Question

THE FIVE DOLLAR FOOTLONG

Stuart Frankel isn't what you'd call a power player in the world of franchising. Five years ago (1) he owned two small Subway sandwich shops at either end of Miami's Jackson Memorial Hospital. After noticing that sales sagged on weekends, he came up with an idea: He would offer every footlong sandwich (the chain also sells 6-inch versions) on Saturday and Sunday for $5, about a buck less than the usual price. "I like round numbers," says Frankel, a brusque New Yorker who moved to Miami in 1972 and owned a drugstore before opening his first Subway outlet in 1988.

Customers liked his round number, too. Instead of dealing with idle employees and weak sales, Frankel suddenly had lines out the door. Sales rose by double digits. Nobody, least of all Frankel, knew it at the time, but he had stumbled on a concept that has unexpectedly morphed from a short-term gimmick into a national phenomenon that has turbocharged Subway's performance. "There are only a few times when a chain has been able to scramble up the whole industry, and this is one of them," says Jeffrey T. Davis, president of restaurant consultancy Sandelman & Associates. "It's huge."

In fact, the $3.8 billion in sales eventually generated nationwide by the $5 footlong alone placed it among the top 10 fast-food brands in the U.S. for the year ended in August, according to NPD Group. That puts the $5 menu's success just a notch behind KFC (YUM) and ahead of Arby's and Domino's Pizza (DPZ). It helped privately held Subway, of Milford, Conn., lift U.S. sales 17% last year at a time when most restaurant chains, save for industry leader McDonald's (MCD), struggled. Subway is poised to surpass McDonald's in worldwide locations sometime early next year. (2)

Frankel, along with two other local managers in economically ravaged South Florida, ceaselessly championed the idea to Subway's corporate leadership amid widespread skepticism. Once it was approved, Subway's marketing team quickly generated a memorable campaign that firmly established the $5 footlong nationwide but, in accordance with Frankel’s franchise agreement the company regarded the five dollar footlong idea as the intellectual property of the franchisor and Frankel was not financially rewarded.

Frankel kept the weekend promotion going for more than a year. At the same time, Subway's top brass was growing tired of a national ad campaign that featured spokesman Jared Fogle, who had lost 245 pounds almost a decade earlier by eating Subway six-inch subs for lunch and dinner. In September 2007, Steve Sager, a Subway development agent who oversaw about 225 franchises across South Florida, heard about the success of Frankel's $5 deal. He decided to try it in a troubled Fort Lauderdale outlet on Commercial Boulevard, a gritty thoroughfare dotted with strip malls. On the first day of the promotion, the store nearly ran out of bread and meat. Sales doubled.

Suddenly Subway needed 50% more food supplies. Bread shortages became a problem, as the ratio of six-inch sandwiches to footlong orders, normally 2 to 1, flipped. Subway's franchise-owned Independent Purchasing Cooperative, or IPC, had to scramble to find new sources of bread. Even mundane items, such as plastic sandwich bags from China, nearly ran out. "I was in a panic," recalls IPC CEO Jan Risi, who furiously worked the phones, cajoling her network of suppliers to run extra shifts.

Frankel who was not financially compensated for his innovation has moved on to a new idea. Now he's pushing for Subway loyalty cards that let purchasers accrue points toward free sandwiches. Driving down Interstate 95 toward Jackson Memorial on a cloudy autumn day, Frankel chronicles the frustrations he's had convincing DeLuca and others that this could be a hit. Maybe now that Frankel is the Father of the $5 Footlong, they'll listen and recognize his innovations with appropriate monetary compensation.

(1)

Subway surpassed McDonalds in 2009

4. USE THESE QUESTIONS TO FRAME YOUR DISCUSSION BOARD COMMENTS  Does the way franchising is structured discourage innovation?

 Would a smaller more entrepreneurial company likely have acted more quickly to capitalize on the $5 footling?

 Did Subway treat Frankel treated fairly?

 What negative consequences might have resulted for Subway if it had made an exception to its franchise agreement and rewarded Stuart financially?

 Does this story encourage or discourage you from considering buying a franchise?

Answer 1

4. Innovation ultimately occured with the footlong subway, its not the case that Subway completely prohibited the idea. Thus innovation took place in a franchisee as well, but there are limitations as to its approval by every store in the country and several rules governing the franchise. Thus it doesn't directly discourage innovation, it will opt for innovation as long as it meets the guidelines.

Smaller entrepreneurial company would have opted more quickly to capitalize on the $5 footlong, but it would have also not been able to access the trusteeship which Subway enjoys, because Subway is a global brand and is known for quality, people opted for this. Thus the sales of the smaller firm would not have increased as fast as it did for Subway.

Subway should have credited Frankel with the idea, but than Frankel would have asked for a share in goodwill and this would have cascaded into all other subway store owners looking for new ideas and asking for a share. Thus in order to discourage such behaviour Subway did treat Frankel in the best of company practices.

It might have resulted into all other owners looking at new ideas and thinking of it as a revenue earning scheme to gain good will from Subway, this would have led to lawsuits if subway wasn't providing them with the financial reward and it would have led to deterioration in the working business model of Subway.

It does encourage one to consider buying a franchise as Subway did in the end implement Frankel's idea, it was not like it discouraged him and sued him, Subway was open to ideas, even though it took some while to approve, but this occurs in big franshisee's as there are several levels for approval. Infact, I would be encouraged to consider buying a franchise as such innovative ideas lead to more profits and even if another person comes up with an idea, all stores gain the benefit of acruing higher profits.