises That Benefit From a Higher Minimum Wage

The easiest way to benefit from that ripple is to sell to the people who are enjoying their increased wage and/or avoid having minimum-wage employees. Home-based, single-employee franchises such as home inspection services, cleaning, and senior care services that hire over-minimum-wage employees are great franchise opportunities in the new economy; find one that sells to the newly-$15/hour crowd, and you can reap the benefits while skipping out on the pain. If you’re wondering where that kind of deal can be found, talk to a franchise broker — they’ll have that data and much more handy, and they can provide free unlimited consulting services to help match you to a franchise opportunity that works.

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Finding the Best Franchise Opportunities for 2015

It’s a tough thing to sort out all these “top franchises” lists. They all use different metrics to determine which is the “best” franchise on the market. Some are geared toward the franchiser’s total profit, others toward the franchises with the minimum investment required to join, and still others toward more obscure metrics like ‘delta-S’ — the change-per-franchise in the brand’s total market share. But for your purposes, there needs to be only three statistics examined: franchisee satisfaction, franchisee success, and the cost-of-entry.

Fortunately, industry research firm Franchisee Business Review has already done the work and given us a list of the ‘best’ franchise opportunities. We’re going to break down three of those opportunities for you to show you what we consider ‘ideal’ opportunities in some very different industries.

National Property Inspections, Inc.

  • Cash Required to Start: $44,000 (Franchise Fee: $34,900)
  • Franchisee Satisfaction: 4.1/5
  • Unique Pros: No other employees required; work solo/from home
  • Unique Cons: Getting wrapped up in Tyvek suits and crawling through confined spaces

A franchisee with National Property Inspections is expected to come in with a modest supply of startup cash (see above), the desire to learn and work hard…and that’s about it. NPI will train you in both home and commercial building inspection and provide you with a complete step-by-step for running your business successfully. So long as you’re willing to get down and dirty (literally!), and you can follow a plan to the T, NPI is a great low-cost opportunity for people who want to fly solo.

Firehouse Subs

  • Cash Required to Start: $128,760 (Franchise Fee: $20,000)
  • Franchisee Satisfaction: 3.8/5
  • Unique Pros: Profound vetting system means if they take you on, you’re probably going to succeed.
  • Unique Cons: Your main competitor (Subway) is far-and-away the most dominant force in the industry and you have to be something special to steal their customers away

Firehouse Subs was started by a pair of firefighters who understood what their fellow public-service personnel — love (hint: meat.) They also have an intense focus on making every store successful (somewhat the opposite of Subway’s “open everywhere, see who fails” model), which on the one hand means it’s quite possible to get your application for a franchise declined — but if they do accept you, you can be assured they’ll do everything in their power to help you make it.

Payroll Vault

  • Cash Required to Start: $69,000 (Franchise Fee: $28,000)
  • Net Worth Requirement: $250,000
  • Franchisee Satisfaction: 4.2/5
  • Unique Pros: A thoroughly white-collar, B2B affair — franchising from a desktop
  • Unique Cons: Lots of legal details; most be attentive to minutia

If you’re interested in a franchise but you don’t want to deal with scheduling shifts, manual labor, or corporate uniforms — if your skillset is in financial advising or business capital — Payroll Vault might be a great fit. With a relatively modest startup fee and great training opportunities that include shadowing existing franchisees on the job, you can start a payroll outsourcing firm and start building your LinkedIn network and brushing up to your local Chamber of Commerce like any other suit-and-tie corporate professional.

These are just a few examples of the best franchise opportunities for 2015. There are hundreds of other brands that have proven successful business models with relatively low barriers to entry. A franchise broker can help you perform a more efficient search by sifting through the hundreds of possibilities and narrowing your search down to the handful of franchises that best suit your passion, tastes and budget.

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