Subway Franchisees Unhappy in Germany

Struggling to keep their businesses afloat, the sandwich chain's German franchise owners blame high fees and the indiscriminate sale of licenses

by Klaus-Peter Kerbusk

The US sandwich chain Subway has ambitious plans for expansion in Germany. But its German franchise owners are unhappy with their side of the bargain. Many are struggling to keep their businesses afloat.

Sonja Birkel thought she knew exactly what she was getting into. After all, she and her partner David Mauk had spent years working as district managers for McDonald's -- a position that gave them ample opportunity to familiarize themselves with all the tricks of the fast food trade.

Birkel and Mauk 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 €184,000 ($243,000) and opened a new fast food outlet in the town of Michelfeld in the German state of Baden-Württemberg.

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 €16,000 a week.

But after three months, turnover began to decline, eventually averaging out at about €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 €20,000. "We lost everything we had spent years working for," Birkel concludes bleakly.

Is their story just an unfortunate one-off, a regrettable accident in Subway's global kingdom? Apparently not -- at least not in Germany, where 295 licensees are now running 418 restaurants with a total annual turnover of €106 million ($140 million). "A conservative estimate would be that 30 percent of the Subway franchisees in Germany are just scraping by at the subsistence level," says Bernd Fassbender, president of the Franchisee Association Germany (DNFV).

"Frustration among the franchisees is growing day by day," says a restaurant owner in the Rhineland. Their discontent has developed to the point where many of his colleagues are refusing to pay the contractually fixed fees to the company headquarters. Others are preparing a class action suit against Subway.

Even Marco Wild, Subway's top representative in Germany, admits there are problems. "Our profitability isn't yet where it should be," he says.

And yet most franchisees were full of enthusiasm when they started out in what is still a booming economic sector -- the franchise business. Germany already has about 870 systems whereby people who want to set up their own business can use a tried-and-tested brand and business model in exchange for a monthly fee. Generally speaking, franchisees are responsible for how business is conducted in their branch, while the franchisor takes care of advertising, book-keeping and supplies.

DISAPPOINTING PROFITS
Subway is considered an especially attractive brand, since getting started as a franchisee doesn't require a large investment -- unlike, for example, McDonald's franchisees, who have to provide at least €500,000 of their own capital.

And so the sandwich kingdom -- founded by Frederick DeLuca with a single sandwich stand in Bridgeport, Connecticut in 1965 -- is expanding rapidly. During the past 10 years alone, the number of Subway outlets has more than doubled. Over 27,000 fast food restaurants already bear the yellow and green logo worldwide and boast a combined annual turnover of about €10 billion.

DeLuca and his colleagues have ambitious plans for Germany, which got its first ever Subway outlet in 1999, in Berlin. They want 1,500 Subway restaurants to open there by 2010 -- which would mean Subway replacing its arch-rival McDonald's as the number one fast food chain in Germany, just as it has already done in the United States.