John Chidsey wasn’t planning on coming out of retirement. But then Subway came calling. In an interview with Brooke DiPalma at the Yahoo Finance Invest conference, Chidsey explains what he said yes to running Subway and how he plans on tackling the challenges the business faces from the changing of consumer habits, global expansion, and inflation. Chidsey also gives additional insight to the sale of Subway to private equity firm Roark Capital.
Chidsey explains that Subway is one of the few big restaurant chains that has a global footprint and how, given its healthier menu, the company can “play in a sweet spot globally.”
Responding to a question about potential changing of consumer spending due to economic headwinds, Chidsey “Definitely in the early times of economy softening for the first 4-8 quarters you get the trade down effect where if maybe if you’re in fast casual or casual dining, people that are more stretched for their dollar, so to speak, do trade down so I think we all benefit from that to a certain extent. Now, if it’s prolonged, you obviously can’t continue to lap that forever, so it eventually shows up in your same-store sales numbers, but it’s definitely a little bit of a tailwind initially.”
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Video Transcript
BROOKE DIPALMA: Let’s just start big picture. You came out of your retirement in 2019 to turn Subway around. What made this opportunity worth that?
JOHN CHIDSEY: Yeah. So I did Burger King, I ran Burger King for seven or eight years, which was a turnaround basically. And I wasn’t looking for a job. I hadn’t worked in like, what, I was working but not in a real job. I always thought Subway was public. And I always said I never wanted to run another public company again having done that twice. And I had no idea Subway was private.
So when I found out that it was private, it had been owned by two families for 5. Years, it had no debt. It had never borrowed bucket of debt in 58 years. It had the second largest ad fund behind McDonald’s. In the US, we have about $550 million ad fund. Globally, it’s about 800 million, largest restaurant chain in the world by unit. So it had a lot of great assets. So I thought, you know, you’d have to be an idiot not to be able to do something good here.
BROOKE DIPALMA: So it just it was an easy yes?
JOHN CHIDSEY: I wouldn’t say it, but it was a fun ask so.
BROOKE DIPALMA: It was a fun ask. I mean, the past four years. So much has happened. But of course, most recently, you have to tell us a little bit more if you can about that $9.6 billion deal. Why Roark Capital? Why go with them?
JOHN CHIDSEY: Yeah. Well, Roark Capital, obviously, Neal Aronson, who founded Roark, loves franchising. I think they own– I don’t even– I can’t remember how many restaurant brands. But they own Massage Envy. And they own Orangetheory. And they own Driven Brands. And they’re just kind of experts at franchising.
So obviously, it was very competitive. We had 24 private equity firms that started at the beginning of the process as we went through it. And, you know, at the end of the day, Roark, I think in the family’s– I think hopefully both sides are happy with the price. But clearly, our franchisees are happy that we ended up with a buyer, who not only understands restaurants, but clearly understands franchising. So I think it’s a win-win-win.
BROOKE DIPALMA: Do you think that Subway will change at all under Roark Capital or still seeing momentum that you’ve seen recently?
JOHN CHIDSEY: No. I mean, they’ve been very clear that they’re going to– they bought it as a solo entity. They’re not going to combine it with any other restaurant chains. They’re, you know, going to keep the same management team, same strategy, same plan. And I’m guessing, I don’t know, but I’m guessing they will take it public one day as a separate entity as well.
BROOKE DIPALMA: Lots to stay tuned for, that’s for sure. Let’s talk about the business here in the US. Last year, Subway closed roughly 500 stores here in the US. How were you thinking about the real estate portfolio here at home?
JOHN CHIDSEY: Yeah. And that was a good year. I mean, when we got there, Subway had had seven straight down years of sales that they were– while they were closing 1,500, 1,000 a year. So I think the fact, this year, we’ll be below that. So the trend in the US has slowed down dramatically. Globally, this will be the first year we’ve grown since 2016. We’ll open up more than enough internationally to make up for that.
But, you know, most big QSR chains close 1% to 2% of their units a year. So if we have 20,000 restaurants in the US, that puts us somewhere in the 200 to 400 restaurants, which is kind of where we are now. So you know, my answer is we should close 300 to 400, like everybody else does. But we should open 200 to 300. So basically, tread water in the US at worst. I actually think we can grow and open up some of what we closed in the past. But best case tread water and internationally, it’s a completely different story.
BROOKE DIPALMA: Yeah. Let’s talk about international for a second. You guys recently announced or rather signed 15 franchise agreements. That’s totaling 9,000 future locations. Where do you see the biggest opportunity for future store growth? What sort of consumer is looking for Subway in their market?
JOHN CHIDSEY: Yeah. Well, I think the beauty if you think about it, there’s really only six global brands out there. There’s McDonald’s, Burger King, Domino’s, KFC, Starbucks, and ourselves that truly are kind of everywhere and have scale. So we have 17,000 restaurants outside the US, only McDonald’s and KFC are bigger. So clearly, we’re out there.
But if you think about of those six global brands I mentioned, we’re the only one that’s really healthier. So easy to say now that I’m not a Burger King. We don’t have to be healthy, just healthier. And if you read the Wall Street Journal and you look around the Middle East, China writes about they have obesity problems now. They have juvenile diabetes. They basically– a lot of these countries have the same health issues we have.
And so I think we really play in a sweet spot globally in terms of the food we have and our menu. So I think we’re positioned perfectly. And then a Subway’s obviously much less expensive to build. It takes a lot less labor than a McDonald’s or Burger King. So when you look at the unit economics, it’s very appealing to a lot of large restaurant developers internationally. So I think we’re in a great spot.
BROOKE DIPALMA: Yeah. And also to, you know, on this weight loss, on this diet trends that you’re seeing, I have to ask, what is Subway thinking about the potential impact of weight loss drugs? Are you guys planning for that? Do you feel like your menu is fitting the needs of a future consumer who perhaps is taking more of these sort of weight loss drugs?
JOHN CHIDSEY: Well, unless people decide if they take the drug, they can go have, you know, two Big Macs and a whopper and whatever, then we might be in a little trouble. But no, I think given the fact, again, that we are sort of the healthier. We have wraps. And we have bowls. And, you know, tuna is our second largest selling product.
So I don’t– I think it actually plays into the trends of where the world’s going. So we don’t spend a lot of time worrying about what’s that going to do to us.
BROOKE DIPALMA: And consumer sentiment is also top of mind right now. So many consumers are searching for value. How are you working with franchisees to make sure that you have the right price point to meet the consumer where they’re at? There’s so many headwinds up against consumers right now.
JOHN CHIDSEY: Yeah. And if you think about, if you come from Wendy’s or McDonald’s or Burger King, everybody has the dollar menu or now it’s $1.29 or whatever, which we don’t have in the sandwich space. So luckily, you know, one of our brand attributes that we’ve been known for 50-plus years is value for the money. That’s probably one of the strongest value proposition Subway has vis-a-vis the sandwich competition. We’re definitely cheaper than our three or four other sandwich competitors.
But, you know, when you have to compete given our scale, you have to compete with the burger chains and the pizza chains. So I think it’s really incumbent upon you to engineer products that are maybe not the footlong or 6-inch, maybe even slightly different sides, things that maybe not– you’re never going to get down to the $1.50, but you can play in the $4 and $5 range, which I think keeps you really relevant.
And so it’s very important to have that barbell strategy, if you will. So you can really get the consumer wherever they want to shop.
BROOKE DIPALMA: Yeah. And speaking of that consumer, who exactly would you say is coming more to Subway these days? Would you say that maybe people are trading down into the category that Subway is? And do you see others maybe spending a little less than they used to in terms of income levels of your consumers?
JOHN CHIDSEY: Yeah. I mean, having been in the QSR industry for a long time and living through ’07, ’08, living through some other times, yeah, definitely in the early times of an economy softening for the first four to eight quarters, you get the trade down effect, where if maybe you’re in fast casual or casual dining, people that are more stretched for their dollar, so to speak, do trade down. And so I think we all benefit from that to a certain extent.
Now if it’s prolonged, you obviously can’t continue to lap that forever. So it eventually, you know, shows up in your same-store sales numbers. But it’s definitely a little bit of a tailwind initially.
BROOKE DIPALMA: And in terms of digital offerings, you guys are working to implement more digital offerings on the app. You’re really looking to get customers engaged. How are you working with franchisees in order to do those digital offerings? What’s their reception so far? I believe that there is a digital offering set to be in effect by the end of the year.
JOHN CHIDSEY: Yeah. So Subway had massively underinvested in technology. That probably explains part of their six or seven year slide before. When we got there, digital sales at Subway were 3.5%, which is abysmal. The pizza chains, which we’ll never be, are more like 75% or 80%. But if you looked at a McDonald’s or a KFC, a lot of those guys are more in the 25% to 35% range. So we’re right at 10%. Pathetic, right?
So you look up four years later, we’re at 17. So we’ve quintupled it, but I would say there’s still a long way to go from 17 to 25 to 35. So we continue to invest in that digital platform. Digital happens to be our most profitable channel in terms of the highest check and the most profitable check for franchisees, helps them on labor. Obviously, it’s much easier on an app. Somebody generally orders, I’ll take the number four or the number whatever instead of having the sandwich artist have to ask you 11 questions.
So I think from a franchisee standpoint, they like the profitability. They like the fact that it’s less labor. And kids today, let’s be honest, the customer doesn’t want to talk to them. I mean, the sandwich– I mean, people don’t like to talk. People like to look, so–
BROOKE DIPALMA: Yeah.
JOHN CHIDSEY: Yeah, we need to–
BROOKE DIPALMA: So the reception has been good to digital offerings so far?
JOHN CHIDSEY: Yes.
BROOKE DIPALMA: And when you think about the person behind the counter, that labor, we– you know, when you think about Subway’s market, one of your biggest markets here in the US is California. And the FAST Act is set to go in effect April 1st. That will bring minimum wages up to $20 an hour there. How is Subway thinking about that? Or are you guys going to raise prices there to offset that higher wage?
JOHN CHIDSEY: Well, again, we’re 100% franchised, so we don’t control pricing. We recommend pricing to our franchisees. But it’s up to them whether they want to accept, you know, what we think or not. But, yes, I would say it’s inevitable that franchisees in California, like, you’ve heard it from McDonald’s, you’ve heard it from Starbucks, prices are definitely going to rise more in California than they have anywhere else, given the wage pressure that they’re obviously going to be facing.
BROOKE DIPALMA: Are your working closely with franchisees to offset that?
JOHN CHIDSEY: Very. But that’s, again, another reason why you want to keep pushing digital. You want to keep pushing as many things as you can to help them take labor out. I assume we’re going to talk about inflation at one point in food costs. But where else in the P&L can you help them? Because you clearly can’t help them from a labor– at least the cost of labor.
BROOKE DIPALMA: Yeah. Let’s talk about inflation really quick–
JOHN CHIDSEY: We don’t have a robotic dog to make sandwich.
BROOKE DIPALMA: No robotic dogs to make sandwiches. No plans to add robotic?
JOHN CHIDSEY: No. We’re very low tech at the moment so.
BROOKE DIPALMA: Any plans to get high tech?
JOHN CHIDSEY: We need to fix the brand first, then we’ll go there.
BROOKE DIPALMA: OK. All right. Good answer, good answer. So your menu does range everything from chicken bacon, ranch melt to bacon and eggs. These are some of the hardest hit ingredients that have seen the highest inflation rates in the past year. How were you working to combat that? Where are we at with the cost of goods now?
JOHN CHIDSEY: Yeah. So luckily, in the US, I’d say from a food standpoint, we think food costs are going to come down sort of anywhere from 2% to 4%. On the aggressive side, 5. Let’s go with 2 to 4. So I think we’ve definitely crested that. And so when we look at our basket of, you know, items that we use, our SKUs, so to speak, I think we will– our franchisees will actually have some tailwind in terms of those costs coming down this year.
The other thing we did, which I have no idea why Subway ever did this, we were the only sandwich chain that actually cut all of our proteins upstream. We didn’t have slicers. We had them decades ago. Why they took them out, I have no idea. And so there are very few suppliers that can pre-slice that quantity of meat. So we pay way more than what everybody else was paying for meat. So now by having slicers in every single restaurant, now we can open ourselves up to infinitely more suppliers.
So not just the fact that inflation has passed as we renegotiate all those protein contracts. We will take big chunks of cost out of the system, which will obviously benefit franchisees as well.
BROOKE DIPALMA: Wonderful. And I want to bring it out big picture really quick. You do plan to open 4,000 locations in China over the next 20 years. What is the status of that expansion plan right now?
JOHN CHIDSEY: Yeah. They’re building away. I mean, again, don’t know– Subway in the past didn’t want people that were in other concepts. So the people that tried to grow Subway in a country would literally go one at a time, which is obviously not the way to grow internationally.
And so when we got there we said, no, we want the people that have 500 Domino’s in the country, 500 Burger Kings, 1,000 Starbucks. They know what they’re doing. They know how to develop. They know that you’re going to lose money on the first 200 or 300 until you get scale and presence. So our deal in China are people that are multi-units. We just signed a 2,000-unit deal in India with the people that have Burger King and Domino’s in India. And you could look in Turkey. You could look in Malaysia, Indonesia. Almost all these 10,000 restaurants you’re talking about that we’ve signed up so far are with people that have experience in other brands, so.
BROOKE DIPALMA: And when you think about that dip in the consumer and adoption of something like a Subway, does that worry you at all? We’re seeing others trying to get into this space, and it’s been a slow go.
JOHN CHIDSEY: Yeah. But again, we have over 17,000 restaurants out there. So it’s not like we’re not out there. We’re in 100 countries. We know sandwiches work globally. And we do have some large competitors like in the UK, we have something called Greg’s. But you’re right, so far the Jersey Mike’s, the Firehouse’s, the Jimmy John’s are much more domestically-focused.
So I always tell our team we need to, you know, turn our list of our backlog of 10,000. We need to turn that into a backlog of 20,000. I mean, we haven’t touched Spain. We haven’t touched Italy. We haven’t done Japan. We haven’t done Vietnam. We haven’t done the Baltics. So we’re out negotiating deals in all those markets. And we just need to make sure that we get them all done before our domestic competitors start to focus internationally.
BROOKE DIPALMA: Is global the future for Subway?
JOHN CHIDSEY: Absolutely– not just Subway. I mean, if you look at any McDonald’s, Burger King– any QSR chain, the vast, vast majority of their growth comes internationally.
BROOKE DIPALMA: And you’ve had such an extensive career. You were at PepsiCo. You mentioned you were a Burger King. If you had to highlight what makes this opportunity unique or different, what would you say?
JOHN CHIDSEY: Like I said, two things really. One, just the scale. It’s great to work with a brand that has 99% brand awareness almost everywhere in the world. But working for two families that don’t owe a bank a single dollar, you’re not having the gun of a public company and having worked for a ton of private equity companies in my life, they’re almost as obnoxious as– I tease them that, because they’re my friends– as being in a public company.
So working for two families that are just very patient and like, John, we don’t owe anybody anything, just take your time, fix it, it’s been a pleasure to work for them. And kind of whatever pressure you have, you put it on yourself. You don’t really have any external pressure, which makes it a lot more fun.
BROOKE DIPALMA: Do you foresee that being the same situation with Roark Capital?
JOHN CHIDSEY: No.
BROOKE DIPALMA: A little bit more pressure? Just a little bit more pressure.
JOHN CHIDSEY: Well, I mean, we’ll be fine. But it’s just different, so, yeah.
BROOKE DIPALMA: Yeah. And in terms of consumer trends right now, are there any ones that you’re following in particular, maybe a certain eating habit or a certain go-to that you’re seeing at your Subway locations?
JOHN CHIDSEY: Yeah. I think people, you know, like snacking, which we were not really great at. You’ll see us in January in the first quarter roll out a lot of snackable items to get people in their sort of between lunch and dinner. I think as people get stretched for price, people maybe skip meals, so they snack more. It really depends on where you are on the economic spectrum.
Again, when we went through our six or seven-year slide, we used to have a really good late-night business, which we don’t have.
BROOKE DIPALMA: Will you bring it back?
JOHN CHIDSEY: With that, we definitely– we’re going to definitely go work on that. Catering, why Subway was never like Panera? It’s like 20%, 25% of their business. If you think about a whopper or Big Mac and fries being delivered to your office or your house, it’s not the most portable product. Subway’s ideal for catering. Never had any catering package. Never advertise catering.
So I think over the next five or six years, won’t happen overnight, but we can build a sizable catering business. So I think we have lots of opportunities that the brand just hasn’t focused on. But our product is perfect for it.
BROOKE DIPALMA: So John, you’re not retiring again anytime soon?
JOHN CHIDSEY: No. No. I’m still having fun.
BROOKE DIPALMA: John Chidsey, Subway CEO, thank you so much for joining us. I so appreciate it. Thank you.
JOHN CHIDSEY: Thank you very much. Appreciate it.
BROOKE DIPALMA: Thank you.
