Low startup costs help lure entrepreneurs to Subway
By Naomi Snyder
The Tennessean
Mark Peterson was a police officer. Now he owns eight Nashville-area Subway franchises. The transition wasn't easy.
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"I had absolutely no money at all, and I had no business experience," said Peterson, 38. "I went from a uniform that demanded respect to a purple shirt with mustard stains on it."
Subway manager Julia Duncan builds a turkey sandwich at the shop on Cooke Street. The sandwich-shop chain is growing fast: In 2002, it surpassed McDonald's for the number of restaurants in the United States.
Yet the sandwich-shop chain's relatively small startup costs, few entry requirements and aggressive growth strategy have meant more people like Peterson are buying into Subway.
In 2002, Subway surpassed McDonald's for the number of restaurants in the United States as it moved into convenience stores, malls, even workplaces such as the Saturn plant in Spring Hill, Tenn. The chain has more than 20,000 stores worldwide, with about 30 percent growth since 1999. McDonald's has about 13,000 U.S. locations; Subway has a few hundred more than McDonald's.
"We try to beat McDonald's," said Larry Clayton, field consultant for Nashville-based Subway Development of Tennessee.
Subway representatives say the health benefits of eating Subway sandwiches are one reason for its growth. Sandwich chains in general are making inroads, including Quiznos, which doubled in size in one year to 2,600 locations in 2003.
Compared to McDonald's, it doesn't cost much to start a Subway — a franchise fee of $12,500, with a low-end estimate for opening a new Subway of $86,300.
McDonald's requires an initial fee of $45,000; the low-end estimate for a new store is $461,000.
Most companies, McDonald's included, demand their franchisees have some business experience and net worth — some as much as hundreds of thousands of dollars — which often precludes anyone who doesn't already own a business.
Subway requires neither business experience nor any minimum net worth.
"If you ... want to open at a good location, and you can pass the English test, and you have the money, you're good," Clayton said.
On the other hand, the royalties, or the percent of sales franchisees must pay back to the company, are higher for Subway than many other chains, at 8 percent. With advertising fees, Subway's cut rises to 12.5 percent of sales. McDonald's requires 4 percent of sales.
With so many Subways popping up, franchisees are careful to protect their turf. The development arm won't let one open across the street from another, Peterson said.
On the other hand, the more Subways the better, franchisees said.
"It's better if we have more," said Suman Patel, who owns eight Subways in the Nashville area. "It's a name recognition thing: Subway, Subway, Subway."
The going hasn't been all easy for Subway franchisees. Mark Peterson and his wife, Debbie, a former cashier in a brokerage firm, almost went bankrupt several times. Employees didn't show up for work. Others stole. Peterson has had to bail one employee out of jail and give another a loan.
As a police officer, "I was used to telling someone to do something and they did it," he said. "When I started with the restaurants, I could tell someone to do the dishes, and they just wouldn't do it."
Debbie Peterson said that when they started out 10 years ago, they were often so exhausted that they would stay overnight at the hotel behind one of the restaurants because they didn't have the strength to go home.
"It sounds easy but honestly, when we had our first three stores, it was the hardest times in our lives," she said.
They have turned over many of the day-to-day operations to managers, and Mark has gone to work as a pilot for Delta. They now have about a 25 percent profit margin, Debbie estimated. It's a far cry from the early years.
"We didn't pay ourselves anything," she said. "We just basically lived, ate and breathed Subway."
