An attorney for an association of Subway franchisees has told the company to stop threatening operators with termination for refusing to sign a contract with the chain’s new beverage supplier.
The dispute centers on Subway’s recent agreement to switch its beverage contract to Pepsi from Coke.
In a letter to the sandwich giant’s attorney, seen by Restaurant Business, attorney Robert Zarco said operators want to review the agreement between Pepsi and Subway before signing their portion of the agreement with the beverage company.
But he said the company is “harassing” operators who have yet to sign the deal. These operators face threats of termination if they do not sign.
“Subway’s conduct in this regard is reprehensible and borderline illegal as it seeks to force franchisees to execute an agreement which is incomplete in the absence of the beverage supply agreement being made available for review first,” Zarco said in his letter. Zarco represents the North American Association of Subway Franchisees, or NAASF.
Subway would not comment on the letter.
It’s not certain what the potential outcome of the dispute could be. Subway in March announced plans to switch from Coke to Pepsi.
Franchisees then sign a participation agreement that includes the equipment Pepsi is paying to install, the ability to serve Pepsi products and the prices Subway negotiated for the franchisees. A source told Restaurant Business that more than 95% of operators have signed the participation agreement.
Those who don’t sign the agreement face the potential that they could be without beverages come Jan. 1, once Pepsi is to begin providing beverages to the company’s 20,000 U.S. locations.
But some franchisees are concerned about the contract between Subway and Pepsi and the potential fees operators could face over the 10 years it is to be in place.
Zarco argues that the beverage supply agreement between Subway and Pepsi supersedes the participation agreement that franchisees sign with the beverage company. As such, he believes franchisees should be able to review the beverage supply contract before they sign any individual agreement.
Zarco in July recommended that operators not sign the beverage contract until he could review the agreement between Subway and Pepsi, according to a document seen by Restaurant Business.
In his letter to Subway’s attorney, Zarco said many NAASF members have notified Subway about their concerns with undisclosed terms in the agreement.
“Subway’s efforts to respond to NAASF members’ inquiries on this point have fallen woefully short of satisfying those members’ concerns and, as such, those members will continue to withhold their assent toward entering into the participation agreement until all of their concerns are sufficiently resolved,” Zarco wrote.
He added that “it certainly is not” in franchisees’ best interest to sign the agreement, Zarco wrote.
But, he added, Subway has been telling members they risk termination under the franchise agreement if they do not sign the deal. Subway’s own objectives “are causing it to unjustifiably compel franchisees into entering a completely lopsided agreement with Pepsi that will be disastrous for their franchised businesses for at least the next 10 years,” Zarco wrote.
The dispute continues a tense relationship between the sandwich giant and some of the operators who run the company’s 20,000 restaurants.
The beverage contract is considered a key change at the Miami-based Subway, which has made significant changes to the menu in recent years in a bid to generate sales.
But the dispute also comes as tension between the company and some of its operators has intensified over issues such as heavy promotion of steep discounts on the company’s mobile app.
Sales have slowed this year at the sandwich giant, as consumers have cut back on fast food amid concern about menu price inflation.
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