Birkel and Mauk [former district managers for McDonald’s) thought they could use their know-how to start their own business — as franchisees for Subway, the US sandwich chain. Full of hope, they scraped together their savings, took out a loan for â‚¬184,000 ($243,000) and opened a new fast food outlet in the town of Michelfeld in the German state of Baden-WÃ¼rttemberg.
In the beginning, everything went better than they could possibly have hoped. The Subway system, which allows customers to select their own bread and fillings for their sandwich, was a big hit with customers. The two new entrepreneurs made as much as â‚¬16,000 a week.
But after three months, turnover began to decline, eventually averaging out at about â‚¬6,000 a week. What with the costs of rent, electricity, personnel, interest and advertising, combined with high prices for tuna, chicken and bread and the fees charged by Subway, in the end nothing was left over for Birkel and Mauk.
“We didn’t earn a single cent even though we ourselves often stood behind the counter for as long as 12 hours a day,” Birkel complains.
After 15 months, bankruptcy was unavoidable — and the restaurant in Michelfeld was sold for just â‚¬20,000. “We lost everything we had spent years working for,” Birkel concludes bleakly.
The franchisees’ objections begin with the English-language franchise contract, which makes a New York City court responsible for arbitration in cases of litigation. On a day-to-day level, the lack of territorial protection for franchisees is more annoying. The DAs are not paid a salary. Instead, they profit from the sale of licenses and receive a percentage of the monthly franchise fees — regardless of whether the franchisee makes a profit or a loss. The system puts the DAs under strong pressure to constantly open new outlets — and they apparently do so without any strategic rhyme or reason. “It’s pure cannibalism,” one franchisee complains.
New franchisees have to pay an initial fee of $10,000 for the right to use the Subway franchise. Subway then pockets 8 percent of their gross turnover, with an additional 4.5 percent going to the company for advertising costs. The fees paid to the sandwich chain are higher than those paid in other systems, raising questions among store owners. “Many Subway franchisees are asking themselves what they get in return for the fees,” says Fassbender.
Dropping about $10,000 a week in sales is a shocker. The required capital outlay by Subway for the opening must have worked, but repeat business and word of mouth just didn’t come through. The franchise groups plan to spend most of their pooled advertising budget on television ads, which may help quite a bit given the huge sales during the grand openings. The articles infers that the problems stem from Deluca’s direction that no capital outlay be made to sell franchises – it is all financed by franchise fees.