September 1st, 2006

For Subway, Every Nook and Cranny on the Planet Is Possible Site for Franchise

By Janet Adamy
Wall Street Journal

After developing more than 100 Subway sandwich shops in the Cleveland area, Ghazi Faddoul was starting to run out of spots for new restaurants.

Then, in May, Mr. Faddoul opened a Subway inside the Jewish Community Center of Cleveland, a recreational and cultural facility that offers yoga classes and preschool.

To locate there, Mr. Faddoul had to make the menu kosher, which meant removing ham and bacon, replacing the cheese with a soy-based substitute and keeping an Orthodox Jew on hand at all times to supervise food preparation. In observance of the Jewish Sabbath, Mr. Faddoul closes the restaurant early on Friday afternoon and all day Saturday.

Mr. Faddoul, a Lebanese Christian, is now part owner of what Subway officials say is the first and only kosher Subway anywhere. “I look at this location in particular as a new market for Subway,” says Mr. Faddoul. “Those are customers that never went to a Subway.”

To maintain its rapid growth as strip malls and spots alongside the freeway fill up with fast-food outlets, Subway Restaurants is increasingly moving into locations where rivals have feared—or neglected—to tread. In the past several years, Subway has opened inside a church in upstate New York, a handful of coin-operated laundries in California, a Goodwill Industries store in South Carolina, a car dealership in Germany and an appliance store in Venezuela. It has more than 110 restaurants inside hospitals.

Setting up shop in any nook or cranny it can find has helped Subway surpass McDonald’s Corp. as the restaurant chain with the most U.S. locations and has made Subway one of the few restaurants that’s building lots of new spots (Subway has more than 20,000 U.S. outlets while McDonald’s has about 13,700). Nontraditional locations—defined by Subway as any place you wouldn’t normally expect to see a restaurant—account for 22% of the chain’s outlets, up from 13% a decade ago, the company says.

For decades, quick-service restaurant chains had little trouble adding hundreds of new locations each year as they expanded alongside the nation’s empty highways and into smaller towns. But several years ago, McDonald’s, Burger King Corp. and other chains began paring their growth in the U.S. as existing restaurants struggled and new sites became more difficult to find. Between 1981 and 1999, the number of households per restaurant in the U.S. fell from 259 to 196, according to Technomic Inc., which tracks data on the restaurant industry. That number has crept up slightly since the beginning of the decade, when the restaurant pullback started.

On a recent drive through Louisville, Ky., where Yum Brands Inc. has its headquarters, Yum Chief Development Officer Chuck Rawley pointed at all the fast-food restaurants sprinkled between clothing stores, movie theaters and car dealers on a busy road. “Look at this street,” he said. “Where are you going to build another store?” At some locations, Yum puts two of its brands, like Long John Silver’s and Taco Bell, under the same roof, in part to use space more efficiently.

Other restaurants have tried nontraditional locations and pulled back. Yum stopped serving Taco Bell food in school cafeterias several years ago so it could focus on its conventional restaurants, a Yum spokeswoman says. McDonald’s has some locations in hospitals and Wal-Marts, but the majority of its restaurants are still free-standing locations, a McDonald’s spokesman says.

Subway, with a menu anchored by cold cuts, has an easier time opening in unorthodox spots because it has a simpler kitchen than traditional fast-food restaurants that require frying and grilling equipment. And Subway has edged out hamburger chains and doughnut shops at hospitals and religious facilities partly because it promotes its sandwiches as a fresher, healthier alternative to traditional fast-food. The chain is owned by closely held Doctor’s Associates Inc. of Milford, Conn.

All Subway restaurants are franchised. The chain estimates that it costs franchisees between $75,000 and $185,000 in initial up-front investment to open a non-traditional location. By comparison, McDonald’s says it requires potential franchisees to have a minimum of $200,000 in “non-borrowed personal resources” to be considered for a franchise, according to the McDonald’s Web site.

Subway first started broadening its location base in the early 1990s when it began opening restaurants inside convenience stores. As the market for new space grew tighter, Subway created a division just to scout nontraditional locations and help prevent cannibalizing restaurants in fully built-out markets.

In 2004, Subway launched a formal initiative to open more restaurants inside Wal-Mart Stores Inc. locations and now has more than 1,200 there. The chain recently opened a handful of Subways inside Home Depot Inc. hardware stores.

Some of Subway’s broadening efforts haven’t worked. It stopped serving sandwiches on Continental Airlines flights a few years ago because it was too difficult logistically, Subway officials say.

The company says retailers and community centers offer a more captive audience than free-standing locations that must lure street traffic. Franchisees say the growth they get from nontraditional spots outweighs the hassles. Mr. Faddoul’s site in the Jewish community center ranks No. 5 in sales out of his 100-plus stable, he says, and the highest-selling restaurant he has developed is located inside the Cleveland Clinic hospital. In return, most locations get rent and a brand-name food-service provider.

Locating in unusual places presents challenges. When Subway opened in a corner of True Bethel Baptist Church of Buffalo, N.Y., two years ago, some area residents complained that a chain restaurant didn’t belong in a church. A radio station in Canada called Pastor Darius Pridgen, the Subway franchisee, to grill him about it, and a woman from suburban Buffalo phoned him in tears, he says.

The church is located in a downtrodden part of the city, Mr. Pridgen says. Hoping to generate jobs, he approached Subway, McDonald’s and Tim Hortons, which is partially owned by Wendy’s International Inc., about locating in his church. “We are in the middle of a place where business does not grow,” says Mr. Pridgen. “How dare someone raise an eyebrow when somebody tries to pull themselves up?”

McDonald’s and Tim Hortons asked for more space and a higher initial investment by the church than Subway did, Mr. Pridgen says. A spokesman for Tim Hortons says limited space and the church’s narrow operating hours made it difficult to open there. McDonald’s didn’t respond to a request for comment.

Subway was game. “We’re fairly flexible in the amount of space we want to take,” says Elizabeth Rolfe, Subway’s director of new business development. The chain figured out how to tuck the restaurant into a tiny spot once occupied by the choir. The restaurant is in a separate room from the worship area, but churchgoers can smell bread baking during services.

The chain agreed to remove one Subway sign on the outside of the building because Mr. Pridgen worried it was too much. It helped create a parking pattern to keep restaurant traffic from displacing churchgoers during services. Mr. Pridgen declines to say how much he paid for his franchise; he says all restaurant revenue goes into the church coffers. Congregants have enthusiastically supported the restaurant, which plays gospel jazz and sermons from other churches over its sound system, he says. But pleased as he is with the Subway arrangement, Mr. Pridgen has his priorities: “The church will always come first,” he says.

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