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Foreign Expansion: A Text Book Case of how not to do it!

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Foreign Expansion: A Text Book Case of how not to do it!

With 27 710 restaurants located in 85 different countries, the US-based Subway franchise chain is widely ranked among the world’s leading brands and perceived to be an icon of franchising. Yet, all is not well with the brand, and here’s why.

According to a report that appeared in the March 2007 edition of the respected magazine Businessweek, Subway’s foray into Germany is an unmitigated disaster. After setting an ambitious target of having 1500 restaurants up and running by 2010, they made a series of mistakes that are not at all in keeping with the high reputation the brand enjoys.

Instead of investing their own money to prepare a solid base and introduce the brand, Subway started franchising from day one. Their franchise agreement is in English language and a New York-based court is responsible for arbitration in case of litigation.

Franchisees also allege that they are not granted sufficient territorial protection, and that Subway’s marketing has been weak.

At the outset, Subway appointed 16 development agents throughout Germany to drive the expansion forward. According to Subway’s own website, development agents are responsible for the recruitment of franchisees and for providing assistance with site selection and lease negotiations, assistance with construction and opening of restaurants as well as ongoing operational support.
In return for their troubles, the development agents receive no fixed remuneration. Instead, they are offered a share of initial and ongoing takings. On the face of it, this seems to be the root cause for Subway’s problems.

To earn a living, the development agents have no choice but to ‘sell’ franchises, acknowledged by responsible franchisors to be a cardinal sin in franchising. It is alleged that they accept anyone as a franchisee who can come up with the required investment and is able to sign his or her name on the contract. For the same reason, they aren’t too fussy with site selection, either, and even quality control does not seem to feature too high on their agenda.

In spite of this flawed approach, everything seemed to be going well in the beginning. By April 2007, 295 Subway franchisees were operating 418 restaurants, with annual sales of about 106 million Euros. However, according to Bernd Fassbender, president of the Franchisee Association Germany, ‘about 30% of the franchisees are just scraping by at the subsistence level.’ That’s not counting those who fell by the wayside altogether.

‘Frustration among the franchisees is growing by the day’ confirms an unhappy restaurant owner. ‘Many of us are now refusing to pay franchise fees, and we are considering a class action suit against Subway.’

Eight years after entering the German market, Subway still has no proper headquarters. Subway representative Marco Wild employs a mere seven people to look after the brand and the over 400 sites.

In response to pressure from franchisees, things appear to be finally changing. Issues of quality control are now being addressed, and for the first time in its history, Subway Germany is preparing a television campaign. Some six million Euros will go into a 14-week campaign expected to turn things around for Subway’s hapless franchisees.

A case of ‘oo little too late?’ Only time will tell but one thing is certain: Even if this campaign brings forth the desired results, it will be cold comfort to those ex-franchisees who placed their trust ‘ and their life savings ‘ into the hands of a franchisor who failed to hold up its end of the bargain.

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