#160 The Subway System in Austria
After a golden age of expansion in the 1980s, 1990s, and early 2000s, the last decade hasn’t exactly been the best for sandwich chain Subway. A few years ago, Subway had approximately 42,000 restaurants in 111 countries globally, and proudly proclaimed itself the world’s largest fast food chain. In recent years, Subway experienced challenges in many countries and shrunk both in numbers of restaurants and countries. In the United States, the company suffered from serious fallout over its spokesperson Jared Fogle’s conviction as a sex offender, its sales declined, and it had to shut down hundreds of stores year after year. In 2018, the number of store closures even exceeded 1,000. In overseas markets, the picture was a bit more mixed. Subway downsized and withdrew from some, but expanded in other markets. While only a drop in the global bucket for Subway, Germany, for instance, proved to be more favorable territory. Between 2015 and 2019, Subway expanded from 610 to more than 700 stores, and sales increased by about 10 percent to just under EUR 300 million. And what about Subway in neighboring Austria? With less than ten restaurants hardly a major market, Subway seems to be trying hard to be of even less significance. In a market where rival McDonald charges a total of 5 percent in combined franchise and marketing fees, Subway takes more than double from its franchisees – a whopping 12.5 percent. Plus, Subway does not guarantee territorial exclusivity, which sometimes puts franchisees into tough competition with each other – franchisees lose while Subway wins. When one of its Austrian franchisees left Subway in 2019 because of these unfavorable conditions and started an independent sandwich shop, Subway tried to shut its former franchisee’s new operation down via the courts. The action immediately drew the attention of the media, and Subways image – which wasn’t favorable to begin with – suffered even more. At the time of this article, the outcome of the lawsuit was still uncertain, but in Germany, a court had already ruled against Subway in a similar case, and similar outcome was to be expected in Austria.
April 2, 2020 @ 5:24 am
For many years, Subway has been criticized by its franchisees, not only for its outrageously high fees, but also for the accusations of excessively concentrating franchises outrageously close to each other. Massive numbers of lawsuits were filed, because of this, and Subway’s reputation is rumored to have been severely affected.
Then comes the lawsuit alleging that the “foot long” sandwich is not really a full 12 inches (as highlighted by a young Subway customer from Australia). The company was accused of quickly settling (in 2015), to simply make the lawsuit go away, but the agreement was tossed out in 2017 by the 7th US circuit court of appeals, which called the settlement “worthless, and stated, “A class action that seeks only worthless benefits for the class and yields only fees for class counsel is no better than a racket and should be dismissed out of hand,” Circuit Judge Diane Sykes wrote for a three-judge panel. “That’s an apt description of this case.”
More bruises (and ongoing battles) for the chain. “Do you want your (less than foot long) bread toasted? Or should we simply continue to ‘grill’ the customers and franchisees?”
April 28, 2020 @ 9:16 pm
Are questionable contract terms the right way to gain the trust of customers and franchise partners?
Once you study the contract details of Subway franchisees, you get the impression that some details in the contract are different from others and also questionable. Aa few examples: As stated above, Subway takes more than double from its franchisees than Mc Donald´s for instance which is 12,5 percent.
Also, there is no territorial protection for franchise partners. This means that whoever opens up a Subway restaurant cannot be sure that Subway doesn´t open up a second branch just around the corner. This would be a major disadvantage for the franchisee, not for Subway as it doesn´t really make a difference if sales are divided into two branches.
It seems that the main method to make franchisees stay is to drag them to court and threaten them with unaffordable fines.
Franchisees are also not allowed, according to the contract, to open up a food business that could be a competitor for Subway even after termination of the contract. Their method of pushing this through? Court.
Franchisees complain that Subway doesn´t care about its locations and that they don´t receive support from the parent company. Their accusation: Subway just cares about the commission.
Seems like the relationship between Subway and their franchisees is broken and maybe this is something that Subway should work on in first place in order to gain back customers trust.
April 29, 2020 @ 7:03 am
Dear Gerhard,
thanks for the very interesting article about subway and its franchise system.
Generally, I’m not so surprised about their non-success in Austria.
The Austrian market isn’t well known for the success of international fast food chains. TGI Friday? Had a restaurant in Vienna but closed it after a few years. KFC? A handful restaurants, but a non-factor in Austria. Dunkin’ Donuts? Less than half a year ago, the next DD store in Vienna is facing insolvency. With the exception of Mc Donalds (and with deductions Burger King) Austria is looking like a pretty difficult new market for expanding fast food chains.
In my mind, there are different reasons for this. We do have a tradition an mentality for Guest houses (not to be compared with pure restaurants) and fine bakeries. As well as the typical Austrian likes to stay for an hour at his favorite coffee shop a read his daily newspaper. A not just to grab a coffee-to-go and a bagel.
Austria is Austria. Always a bit different then its big neighbor, always very special.
June 21, 2020 @ 7:30 pm
In my opinion, there was not really a need for another fast food chain in Austria. A further aspect is that the product sandwich is bought among the Austrian population also gladly in supermarkets, which are at each corner and with which one feels safe on the quality of the ingredients. Due to the fact that Austria is one of the countries with a higher level of uncertainty avoidance, it is not surprising that local restaurants or fast food chains which have been around for a long time are preferred. To me it feels as if it is not necessary for an Austrian to have a sandwich in a restaurant that does not offer alternative meals, especially in more rural areas where many people like to have a “Jause” at home. So, I think that the franchise model was not the only problem for Subway in Austria.
June 29, 2020 @ 6:39 pm
In my opinion, it is not surprising that Subway does not work so well in Austria. Austrians are emphasis on regionality, which Subway does not want to support. But not only that, fast food chains are not the most popular restaurants in Austria. Besides MC Donald’s, hardly anyone has a chance to survive. KFC and other well-known fast food chains are not so popular in Austria. If Subway would adapt its products to the Austrian market and, for example, buy the ingredients for the sandwiches from Austria and communicate this, so they most likely would have a different status in Austria.
June 29, 2020 @ 6:40 pm
It doesn’t surprise me, that Subway and its franchise system has a bad reputation. In my hometown (which is in Austria), we also have a shop, which is unfortunately directly next to McDonald’s. The McDonald’s store is always very crowded, and many people line up at the checkout to get one of the highly coveted burgers. In contrast, you hardly ever see one single customer at the Subway store. However, if you visit Subway in another country, for example in the UK, you will not believe that it’s the same retail chain. Here, one always meets a lot of people, comparatively as many as in a typical McDonald’s store in Austria.
Anyway, it seems that McDonald’s is the only international fast-food chain, that has succeeded in Austria. Also, other global players like KFC or Pizza Hut entered the Austrian market and had little success. For instance, Pizza Hut had five stores in Vienna and had planned to open 50 stores throughout Austria. Due to the lack of success, they have already left the market 10 years ago.
June 29, 2020 @ 10:13 pm
I think this is a good example of a company that has rested on its past success and realized too late what a threat the competition poses. In addition, they combined this market blindness with greed, which was particularly noticeable among franchisees.
Although the concept could certainly have been successful in Austria, the way it was implemented was simply inadequate. Above all, the unthought-out communication, which is more expensive for the franchisees than the competition, shows the lack of understanding of regional peculiarities and trends.
In comparison, McDonalds supports its franchisees, knowing how much the success of the entire company depends on the individual branches.
In my opinion, a different management with more vision could have made the company very successful in Austria.
June 30, 2020 @ 10:57 am
Dear Gerhard,
Thanks for reminding me of Subway. Immediately come a lot of emotions to my mind. I like it a lot actually, the sandwiches taste great, no doubt. There are different flavors. Different bread, filling, topping and sauces. It is special that you can build your own every time, although I would have liked the option to just get a pre configured one. It is a hassle sometimes to choose the same ingredients every time over and over.
And, they only sell sandwiches, there are no sides. You get a drink and a cookie but that’s it. It is too much / too big to eat it on the go. Perhaps in big cities it is more acceptable. And a sandwich to little to eat it in store. There are no fries.
Also you always think, you could have eaten two of them. And the prize is not cheap either. At McDonalds you can get more bang for the buck. A footlong costs 7 Euros.
And the stores are always shabby in my eyes. That’s also a problem.
All in all, nice food. But the circumstances make it unenjoyable.
BR Max
July 2, 2020 @ 8:34 am
I think there are a few reasons why Subway struggles in Austria. It seems like Subway took what worked in the USA and just expected it to work when they copy and past it in a different country, without making many changes. I personally think that the stores usually look a little outdated and don’t look very inviting , compared to a McCafé for example.
During my time in the USA I did enjoy Subway a lot and we usually used the drive through , which isn’t available in Austria (I think the modern drive through system works very well for Subway). Additionally it never looks good for a company that seems to only care about the money and not about their franchisees that do all the work! The media today, with its „canceled culture“ is something that companies, like Subway, should be very aware and afraid of when starting lawsuits against people just trying to make a living.
November 10, 2020 @ 4:38 am
Subway found a way to become successful, not just in the United States, but globally. However, with Jared Fogle’s conviction, Subway lost its good reputation. When a company loses its reputation, it usually negatively affects the company. While Subway has been able to stay successful in Germany, they probably thought that they could be just as successful in Austria. However, this has not happened. While both McDonalds and Subway are fast food chains, they serve different types of food. Austrians may have a different taste in foods. Subway has yet to find a way to adapt to the Austrian culture. In addition, I believe that by trying to shut down a former franchisees’ independent sandwich shop gives Subway a bad reputation as well. Subway does not have exclusive rights to making sandwiches, therefore, others have the ability to open their own shop. Especially because Germany went against Subway in a similar case, Subway should know that they do not have much ground to win the case in Austria. Subway should find a way to remove themselves from Austria and put their efforts into becoming successful in another country.
January 12, 2021 @ 3:54 pm
It is very interesting to read about Subways way into the Austrian market. I work very close to the Subway location which was the one to be sued in May 2020. Even though it might not be the very best spot for selling sandwiches, if Subway had a good reputation in Vienna people would go the extra mile to get themselves a sandwich for lunch. According to the news, the franchisee, Mr Kozak, unsuccessfully tried to reach out to the Austrian country manager of Subway after he had to declare insolvency. There was no way to find a solution with Subway and help Mr Kozak in his situation. Now, after breaking up with Subway, Mr Kozak opened a new sandwich store on his own and got sued by Subway for breaching competition clause. Local news were stating that Subways went even to threaten other franchisees with legal actions if they were to do the same as Mr Kozak. Also, Subway made sure that the sandwiches of Mr Kozak are not delivered by Mjam.at, the biggest food delivery service in Austria – because of exclusionary clauses. For sure the sandwich business is very competitive and hard. However, 12.5 % franchise fee and 4.5 % marketing fee is a lot to carry if the brand is not worth it. Subway seems to have several problems to enter the market in Austria. The brand is not linked with the image of high quality, delicious sandwiches. Instead the logo looks for me old fashioned and shabby. All in all, Subways actions are not helping its brand and it looks like they are trying to grasp any straw to avoid extinction.
I read in the news that another Viennese Subwas franchisee (Kaiserstraße, 7. District) decided to quit the contract with Subway and now works as a franchisee for the new business of Mr Kozak (https://www.derstandard.at/story/2000117667634/wiener-gastronom-bringt-netz-des-us-fastfoodriesen-subway-zum-broeckeln). I hope they can make a better business case out of it. Still, the competition stays strong. I heard that the Californian burger chain In-n-Out Burger will come to Vienna soon. We will see how they manage the market entry.
January 13, 2021 @ 12:10 am
In N Out in Vienna? That would be revolutionary (and very well worth the visit….)!
January 16, 2021 @ 4:34 pm
In my opinion, Subway causes its difficulties on the one hand with its product range and on the other hand due to its contracts with Franchisees. First of all, although the sandwiches are advertised as healthy but they are in no way healthy at all. A study by the University of California confirms this. Subway also does not reveal the calories of its products. In terms of Austria, I would argue that the typical Austrian wants a warm sandwich with a really crispy bun and not the soft stuff from the land of junk food, the USA.
The second problem is clearly the hard contracts with over 600 pages to the disadvantage of the franchisees. Legal disputes, according to the contract, have to go through arbitration in New York. Such one-sided contracts are dangerous and unacceptable! Subway earns its money not with the sale of food but with the sale of Frenchise stores. Therefore, it doesn’t matter how many stores close. The only relevant thing is how many new stores open. In many countries, it is now no longer possible to obtain a loan from a bank to open a Subway store.
February 5, 2021 @ 8:28 pm
From my experience the German food market cannot be compared to the Austrian. While the German consumer is highly price-sensitive and not that much concerned about quality, the Austrians are much more quality-sensible and also willing to pay for better quality. In addition, recent studies show that for 32% of Austrian consumers, the origin of food plays a decisive role in their purchasing decision. Since Subway is clearly not associated with regional ingredients, this is definitely a disadvantage.
From a systematic international market entry approach three steps are questionable. Firstly, the product readiness is hardly existing. Because, in Austria a sandwich is perceived more as a snack and not as a full meal. Secondly, sandwiches can be purchased nearly everywhere in Austria, in supermarket as well as gas stations. In absence of a clear unique selling proposition Austrians have simply no reason to visit a Subway store. This fact should have been taken into account when selecting the target market. And finally, entering the market with such high franchise fees, combined with high overhead costs based on Austrian food law leave the franchisee little chance of making profits. Therefore, the market entry mode was doomed to failure from the outset.