“Originally, Subway was just a way to pay my way through college,” says Fred DeLuca, who started Subway in 1965 when he was just 17. “But we did have a goal.” That goal – to open 36 Subways over the next 10 years – has been well and truly blitzed. Subway now has 33,749 restaurants, the first to beat McDonald’s, with 32,737. “To have 1,000 times as many is unbelievable,” says a slightly bemused DeLuca, whose net worth is now $1.8 billion.
In this article, one of a series on the secrets of successful franchises which includes Five Guys Burgers and Fries and New Zealand’s own Hell Pizza, we look at the beginnings of the Subway phenomenon and reveal the ‘backbreaker’ that cost just $550 to sort out, but very nearly stopped Fred DeLuca from getting started in the first place.
In a recent Inc magazine interview, DeLuca revealed how tough it was to set up his first store with just $1,000 borrowed from his friend, Pete Buck.
“I borrowed my dad's car on Monday and drove around a little bit and found a vacant store,” he said. “Pete came over on Saturday, and we rented it, with no lease – you probably couldn't do that today.”
They did the fitout – such as it was – themselves, with no plans and no licence until someone spotted them in the middle of construction and pointed out that you couldn’t build a sandwich store without some approvals.
“I walked to the town hall and said, ‘I have to get some kind of licence for the store I'm gonna open.’ The lady behind the counter said, ‘We need some kind of plans for your store.’ I said, ‘Well, I don't have any plans.’ She said, ‘If you could draw something out, that would be great.’ So I drew a sketch, gave it to her, she stamped it, and that was it.”
One of the City’s food operator licence requirements was what DeLuca describes as ‘almost a backbreaker’: “We learned that we had to install a special sink that cost $550, so Pete had to give me a second thousand dollars.”
They acquired the necessary equipment cheaply by putting ads in the newspaper “saying something like, ‘Student needs refrigerator’” and eventually opened for business, but on the opening day, DeLuca had to sit an English exam.
“I make the first sandwich to show my buddy how to make a sandwich, then I go to take the test. I come back, and there's a line of customers out the door. And Pete is walking across the parking lot holding this paper bag. He said, ‘I had to go buy some knives.’”
With little or no working capital, DeLuca had to rely on cashflow and the credit and goodwill of his suppliers to keep the business going.
“You'd sell the sandwiches for cash today, and you'd pay the employees and the food bill tomorrow,” he says. “Every Friday, my mother and I would pay a visit to the people who sold us meat, vegetables, bread, and paper. It was a little social call ... They knew we were always there to pay the bills, even though we never paid as much as we bought and balances always built up. If we didn't drive around to deliver cheques, which is a totally inefficient thing to do, I am positive that we would not have built the kind of relationship that allowed them to be as comfortable with us.”
The inspiration for the sandwich business came from a small chain called Mike’s. The owner of Mike’s had started with nothing but, after ten years, owned 32 stores. We have no idea what has become of Mike’s since 1965, but the idea behind Subway was truly inspired, not only because it costs less to set up a Subway store than a McDonald’s and Subway’s smaller footprint and simpler equipment requirements have enabled it to open in non-traditional locations such as petrol stations, showrooms, supermarkets and even churches, but also because the perception that made-to-order subs are intrinsically healthier than hamburgers has enabled Subway to ride the healthy food movement, an area where McDonald’s has been playing catch-up in recent years.
However, rivalry between the two franchises is something DeLuca plays down. He accepts that “We've been big beneficiaries of McDonald’s. I would say if McDonald's never existed, we would have had fewer stores than we have. They've gone to so many places and gotten people into the habit of going out to eat on a regular basis and that opens the door for us to grow.”
According to Franchise New Zealand magazine, there are now 229 Subway outlets in New Zealand compared to McDonald’s 150.
Read about 2 other inspiring franchise success stories:
Inspiring franchise stories: How Five Guys Burgers and Fries built an 570-store empire and a cult following in just 7 years
Bat out of Hell: The True Story of Warren 'Otis' Powell and Hell Pizza