Jared raid is only Subway’s latest problem

NEW YORK (AP) — A raid at the home of “Subway guy” Jared Fogle is just the latest trouble to hit the ubiquitous sandwich chain.

The company has been struggling with sales, its CEO was diagnosed with cancer and it’s trying to persuade customers that its food delivers value and quality ingredients.

Here’s a look at the challenges facing Subway, the largest restaurant chain with about 44,000 locations globally:

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DEAL MEALS

Subway is privately held and doesn’t publicly report its financial results. But last year, market researcher Technomic said average annual sales at U.S. Subway locations fell 3 percent to $475,000. That was the first decline since 2006.

The company hasn’t explained what it thinks might be hurting sales. But in an interview last month with The Associated Press, Subway Chief Marketing Officer Tony Pace noted that sales are a “multi-variable equation,” and that value promotions and prices don’t get a lot of attention.

That suggests one factor affecting performance could be Subway’s shift away from its $5 Footlong deal.

“It’s a challenging thing for chains that have built so much of their business off of a discount,” said Jonathan Maze, senior finance editor at the trade publication Nation’s Restaurant News.

Maze compared the $5 Footlong to the Dollar Menu at McDonald’s. As ingredient prices have climbed, both chains have tried to steer customers to other deals. Last year, Subway rolled out a $6 meal combo that includes a six-inch sub, chips and a drink.

But psychologically, Maze noted $6 just doesn’t have the same ring as $5.

HEALTHY SKEPTICISM?

Perceptions of what is healthy are always in flux, which means food makers can suddenly find themselves on the wrong side of a trend. Subway, for instance, could be hurting from the popularity of gluten-free diets.

Food industry executives also say people are showing more interest in things like ingredients and quality, rather than calories and weight loss. That has prompted several companies, including Subway, to vow that they’ll get rid of artificial ingredients.

Still, Subway may still be hurting from a petition last year that called on it to remove azodicarbonamide from its bread, saying the ingredient is also used in yoga mats. The chain later said it had already been in the process of removing the ingredient, which is widely used in a variety of breads.

After its removal, Subway ran TV commercials noting its bread contains no high-fructose corn syrup, artificial trans fats or azodicarbonamide. One store in New York City also had fliers this week with the same message under the heading, “Our Best Bread Yet!”

AN ILLNESS AT THE TOP

Subway announced two years ago that its CEO and co-founder, Fred DeLuca, was diagnosed with leukemia. It said DeLuca was focusing on his health, but that he was in regular contact with his management team from his home in Florida.

Then last month, Subway said DeLuca’s sister, Suzanne Greco, would take over as president, while DeLuca remained CEO. The company said at the time that the 67-year-old DeLuca remains “very active” in the company.

Last year, a soft-spoken DeLuca had met with reporters in New York City to talk about the business. Subway declined to share specifics on DeLuca’s condition last month.

Calls to phone numbers listed for DeLuca and Greco went unanswered Tuesday and Wednesday.

SMALLER RIVALS

Subway has 27,000 locations in just the U.S., nearly twice as many as McDonald’s, but it isn’t immune to pressure from competition.

Sandwich chains Jimmy John’s, Jersey Mike’s, Firehouse Subs and Potbelly are all far smaller. But each expanded its footprint last year, and each also has far higher average annual sales per store than Subway, according to Technomic. At $1.2 million a year, Potbelly’s average annual sales per store was more than double that of Subway’s.

In the meantime, Subway franchisees may be feeling pinched.

In addition to operational costs for things like equipment and rent, franchisees are subject to a variety of fees. At Subway, those include a royalty fee of 8 percent of sales on a weekly basis, according to a document filed by Subway’s parent company Doctor Associates Inc. earlier this year.

An advertising fee of 4.5 percent of sales is also deducted on a weekly basis.

A representative for the North American Association of Subway Franchisees wasn’t immediately available for comment.

PITCHMAN TROUBLE

It’s still not known what federal and state authorities hoped to find on electronics removed from Fogle’s home Tuesday. But Fogle’s attorney, Ron Elberger, said his client wasn’t charged or arrested. He said Fogle was cooperating with the investigation “and looks forward to its conclusion.”

Subway also said in a statement that Fogle “expects no actions to be forthcoming.”

Still, the company said it mutually agreed with its famous pitchman to suspend their relationship. Earlier, the company had already scrubbed references to Fogle on its website. And the news nevertheless casts a shadow on Fogle, who was widely seen as a regular guy who became one of the most recognizable figures in the restaurant industry.

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Follow Candice Choi at www.twitter.com/candicechoi

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