Subway franchisees are pushing back against the company’s plan to stop paying them rebates on delivery orders, a move the chain’s association warns could lead operators to increase prices on orders from third-party services.
The North American Association of Subway Franchisees, an independent association representing the chain’s operators, called the plan “an unethical increase in royalties and ad fees” in a letter last week to CEO John Chidsey, a copy of which has been obtained by Restaurant Business.
The letter argues that, if the plan goes forward, the association “will have no choice but to recommend to all Subway franchisee-investors that [third-party delivery] prices be increased sufficiently to pass these additional costs onto the consumer.”
“No one wants sales to decline,” the letter says, “but Subway owners cannot afford any further degradation of profits.”
The dispute comes as delivery has become an increasingly important part of many restaurants’ sales as the pandemic has kept people at home. And it highlights a key concern for many franchise brands as these sales become a bigger portion of many chains’ business.
Delivery orders come with a steep price—commissions as high as 30% on the delivery order. For franchisees, who rely on the profits they make from their restaurants, that can be a significant problem, especially given that they already pay royalties and ad fund fees to the franchisor.
At Subway, for instance, those fees amount to 12.5% on sales and a typical delivery commission is about 20%, sources said. So franchisees have to make a profit off of just about two-thirds of their sales. In other words, a $20 order costs that operator costs a Subway franchisee $6.50 before they pay for labor, food, rent and utilities.
A representative for Subway disputed the 20% number in an email sent 30 hours after this story was first published. The company would only call its delivery contract “competitive” but would not provide the actual number.
A few franchisors, such as McDonald’s, provide rebates or other incentives to encourage operators to provide delivery, or they do not charge royalties on those commissions. But most systems do not, based on conversations with operators at a number of several different chains.
Many brands will allow their franchisees to raise prices on delivery orders, though not all will allow that—fearful that excessive prices for delivery orders will cut down on transactions.
Subway franchisees operate a business with low unit volumes—average unit volumes were $420,000 last year, according to Restaurant Business sister company Technomic. As sales have fallen in recent years, operators have been shutting their doors: Unit count is down 12% over the past five years as the system shed more than 3,000 restaurants.
Those concerns, and changes the company has made in recent years, have led to a number of disputes between the brand and its franchisees who operate all of its 24,000 restaurants. That included one earlier this year over a now-failed 2-for-$10 Footlong sub offer.
Subway began reimbursing franchisees for rebates paid on delivery commissions in 2018 based on an agreement between the company and its operators. At the time, the company was eager to jump on the delivery bandwagon, which was occupied by many of its competitors, including Jimmy John’s, Jersey Mike’s and Firehouse Subs. Subway, like many brands, has agreements with a number of delivery providers.
Franchisees argue that their franchise agreement does not allow the franchisor to charge royalties for fees paid to third-party delivery companies—saying that the fees amount to revenue that is generated by the delivery company and not the franchisee.
In the letter, the association warns Chidsey that it would recommend higher prices on delivery orders, which could lead to declines in transactions. “An unprofitable sale only benefits [the franchisor] and not the franchisee investors,” the letter warns.
Yet higher prices are an increasingly common practice in the restaurant business in recent months as delivery has taken a bigger chunk of restaurants’ sales—accentuating concerns about the profitability of such orders. Chains such as Chipotle Mexican Grill and Noodles have started experimenting with higher prices as a strategy to get customers to order through their own apps or websites.
“During the rollout of third-party delivery in 2018, we supported our franchisees by temporarily offsetting some of the program’s initial costs,” a Subway spokesperson said in a statement. “As with everything, we take a holistic approach to all factors that touch our franchisees’ businesses with the goal of increasing profitability, including negotiating highly competitive third-party delivery rates. We continue to invest in programs to help our franchisees grow their business.”
UPDATE: This story has been updated from its original version to add comments from Subway.
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