The New York Times recently released a scathing article that shines the light on systematic franchisor abuse at the world’s largest fast-food company, Subway.
Development Agents Shutting Down Less Profitable and Competitive Franchisees
In the article, titled “Subway Got Too Big. Franchisees Paid a Price.,” authors Tiffany Hsu and Rachel Abrams interview multiple franchisees who claim that the company’s development agents sought to close down their shops through aggressive inspections that racked up violations. In some cases, they believe that Subway simply wanted to close down poorly performing units. In other cases, the development agents—franchisees themselves—ended up taking over the ownership of the shops they helped closed. As the article describes:
“Subway parcels its vast network of stores into more than 100 regional fiefs. Each is overseen by a development agent, who recruits new franchisees, approves buyers for existing stores and sends inspectors—known as field consultants—to conduct monthly reviews. But usually, development agents are also franchisees themselves. When that is the case, they are both in charge of and competing with other store operators, and their own locations are inspected by people they hire.”
The authors of the article even interviewed an inspector, Rebecca Husler, who confirmed that she was given explicit instructions to find violations at certain franchise units.
John Gordon, the restaurant analyst who provided some data for the NYT article, noted to us: “Subway’s overuse of area developers and litigation against franchisees—the litigation exceeds the other international competitors like McDonalds by a multiple of hundreds—poses multiple problems to the wellness of the brand. Subway is consumed by self-imposed internal issues that diverts them from fixing the brand.”
Franchise Agreement That Tilts the Playing Field
According to the article, Subway currently oversees 24,000 restaurants just in the United States. Its low investment costs make it an attractive option for many franchisees. One expert interviewed in the article estimated that 30 to 50 percent of Subway franchisee owners were immigrants, a significant portion of whom may struggle to understand the franchisor’s dense franchise agreement.
The article states that, “In the most recent version of a disclosure document given to prospective franchisees, which is more than 600 pages long, the company notes that it can revised its rule ‘at any time during the term of your Franchise Agreement under any condition and to any extent.’”
When franchisees try to complain or fight to keep their stores, they often find themselves in arbitration, which is usually heard in Connecticut near Subway’s headquarters. The cost of traveling to Connecticut to argue their case is more than many franchisees can shoulder.
One of the article’s most damning criticisms is that Subway has been able to get away with this behavior due to a severe lack of oversight. The authors note that even though the Federal Trade Commission requires the franchisor to list its permanently closed stores, Subway gets around this rule by pressuring noncompliant franchisees to sell their stores, which it categorizes as a transfer, rather than a closure. This deprives potential franchisees from receiving an accurate list of closed stores and contacting those previous franchisees.
The article explains that, “The F.T.C.’s compliance guide for franchisors has not been updated in more than a decade.” An expert interviewed for the article further explained that “the agency had not focused on franchise misconduct or taken any franchise-related enforcement action in years.”
Subway Is Far from Alone
The NYT article should be required reading for every franchisee or perspective franchisee. Unfortunately, the many abuses the article documents are far from uncommon. Subway is not a rogue actor. Rather, its tactics are part of a common franchisor playbook.
This is why franchisees must consider forming a franchisee association, so they can pool their assets and aggregate their voices to address abuses within their own system. On a larger scale, the AAFD Franchisee Leadership Summit was created to bring franchisee associations together to fight for fair franchising standards throughout the franchising industry. We want to even out the playing field and ensure all franchisees can protect their rights, their hard work, and their equity.
If this article lights a fire inside you, please join us this September in Mesa, Arizona or the 2019 AAFD Franchisee Leadership Summit and Annual Conference.