Why the $5 Footlong Failed: How Franchising Works

This video is sponsored by Dashlane. Protect your passwords free for 30 days with
the link in the description. When the United States gets hungry, and, we
do that a lot, we like to hop in our car, preferably not get out of our car, and pay
an absurdly small amount of money. Fast food, or Quick Service restaurants, are
a $256 billion a year business made one or two or five dollars at a time. Globally, there are 20,000 KFCs, 30,000 Starbucks,
37,000 McDonalds, and, more than any other, 43,000 Subways. There’s one in every U.S. state, every U.S.
territory except American Samoa, schools, churches, and casinos. One, even, was hydraulically-lifted above
New York’s Freedom Tower during its construction to accommodate workers who didn’t have enough
time during their lunch break to go down to ground level. Subway, like many companies, got so big by
outsourcing its growth – allowing just about anyone, just about anywhere to open their
own location. It’s the poster child for franchising – growing
22% during the worst recession in 75 years. But it’s also a perfect example of what
can go terribly wrong. In 2017, Subway lost over 900 U.S. stores,
and the $5 footlong, the catalyst behind the company’s insane growth, became the source
of its downfall. So, why do some companies choose to share
their business model when they could just keep all the profit themselves? If you a) like the idea of being your own
boss and b) know how to cook, you might be tempted to start a restaurant. Something like 1,000 new independent restaurants
open each year in the U.S. and it’s easy to see why. The average American spends 13% of their income
on food. Nearly half of which is eating out. Gyms and travel agencies are fickle, but almost
everyone needs to eat. And starting a restaurant can cost as little
as $100,000, which, while not exactly cheap, is relatively accessible for many people,
with loans. But, of course, it’s much easier said than
done. The idea of not having a boss sounds great
until you realize that means working long hours, getting paid last, and being responsible
for every little thing that goes wrong. People often choose to open a Mexican restaurant
because that’s what they like or a gym because they like working out, but soon find that
managing a business and eating tacos are two, very distinct skills. Restaurants also have extremely high turnover,
and often employ family members, which makes firing them especially difficult. It’s a myth that 90% of restaurants fail
in the first year, but the truth is still not very promising – about a third in the
first year and two thirds after three. Although, this does include change of ownership,
and sometimes owners are just ready to move on. Regardless, it’s not an easy feat. So, if you do succeed, you tend to get a little…
confident. If you can turn a hundred thousand dollar
loan into a hundred thousand profit in a few years, why stop there? A second restaurant could double your income! At least, because now you have experience! The truth is, no matter how successful you
are, you haven’t yet proven the business model. You’ve proven the business model at this
location, with these employees, this year. Breaking into a new market isn’t easy, even
for the biggest companies on earth. Amazon failed in China, Uber in Korea, and,
for a long time, Dunkin’ in California. A smart business owner knows each and every
new location is a huge opportunity and a huge risk. Enter: the franchise! It’s easy to see a company like Subway as
an unstoppable giant, but one day it was just a 17-year-old kid in Connecticut trying to
pay his way through medical school and opening a second location meant gambling everything. The beauty of franchising for the Franchisor,
that is, the larger company, is that it shifts some of that risk to the Franchisee, the person
who pays to open a new location, and usually buys or leases the land, building, and equipment. Every franchise is different, but here’s
how it generally works: First, anyone who meets the minimum requirements
can apply to open a new location. The potential franchisee and an agent representing
the franchisor will then interview each other, deciding whether it’s a good fit. This culminates in what’s called a Discovery
Day – where the candidate flies to the company’s headquarters, meets its executives, and see
its operations firsthand before making a final decision. If both parties are satisfied, they sign a
Franchise Agreement – which has three main components. First – it sets the length of the contract. A franchise is really a lease, and when it
expires, usually in 5-10 years, both parties have to agree to renew it. Otherwise, the franchisee is simply out of
luck. Second – it outlines the costs. There’s an upfront, one-time Franchise Fee,
think $10-50,000, and an ongoing royalty, say 4-15% of all revenue. Finally, the Franchise Agreement lays out,
in great detail, exact requirements for doing business, from how everything is made, what’s
on the menu, and often, what hours it must be open, sometimes on Christmas. The goal is to maintain consistency – every
McDonalds and Subway and Dunkin’ should look, smell, and feel the same. Without these strict standards, individual
stores could coast on the success of the brand as a whole, while cutting corners and saving
money. For the franchisee, this model is attractive
because it’s relatively safe. If people like McDonald’s fries in D.C.,
so you can pretty safely bet they’ll also like them in Portland. And, when the time comes, it’s much easier
to sell a Pizza Hut than a generic Bob’s Local Pizza. You probably won’t be as rich as, say, a
successful tech startup, but you’ll also sleep much better at night knowing that while
your income ceiling is much lower, the floor is much higher. The secret to Subway’s success is that stability
combined with low barriers to entry. Its franchise fee is just $15,000, in total,
about a tenth of the cost to open a McDonalds. They’re also quite small – just 1,200 square
feet on average, compared to McDonald’s 4,500. In 2013, Subway opened 50 new locations a
week – that’s seven every single day, on average. But don’t confuse Subway’s success with
its Franchisees’. Companies like to portray franchising as a
sort-of economic marriage – both wish the other success, while the corporation provides
support and guidance. The reality, though, is often much different. The local owner of a Subway, for example,
might argue that while he or she is in the business of selling sandwiches, Subway, the
corporation, is really in the business of selling its logo. Because it doesn’t own any of its stores,
but makes a minimum of fifteen grand no matter how successful they are, it’s incentivized
to open lots of locations, regardless of how qualified the applicants. Unless they have exclusive territory agreements,
longtime franchisees may find themselves competing with another Subway or six within a mile radius. And they often find franchise agreements overly
restrictive. Sure, you don’t have to come up with new
recipes or find the right equipment, just follow the instructions, but you also don’t
get to if you have a better idea. This tension became an all-out war with the
$5 footlong. It started as a brilliant idea. Something about that clean, even $5 price
attracted customers like nothing else in company’s history. Now, one would assume a $6 footlong would
sell about 20% worse, because, ya know, math! But one would also assume no-one would eat
disgusting cashews and yet you goons gobble them up like crazy! The point is people are weird, and in the
15 years since the $5 footlong was introduced, haven’t gotten any less weird, in fact,
weirder probably, but while we still like nice, round numbers, because of inflation,
5 2004 dollars is now equivalent to about $6.78. Not to mention the rising cost of labor, land,
and health insurance, which also vary considerably by region. In other words, Subway is making a lot less
money for the same price. Well, Subway Franchisees, that is, because,
remember, Subway Incorporated takes a cut of revenue, not profit. The promotion was great for the corporation,
it even threatened to sue other chains who used the term “footlong” in advertising
the length of their sandwiches. And when an Australian teenager complained
that his sandwich was only 11 inches long, Subway argued it’s “Footlong”, not foot-long. Clearly it’s a descriptive name for the
product, not intended to be a measurement of length. Duh! In 2014, Subway switched to a $6 combo with
a drink and cookie or chips, but it wasn’t nearly as successful. And, after much fighting, the company finally
made the $5 promotion optional for franchisees in 2018. The damage, it seems, was already done. Subway fell into the franchise trap – focusing
only growth, to the detriment of its existing locations. Meanwhile, people’s preferences simply moved
on. At their best, franchises represent the American
dream – anyone with an entrepreneurial appetite and even the most modest savings can go from
working in a convenience store to owning one in a matter of years. But, like anywhere money is made, there tend
to be a few big winners – the owners of 5, 10, 50 locations who’ve optimized for everything,
and many others barely scraping by, despite, not uncommonly, making a million dollars in
revenue, per store, each year. Franchising can be a great opportunity, but
it’s important to remember that each new location is a new risk – not just that it
will fail, but everything you own will. Likewise, every time you sign up for a new
website or app, you risk having not just it but all your accounts hacked if you use the
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this video.

42 thoughts on “Why the $5 Footlong Failed: How Franchising Works

  1. Promotional vdo of Subway to how easily you can get its franchise and how it depends on you to succeed and not on the Subway's dis-repute it earned on "footlong" debacle.

  2. I’m only watching your videos just to copy your accent or the way you speak because you sound appealing

  3. motherfucker took 10 minutes to say that inflation made the footlong almost 7$ in 2019. then somehow used the whole fucking video purpose to gear towards an ad at the end.

  4. If you're ever in Phoenix Arizona go to the intersection of 35th Avenue and Camelback. There's a Subway restaurant on the west side of the street and another on the east side. They've been both operating like that for years now

  5. I expected a video about why the $5 footlong failed. I finally got my wish….during the last third.

  6. Duh, because anyone with a footlong knows they can easily sell it for WAY MORE than $5, that and it was illegal prostitution in the first place.

  7. Actually, having a personal thing against cashews is a lot weirder than someone just liking cashews, tbh.

  8. Did you really clip clover grill in at 9:03 with a discussion of a franchise trap???? Bruh that is THE late night spot for all us queer folk in nawlins. It ain’t no damn franchise! It’s the damn OG!

  9. That's why I love network marketing, low start up cost, training and support and can set your own schedule.

  10. more to it than this . scammers

  11. Wow, not only they lost to inflation, they lost to rubberized bread. RIP Subway.

    This to show people, when you sell something, dont sell it cheap. Always better to go down in price later on, then to sell yourself short.

  12. My brother-in-law has a degree in restaurant management.
    He actually has a degree in that field, and he uses the skills he learned every day.
    If you want to open a restaurant, ant the very least, you should get hired working as an assistant manager for at least a year before you even apply for a loan. For one thing, if you have experience, you will more likely get a loan. And another, you may discover you hate it.

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