Subway’s fall from second-largest restaurant chain to No. 3 in Technomic’s Top 500 Chain Restaurant Report, the prevailing story line in a study full of intriguing developments, reveals a lot more than just how one brand is struggling to hold on to its market share.
The chain’s 3.3% decrease in estimated annual sales means about $400 million off the top line for the brand with the most locations of any restaurant in the United States or the world. The setback in 2014 sales took Subway below the $12 billion mark, which Starbucks eclipsed on its way to leap-frogging Subway for the No. 2 spot—which, we should note, is still just one-third of McDonald’s annual sales of nearly $36 billion. (Editor’s note: Financial results are preliminary and subject to revision.)
Subway’s year exemplifies several restaurant industry trends from 2014. Technomic has repeated the first point in several venues: Bigger doesn’t necessarily mean better, as established and legacy brands lost share to emerging chains, especially fast-casual ones. But fast casual growing at the expense of quick-service giants has been happening for years, and that’s not all that’s going on in the Subway story. It also brought the rise of QSR Plus into focus.
By Technomic’s estimates, Subway grew its unit count 2.9% in 2014, but even as franchisees continue to open stores, the chain’s average unit volume continues to drop. In 2014, that metric declined 3.1% to an estimated $475,000.
In addition, the brand’s three major fast-casual sandwich competitors had monster growth years, no doubt at the expense of Subway’s falling AUV and the continued contraction of Quiznos, which closed about 240 net locations in 2014, or about one-sixth its system size. Jimmy John’s Gourmet Sandwiches increased its annual sales 17.9% to $1.73 billion, driven almost entirely by new stores. Meanwhile, Firehouse Subs and Jersey Mike’s grew their annual sales 14.7% and 30.2%, respectively, layering decent AUV increases on top of double-digit unit count growth.
Fast casual’s unit growth is far outpacing that of quick service, with a 9.2% rate lapping quick service’s 1.5% increase several times over. But the dynamic is most prevalent in the sandwich segment. Fast-casual sandwich brands in the Top 500 logged a collective increase of 14.7% in locations in 2014.
By contrast, quick-service sandwich concepts grew their total unit count 1.4% in 2014.
Yet within quick service, Technomic is starting to pay even more attention to an emerging subsegment called QSR Plus, and its accelerating momentum could spell greater trouble for Subway and other mature chains. QSR Plus constitutes brands that have menu offerings approaching fast casual in perceived quality, freshness and craveability, yet still offer QSR conveniences like a drive-thru and keep prices just below fast-casual territory, somewhere between $6 and $9.
A group of seven QSR Plus bellwethers—including Chick-fil-A, Culver’s, El Pollo Loco, Freddy’s, In-N-Out Burger, Pita Pit and Potbelly Sandwich Shop—collectively grew 2014 annual sales by 9.2%, including a 9.6% gain at Potbelly and an 8.5% increase at Pita Pit.
Where Subway became vulnerable to QSR Plus competitors was on the menu board. As Subway’s prices have crept upward with the promotion of premium footlongs and the $6 price point rather than $5, perceived freshness and quality have not. Fast-casual brands from inside and outside the sandwich segment have also made inroads into Subway’s positioning as the health leader in limited service.
It’s counterintuitive to think of a 27,000-unit chain as a microcosm for anything, but Subway is illuminating several wider restaurant trends with its market share losses.