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4 years Ago
On February 5, 2020, Subway gathered employees into a room at its headquarters in Milford, Connecticut. Within hours, 300 of them would lose their jobs.
Many had spent decades at the company, building Subway into one of America’s largest fast-food chains.
“They herded cattle into a room and slaughtered them,” one fired employee, who worked at Subway for more than 30 years, told Insider.
The layoffs came three months after John Chidsey joined the 56-year-old sandwich chain as its chief executive.
Subway was in a downward spiral when he arrived. In 2015, spokesperson Jared Fogle — who famously lost weight and dropped pant sizes eating only Subway sandwiches — was arrested on charges of child pornography. A few months later, cofounder Fred DeLuca, the man who turned Subway into a behemoth with more than 40,000 locations worldwide, died. DeLuca’s successors, including his sister, have struggled with mounting closures, sinking sales, and lagging digital and delivery programs.
Chidsey was hired by Subway’s owners, led by DeLuca’s widow and 90-year-old cofounder Peter Buck, to turn the company around.
But corporate employees and Subway franchisees told Insider a lack of long-term vision has persisted, and that Chidsey’s clearest priority is cutting costs. Many Subway veteran employees and franchisees say that the company is slipping away emotionally and literally. In addition to layoffs and store closures, Subway is relocating dozens of jobs to Miami and redesigning the company’s franchise structure.
Subway’s US sales plummeted to $8.3 billion in 2020, down from $10.2 billion in 2019, according to Technomic. The market-research firm’s data indicates that 1,796 Subway locations closed in the US last year, with store count dropping to 22,005 from 23,801.
Insider spoke with more than a dozen franchisees and current and former Subway employees — including six former executives — in recent weeks about the changes at the chain since Chidsey was hired.
Franchisees and current and former corporate staffers interviewed by Insider say Chidsey’s strategy looks familiar, and history is about to repeat itself. Chidsey’s last job before Subway was leading the Miami-based Burger King almost a decade ago, where he slashed costs and ultimately sold the brand to 3G Capital in 2010.
“He’s following the exact playbook that he followed for Burger King,” a veteran California operator, who spoke on the condition of anonymity so they could speak freely about the inner workings of Subway, told Insider.
Subway declined to comment on a potential sale. But insiders said that layoffs, Miami moves, and unprecedented changes in Subway’s franchise structure have convinced them that the company is looking to sell.
In May 2020, on the heels of the February layoffs, another 150 corporate Subway employees were let go.
Fifty more people were axed in September, with the New York Post reporting at the time the company’s headquarters had shrunk from 1,200 employees at the start of 2020 to roughly 700 people, a decline of 40%.
Last month more people lost their jobs when Subway told the marketing and culinary teams that their positions were moving to Miami, the same city that Burger King calls home. Subway says fewer than 10% of the headquarters’ employees were affected.
Insiders said the current “new regime” is led by Chidsey, who has done little to assuage Subway employees’ fears as the headcount shrinks. His right-hand man is Mike Kappitt, who joined Subway as chief operating and insights officer in March 2020.
While Chidsey spent close to a decade in retirement after Burger King, Kappitt came from a nine-year stint at Bloomin’ Brands, most recently serving as the president of Carrabba’s Italian Grill. Kappit has helped hire a number of former colleagues from the Tampa restaurant company, forming what one former executive called the “Bloomin’ cool kids club.” Both he and Chidsey own homes in Florida, but not Connecticut, property records show.
The increasingly Florida-centric C-suite has many employees questioning whether there is a future for Subway in Milford, Connecticut. With roughly half of the company’s headquarters laid off in the past year and a half, the 11.5-acre campus on Sub Way in Milford seems superfluous.
The industry expert John Gordon said that there is a “long tradition” of companies moving their headquarters to fit the needs of their CEO. For example, Chipotle moved from Denver to Newport Beach, California, after hiring Brian Niccol as CEO.
In late March, Subway signed a deal to lease 64,256 square feet in an enormous office park near Miami International Airport, with plans to have 100 employees work from the space.
“Connecticut is where Subway started more than 50 years ago and our headquarters will remain here for the foreseeable future,” Maggie Truax, the director of public affairs at Subway, said in an emailed response regarding rumors of a move.
Miami has its benefits. Truax said the city is the ideal place for consumer-facing roles thanks to its “dynamic business climate, diverse population, and multicultural influences,” allowing Subway to keep up to date on trends.
A Miami headquarters could also make it easier to recruit, especially from nearby Burger King and Bloomin’ Brands headquarters. Even former Subway employees acknowledged the wisdom of the move. But some took issue with the company’s rollout.
Internally, Subway leadership has repeatedly denied plans to move headquarters, but insiders continue to speculate. In a 2020 town hall, staffers were shown a slideshow calling plans to move the headquarters to Miami “fake news,” following a New York Post report that the company was leasing office space in Florida. Two employees who attended the town hall said that the denial felt duplicitous in light of plans to move marketing and culinary jobs to Miami.
“As soon as they said it was fake news and then ended up moving people to Miami — if there was any credibility left at all — all of that was shot,” one employee said.
Questions about where Subway would be based and other long-term decisions have been complicated by the pandemic, which transformed the restaurant industry four months after Chidsey started at Subway.
Subway closed more stores than any other major chain in 2020, according to Datassential’s “Firefly 500 Report.” Yet the pandemic is not entirely to blame for the closures. The company’s store count and sales have been on a downward spiral for years, franchisee disclosure statements and industry reports show.
In 2020, US sales at Subway plummeted to $8.3 billion, down from $11.5 billion in 2015, according to market-research firm Technomic. Over that same period, Subway’s US store count has decreased by more than 5,000 units, closing 2020 with 22,005 units.
As Subway sheds stores, it’s also starting to directly manage more of its franchisees and thin its ranks of development agents, who act as middlemen between the company and its franchisees, three people told Insider. This shift could make Subway a more attractive acquisition target, they said.
Specifically, Subway grew its number of stores in “company territories,” or areas without development agents, from 300 in 2019 to more than 3,000 at the end of 2020, a former executive with direct knowledge of the situation said. At least 40 to 50 development agents have left the system over the past two years, a California franchisee added.
“They’re increasing their cash flow, EBITA,” or earnings before interest, taxes, and amortization, a former executive said. “That’s how these companies are valued — they sell them on multiples of cash flow, EBITA.”
“I would bet anybody that they’re selling,” said the former executive, a sentiment echoed by a number of current and former employees.
Truax said the changes and closures are strategic decisions as Subway’s business model evolves: “We want to ensure our restaurants are in the best locations and in the best format for success.”
When Subway announced Chidsey was joining as CEO in November 2019, news of a new chief executive after a year and a half of an interim CEO should have been cause for celebration among franchisees.
The reality was less positive.
Chidsey’s last job before Subway was leading Burger King almost a decade ago, where he slashed costs and ultimately sold the brand to 3G Capital in 2010. He stepped down soon after, in 2011. 3G later acquired Tim Hortons, eventually merging the two companies to create the now publicly traded Restaurant Brands International.
A current California franchisee recalled that he was at an industry conference when the news of Chidsey’s hire broke. The franchisee was coincidentally seated at a table with some Burger King franchisees when he got a text, alerting him of the news.
“I look up at them, I go: ‘Who is John Chidsey?'” Two of them, in unison, within two seconds — and excuse my French — ‘Oh fuck,'” the franchisee said.
Chidsey earned that reaction after facing off against Burger King franchisees before to the 3G sale. Franchisees sued Burger King, after being forced to participate in an unprofitable $1 double-cheeseburger deal in 2009. Kappitt, now Chidsey’s right-hand man at Subway, helped develop the controversial deal at the time as Burger King’s then senior vice president of global business intelligence and strategy.
Subway franchisees said they are facing similar issues under Chidsey’s regime.
Early on, when Chidsey was first named CEO, the former Burger King executive reached out to high-level operators and “said all the right things” like being there to help operators make profits, a different veteran franchisee from California said.
But he has since distanced himself from communicating with franchisees. Before Chidsey, some powerful franchisees had executives’ and ownerships’ numbers on speed dial, several people said. Chidsey immediately put a stop to that, insiders added.
Chidsey’s only form of communication is a video message sent to operators every few months with no ability to provide feedback, a number of franchisees said.
“There is no channel right now that the franchisees really have to send back to corporate and for corporate to listen,” a Subway franchisee in the Midwest said. “This year, in the last 12 months, there’s been basically zero two-way communication.”
“Most of the time he’s missing in action,” said the franchisee who was warned by Burger King operators, adding: “If I could cash out with anything right now, I would get the hell out of here.”
In a move reminiscent of the 2009 Burger King lawsuit, some Subway franchisees filed complaints with the Federal Trade Commission in June 2020 after the chain rolled out a “$5 footlongs when you buy two” deal. In the fall, the company also began strictly enforcing the number of hours a week stores are expected to be open, infuriating franchisees. Until then, the company had allowed flexible work hours and had deferred royalties during the pandemic.
Former employees said that they felt Chidsey was emphasizing cutting costs over long-term changes that could improve franchisees’ profitability, such as developing new menu items. For example, Subway stopped selling the more expensive rotisserie chicken and roast beef last June, just as the chain doubled down on bringing back the controversial $5 footlong deal.
“They’re selling fucking frozen reconstituted chicken breast and whatever other garbage without trying something new,” one former executive said. “How is that going to work?”
Of the more than dozen franchisees and current and former employees who spoke with Insider in recent weeks, nearly every person had heard rumors that Subway was trying to sell itself.
One buyer that keeps coming up as a top contender is Restaurant Brands International, the parent company of Miami-based Burger King. Inspire Brands, which is owned by Roark Capital Group, was also rumored to have explored a deal, before its acquisition of another 100% franchised mega-chain, Dunkin’.
“What is confirmed through chitchat in the restaurant industry is that both RBI — Restaurant Brands International — and also Inspire, in the last year to year and a half, have done due diligence looking at Subway,” industry veteran Gordon told Insider.
A representative for RBI told Insider that it has “always been our approach to not comment on acquisition or investment rumors.” Inspire and Roark did not respond to Insider’s request for comment.
Restaurant consultant Tim Powell, managing principal at industry consultancy Foodservice IP, said he wouldn’t be surprised if a private equity firm scooped up Subway — a mature brand that has “lost its purpose.” He said a new private owner would likely assign a turnaround specialist to clean up the books and fix the business.
“The brand has upside, and it is a good time to buy,” Powell said.
Gordon said that beyond industry chatter, Subway’s strategic decisions further indicate that it is trying to sell itself. But it may be difficult to find a willing buyer. Even as stores close, average unit volumes are continuing to drop — meaning that if one Subway closes, customers are switching to a different brand entirely instead of visiting a nearby location.
“That is a sign of something is really, really, really wrong,” Gordon added.
Franchisees and former Subway executives said chatter of the owners unloading the brand to private-equity dates to before Chidsey’s arrival. With business restrictions lifting across the US and with millions of consumers vaccinated, rumors are back.
Insiders say founder Fred DeLuca was adamant that Subway stay in the family, a wish he passed on to his wife, Liz DeLuca. Yet Subway’s current owners, Liz DeLuca and Peter Buck, have distanced themselves in recent years.
“The minute they hired Chidsey, they disappeared. There’s no involvement. We never hear from them. There’s no evidence that they even still own the company,” the California operator said.
While Subway declined to comment, a former executive said that selling the brand might not be a bad thing for the chain.
“I think the best thing for Subway would be for it to be sold,” he said. “That would be good for the brand and ultimately good for franchisees.”
The veteran California franchisee agreed, saying talks of a sale to the parent of Burger King is not necessarily a bad thing among operators.
“When we hear about RBI we get excited,” the veteran California operator said. “RBI you know, they resurrected Popeyes … their brands are doing pretty well. But whatever they’re doing, they’re doing it right. I think most people are excited about future change.”
A Midwestern franchisee wasn’t as enthusiastic.
“I don’t think we’d be better off with RBI,” he said. “But something’s got to change.”
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