Subway was in dire need of an update when John Chidsey took over as CEO in 2019. Before Chidsey took over in 1995, the company had been run by the same family that had founded the chain in 1965.
And it had fallen behind the likes of McDonald’s and Panera in the race to serve customers quickly. Subway, the largest fast food franchise in the world with over 37,000 stores, is privately held and so is not obligated to report its financial results to the public. However, when profitability plummeted between 2015 and 2021, Subway closed 6,000 restaurants in the United States. The business has resumed adding additional locations. Its owners are apparently planning to sell the company to private equity for $10 billion, and they turned to Chidsey, a turnaround artist who had previously fixed Burger King as CEO, four years ago to perform his magic again.
“I use the words stale and static,” the 61-year-old who came out of retirement after eight years to reform Subway claims. Customers and business owners alike demanded more creative dishes.
In an effort to appeal to a more contemporary clientele, the menu has recently expanded to include delicatessen-style products and a new sandwich series prepared in a predetermined fashion as opposed to the standard make-your-own approach. To compete for top personnel, Chidsey has pushed for the implementation of corporate features that were surprisingly lacking at a company of this size.
Even though the company was in dire conditions when he started, his strategy has paid off thus far. Sales per restaurant are relatively stable compared to 2012 levels (after adjusting for openings and closings), but they have increased every quarter for the past decade. Subway hasn’t had this kind of winning streak in almost a decade, after years of struggling financially.
Fortune: Subway is turning around under your leadership. Subway’s purpose is unclear.
In the fast food industry as a whole, quickness and ease of service are highly valued by customers. In a world when McDonald’s, Burger King, KFC, and Domino’s all seem to be on every corner, what sets us apart is that we offer a healthy alternative. Being in good health is not required of us. Just getting healthier might help.
It seemed like nothing had changed at Subway in years, and the chain as a whole remained stagnant. Is that a reasonable critique?
I describe it as stale. Fred DeLuca, the company’s founder, was ill and left his sister in control for a long period of time. Due to his passing and the lack of a clear successor, the restaurant’s menu stagnated for a while. Research was already underway when my colleagues and I arrived. Franchisees and customers alike were calling for more creative solutions.
We lagged behind the competition despite having unlimited resources because the company decided not to prioritize digital. We committed ourselves to it almost three years ago. The finest part was that we could learn from the mistakes and successes of others. The proportion of sales coming from digital channels has now increased by a factor of four.
Unlike Chipotle, which owns all of its restaurants and thus claims greater flexibility, and unlike McDonald’s, which is trying to reset relations with its franchisees, your locations are all owned by independent business owners. Please explain the benefits of franchising.
Franchised quick service restaurants that are publicly traded command higher valuations than their non-franchised counterparts. Why? Wall Street probably likes them because they don’t require a lot of upfront investment and create a lot of cash flow. We could never possibly own 37,000 eateries. I’m referring to the time and money it would require.
Your average restaurant sales from last year are still relatively high. How can we help them significantly?
Revenues have a ton of room to grow. Our online sales have the potential to quadruple again. Catering, too. Why Subway hasn’t expanded into catering is beyond me; our cuisine is much more transportable than, say, a wet burger and fries.
Subway’s ubiquitousness can be attributed in part to the fact that its restaurants are far smaller than those of other QSR chains. Do you think there’s opportunity for some bigger eateries that provide a more substantial meal?
To operate a Subway, all you need is energy and water; that’s the beauty of it. No deep fat fryers, broilers, or hoods are present. In places like Jakarta or central Tokyo where a McDonald’s or Burger King would be too large, you can now open one of them. You’ll benefit from that. However, on the other side, they must be compact. There is a significant need and potential to revamp the remaining U.S. eateries, some of which will cater to customers who prefer to eat in, while others will emphasize takeout.
You’ve led successful rebranding efforts in the past for companies like Burger King and Avis, and now you’re steering a turnaround at Subway. Why do you like making U-turns?
As a matter of fact, it’s more enjoyable. You can make a ton of choices, and if it doesn’t work out, it’s obviously due of some flaw on my part. This gives me the green light to go headfirst into any and all possibilities. That’s a lot better than hearing, “Oh, you messed up something that was running really, really well,” which is the alternative.
Subway faced difficulties due in part to the fact that it was a family-owned business that, despite its size, didn’t adhere to all the standard corporate governance rules. How did you manage to fix that?
We established an independent board of directors and hired a more competent management team. The company is owned by its shareholders, but we have a diverse board that includes people with backgrounds in retail and the restaurant industry to ensure that our shareholders get input from a variety of perspectives.
You also needed to make Subway attractive to potential employees. How did you manage to do that?
The founder had several unique regulations, such as no equity incentive scheme. Bonuses weren’t given out until after Fred, the founder, passed away, and even then, the most you could get was 5% of your income. No wonder it was so hard to lure customers away from McDonald’s and Hertz to come here. But there are other residents who have been in the area for decades. Having no fresh ideas being introduced is generally a bad thing. Therefore, everything became rigid and patriarchal throughout time.