Subway Restaurant Owners Allege Franchise Agents Abused System to Close Competing Stores

Dozens of U.S. Subway restaurant franchisees and former franchise inspectors are accusing the world’s largest fast food chain of mismanaging franchise agreements. The owners allege in a report by the New York Times that in an effort to trim back underperforming stores, Subway’s corporate system incentivized regional development agents to rig store inspections at profitable locations and take over or close stores under duress.

Subway is the biggest fast food chain in the world with 24,223 U.S. restaurants — a large proportion of them run by immigrants. Until 2015, the company was on an expansion path led by co-founder Fred DeLuca. During that time, franchisees claim the company’s development agents used aggressive tactics to strong arm owners into opening new restaurants within blocks of other restaurants or face competition from other franchisees. However, the chain faced a PR nightmare in 2015 when its longtime spokesperson Jared Fogle came under investigation for child pornography. (He was eventually convicted.) DeLuca died that fall of leukemia, and Subway installed new leadership who began systematically looking for ways to reduce its store count. Since 2016, the company has closed thousands of stores.

Despite claims by Subway that the focus was on eliminating underperforming stores, multiple franchisees tell the Times that they lost ownership of profitable restaurants. Franchisees describe situations in which they were repeatedly cited by Subway franchise inspectors for minor violations such as handprints on windows and cucumbers sliced too thick. In one case, a franchisee alleges an inspector purposefully punctured a meatball storage bag with a thermometer to get a false temperature reading. The owners claim that the Subway system incentivizes these practices by giving regional development agent positions to other Subway franchisees — a conflict of interest because the agents are then responsible for policing the behavior of competitors.

Several former inspectors, known as field consultants, corroborated the allegations. One former inspector Rebecca Husler worked for a development agent named Chirayu Patel, who oversaw parts of California and Nevada. Husler described her role as a “hit man,” alleging that she was encouraged by Patel to find violations at particular stores while ignoring violations at his own stores. In several cases, when the restaurants weren’t closed through Subway’s formal franchise arbitration system, development agents such as Patel took over the restaurants. Patel and Subway deny the allegations.

The system has led to increased litigation between franchisees and Subway, though few store owners have been successful in proving their claims. Meanwhile, the privately owned company’s lack of transparency and limited Federal Trade Commission regulations make it difficult for prospective franchisees to adequately evaluate their investment in Subway franchises.

Perhaps Subway would improve their image and reputation by focusing less on Linklater-esque short films about the beauty of their sandwiches and more on their broken internal system.

• Subway Got Too Big. Franchisees Paid a Price. [NYT]
• All Subway Coverage [E]