Subway Franchisees Unhappy in Germany

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But the 16 so-called development agents (DAs) responsible for advancing DeLuca's sandwich offensive in various regions of Germany are having difficulties meeting the target that has been set for them. Turnover isn't rising as quickly as the number of restaurants, and expansion has even halted in some places. In the city of Aachen, for example, only two of the orginal four Subway restaurants are still in business.

Inside sources indicate that DeLuca's original goal has been postponed, so that the plan is now for 1,500 Subway restaurants in Germany by 2011, one year later than originally intended. The local franchisees' complaints are getting louder, and the word has begun to spread among would-be entrepreneurs that a Subway license can easily turn out to be a one-way ticket to downward social mobility.

Subway's management found out just how strong the discontent among its franchisees is in Leipzig last November, at the group's first national meeting in Germany. A respected institute for market research presented the results of an extensive objective survey of Subway's franchisees. "The result was devastating," says Sven Romberg, who runs several Subway restaurants in the Ruhr region. "It was like a slap in the face."

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.

The selection procedure for new franchisees is also controversial. Unlike McDonalds, where new franchisees go through a one-and-a-half-year training program, the DAs hand out licenses after a two-week course. They are happy to give them "to anyone who can read and write," complains Romberg, who is also the chairman of the National Franchisee Board Germany (NFBG), an association founded by German Subway franchisees to represent their interests.

HUNGRY FOR HELP
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.

And eight years after the company first ventured into the German market, there is still no proper Subway headquarters in Germany to provide franchisees with advice, practical help, analysis and information. Subway representative Marco Wild employs just seven people in his office in Cologne.

Issues of quality control are only being tackled now, following massive pressure from the ranks of the franchisees, with some suppliers being changed. Last year, several Subway restaurants repeatedly received meat that had been found to be of inferior quality by public testing institutes. One report by the Oldenburg Food Institute stated that, "This kind of product cannot be classified as 'ham.'"

"Subway has to invest more money in its company structure in order to boost its expansion," insists Romberg. But that's precisely the problem. DeLuca isn't willing to spend much money on his ambitious plans. He wants Subway's expansion to be financed almost exclusively by the franchisees.

The national groups even have to painstakingly pool their money to finance their advertising campaigns. It took several years before they had enough funds to pay for television ads. Now the time has finally come: Some €6 million will go into the first German TV ad campaign in mid-April, which will last 14 weeks. "That will provide a massive boost," says Wild confidently.

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