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Exercise 5 – Subway: Pricing Problems

Subway was founded in Bridgeport, Connecticut, in 1965, as a partnership between 17-year-old Fred Deluca and family friend Peter Buck. The partners were determined to grow quickly, focusing almost exclusively on restaurant count. They embraced franchising in the mid-1970s to pursue this objective.

They made the company’s franchises affordable, which contributed to astronomical growth throughout the 1980s, 1990s, and 2000s. In fact, in 1995, Subway’s thirtieth year of existence, the company opened its 11,000th store, and by 1999, it had opened its 14,000th store. In 2002, Subway achieved its longstanding goal of surpassing McDonald’s as the largest restaurant chain in the United States, and in 2011, it surpassed McDonald’s as the largest restaurant chain in the world. By February 2020, Subway had 44,805 stores Subway had a reasonable price point in its sandwich category but also engaged in value pricing strategies. For example, in 2008, the company launched its $5-footlong deal—which was discontinued by 2020 —and also offered coupons via mail to help keep prices affordable.

By 2020, Subway had experienced significant problems with its $5 footlong pricing strategy. On its initial launch in 2008 across the United States, the strategy was beneficial for the company and allowed it to grow during the 2008 recession, when many restaurants struggled.

Furthermore, the pricing strategy helped the company gain a significant advantage over Quiznos, one of its main competitors at the time. However, Subway likely kept the promotion going for too long. Customers became used to paying $5 for a footlong sub and were unwilling to pay a higher (and more reasonable) price once the pricing strategy ended. Stuart Frankel, the franchisee who devised the $5 footlong promotion in 2003, as a measure to boost sales on weekends at his Florida Subway store, agreed that the company overused the promotion to its detriment: “. . .[O]nce you keep pushing a low price point in the minds of the consumer, it’s hard to sell sandwiches for what they’re really worth.”

Evidence also indicated that the $5 footlong promotion had caused problems for franchisees since 2012. By this time, the recession had ended, and price had diminished in importance.

However, Subway had not altered the pricing strategy, and in the meantime, costs had risen. All these negatively affected franchisees’ operations.

When Subway tried to re-introduce the $5 footlong promotion in December 2017 for a two-month trial run, many franchisees were outraged and petitioned against the idea. A franchisee letter to the company’s corporate office stated, “The national promotional focus over the past five years . . . has decimated [us] and left many franchisees unprofitable and even insolvent.”

1. Do you think that Subway can solve its issues related to price? How? Why/why not?
2. How can Subway alter the negative price perception that it created through overuse of the $5 footlong pricing strategy?
3. What pricing strategy would you recommend Subway adopt? Why?