Subway Restaurant retailer house owners are seeing pink over onerous new rules they are saying may require them to maintain their doorways open even throughout a snowstorm, electrical outage or terrorist assault.
Subway shops that shut greater than every year with out permission barring “an act of God” — a strict authorized time period that tends to incorporate solely essentially the most extreme of pure disasters — threat being taken over by the Milford, Conn., firm headed by ex-Burger King CEO John Chidsey, sources mentioned.
The restaurant chain — which grew to reputation with its $5 footlongs — is allegedly making these and different new calls for through new 20-year contracts it began handing out final month.
Franchisees who select to not conform to signal their shops within the occasion of a non-qualifying emergency away can be required to fork over 10 p.c of their gross revenues to headquarters, sources mentioned.
Taco Bell, against this, prices its retailer house owners a 5.5 p.c royalty payment, whereas Burger King levies a 4.5 payment and McDonald’s calls for simply 4 p.c of franchisees’ revenues.
The push has some retailer house owners threatening to stroll away from the corporate co-founded by Fred DeLuca in 1965.
“I’ll start systemically shutting them down,” a Northeast franchisee informed The Post of the new calls for, the main points of which have been additionally outlined in a latest report back to members of a Subway franchisee affiliation by legislation agency Dady & Gardner, a duplicate of which was obtained by The Post.
Other phrases of the new contracts being handed out to new franchisees and present franchisees whose 20-year contracts are arising for renewals embrace:
- No unfavourable feedback about Subway in any discussion board
- No utilizing Subway’s identify on franchisee web sites or e-mail addresses with out permission
- Franchisees that go away the system prematurely should pay royalties for 3 years based mostly on the prior yr’s common
- Let Subway management hours of operation, and pricing
- Pay $155 a month for rights to Subway’s digital menu board
- Give any furnishings, signal, or materials that claims “Subway,” again to Subway, despite the fact that franchisees could have paid for it, on the finish of the connection.
Experts say essentially the most onerous change will possible be Subway’s demand that eating places keep open except permitted in any other case, with just one exception being made each 12 months.
While Subway plans to be lenient on shops which have suffered an “act of God,” specialists say that’s authorized jargon for under essentially the most extreme and sudden of pure disasters, like a flood or an earthquake.
It’s unlikely, they mentioned, to guard franchisees from snowstorms, electrical outages and even acts of terrorism.
“When I was a franchisee, my Subway was just outside the 9/11 frozen zone. Since terrorism would not be an act of God under NY law, if this new franchise agreement had been in effect, Subway could have taken my store,” mentioned Paul Steinberg, an legal professional who additionally used to personal a New York Subway restaurant.
Steinberg mentioned that when he was operating his Subway, he aimed to open day-after-day, even on holidays. But it was unimaginable.
“Often on holidays such as Thanksgiving and Christmas, nobody wanted to work — even at double or triple pay — and so I and my partner worked and skipped our family gatherings but even with that, we would have times when the snowfall was such that we would not open,” he mentioned.
“In a place like New York, you might be closed two days per year due to snowstorms,” he mentioned.
Subway acknowledged that it has modified the phrases of its franchisee contacts for the primary time in 20 years.
“As would be expected for a large brand over the years, we recently evaluated and made changes to our franchise agreement that we believe makes it more consistent with other franchise agreements in the industry,” the corporate mentioned in a press release.
It additionally acknowledged that franchisees who select to not signal the new contracts can be compelled to surrender a bigger reduce of their gross sales.
“The royalty rate would increase to 10 percent for franchisees who elect to remain on the old form of agreement when their renewal came up. It’s important to note that this is NOT a new royalty increase that we’ve implemented,” Subway mentioned.
The upheaval comes amid rumors that Chidsey, who took the helm in late 2019, has been slicing prices, together with moving operations to Florida from Milford, Conn., in an effort to gussy up the corporate up on the market.
Restaurant marketing consultant John Gordon, who additionally noticed the Dady & Gardner report, theorized that Subway is betting that the typical franchisee won’t shutter in face of the new contract phrases, however somewhat conform to fork over greater royalty charges.
“What I think they are doing is creating a franchise agreement so draconian that franchisees will have no choice but to pay the 10 percent royalty fees” somewhat than settle for the new phrases.
And that, he mentioned, may assist the retailer pay for the rising variety of leases it has piling up tied to shuttered shops.
Subway, which is liable for franchisee leases, has suffered extra retailer closings than openings since reaching a peak of 27,103 eating places within the US in 2015.
Over the final three years, a internet 14 p.c of US Subway eating places have closed, leading to a 26 p.c decline in royalty funds, based on public filings. Last yr, Subway reported 1,601 internet US retailer closings, bringing the overall variety of US areas to 22,201.
The Subway franchisee who informed The Post he’d somewhat shutter his shops than conform to the new phrases says eight of his shops have 20-year contracts arising for renewal within the subsequent 18 months.
He may promote these shops, however doesn’t see a purchaser accepting the onerous new contracts or jacked up royalty charges. And he can’t afford to function the eateries beneath these situations. As it’s, solely half of his eating places become profitable.
“I built this. As I start looking back, I wonder was it worth it?” he requested, reflecting on the lengthy hours he has put in and household time he’s missed. “You can’t get out because no one wants to buy these stores.”
Franchisees posting on a personal weblog moderated by the North American Association of Subway Franchisees, the membership group behind the Dady & Gardner report, expressed related emotions.
“The agreement kills any chance to sell our stores,” a Wisconsin franchisee mentioned.
“Subway is not in line with their competitors on this, they just want all the control they can get,” an Alabama franchisee mentioned. “Pure insanity!”
“I’m 100 percent over this,” a Pennsylvania franchisee mentioned. “This is not what I signed up for and I’m only four years into being a franchisee.”
Ironically, franchisees who conform to the new contracts could not be capable of put up their criticisms of Subway on NAASF’s membership discussion board.
Steinberg, who additionally reviewed the Dady & Gardner report, agreed that Subway seems to be orchestrating a cash seize.
“To me, this looks like a maximum milking of the cash cow with no regard for maintaining a working relationship with franchisees … or even any regard for the long-term health of the franchisor. This would be irrational to the point of verging on bizarre, but the pieces fit,” Steinberg mentioned.
He theorized that Subway, which noticed gross sales hit onerous through the pandemic, could also be involved about its personal gross sales prospects.
“Co-owner Dr. Peter Buck, I think he soured on the growth potential of the Subway brand long ago,” Steinberg mentioned. “He is a smart guy and may figure that if Subway cannot find a buyer it is fated to a long and irreversible decline. In that case, it may actually be smarter to collect more revenue upfront even if it accelerates the inevitable decline.”