February 28, 2023 | Last Updated on: April 15, 2024
Subway, one of the world’s largest fast-food chains, has gained immense popularity in recent years due to its emphasis on healthy food choices and its extensive menu options. For many aspiring entrepreneurs, joining the large community of Subway franchise owners can be a lucrative business opportunity. However, before embarking on this journey, it is crucial to understand the costs associated with starting a Subway franchise.
In this article, we will explore the various expenses involved in opening a Subway franchise, including the franchise fee, equipment costs, real estate expenses, and ongoing fees. By the end of this article, readers will have a comprehensive understanding of the total investment required and franchise financing options to start a new Subway. We’ll cover the following topics in detail in this post:
The initial franchise fee is the payment that a franchisee makes to Subway to operate a restaurant under its brand. This fee varies depending on the location, but it typically ranges from $15,000 to $30,000. This rate is cheaper than the typical franchise fee. Compared to these other popular fast-food chains, Subway’s franchise fee is relatively low. The typical franchise fee for other fast food joints tends to be around $45,000. For example, McDonald’s had a franchise fee of exactly $45,000, Burger King of $50,000, and Taco Bell of between $25,000 and $50,000. This lower cost of entry makes Subway an attractive option for aspiring entrepreneurs who may not have the capital to invest in a higher-priced franchise.
In addition to the initial fee, franchisees are also required to pay an ongoing royalty fee of 8% of the restaurant’s gross sales. This fee is paid weekly, and it covers the cost of using the Subway trademark and other services provided by the franchisor, including marketing and training. This royalty fee is unusually high. The industry standard royalty rate ranges from 4-5%. For example, McDonald’s has a 4% fee, Burger King’s is 4.5%, KFC’s is 5%, and Taco Bell’s is 5.5%.
Additionally, franchisees have to pay a 4.5% marketing fee. This fee is slightly higher than the industry standard 4% marketing fee. This marketing fee, also known as an advertising fee, will be used to help pay for Subway’s international ad campaigns, which will help people drive people to your franchise.
Another cost associated with opening a Subway is the cost of leasehold improvements. For a Subway franchise, the total cost will depend on several factors, such as the location of the franchise, the size of the space, and the specific design and layout requirements of the franchise. Generally speaking, however, leasehold improvements for a Subway franchise may include the installation of equipment such as ovens, refrigerators, and display cases, as well as the construction of walls, flooring, and lighting. The cost of these improvements can vary widely but may typically range from $50,000 to $250,000.
Franchisees are also required to purchase an inventory of food and supplies from Subway’s approved vendors. The cost of inventory can vary depending on the size of the restaurant and the menu items offered. Typically, a franchisee can expect to spend between $5,000 and $10,000 on inventory each month.
Operational expenses are the ongoing costs of running the restaurant. This cost includes rent, utilities, wages, and other expenses such as insurance and advertising. The cost of operating expenses will depend on the location of the restaurant and the size of the staff. On average, the cost of operational expenses can range from $8,000 to $15,000 per month.
Taken together, franchising a Subway requires a significant investment, which includes the franchise fee, equipment, inventory, and operational expenses. The cost of franchising a Subway can range from $200,000 to $400,000, depending on the location and size of the restaurant. Additionally, the annual cost of operations and inventory combine to an estimated $132,000-$300,000. Odds are you will need to look into franchise financing options in order to get your Subway franchise off the ground, which is an important step in starting almost any small business.
Subway, the world’s largest restaurant chain, is an American quick-service restaurant company that has revolutionized the way people eat fast food. Founded in 1965 by Fred DeLuca and Dr. Peter Buck in Bridgeport, Connecticut, Subway has grown to over 44,000 locations in more than 100 countries.
The first Subway store was a humble sandwich shop that operated under the name “Pete’s Super Submarines” in Bridgeport, Connecticut. DeLuca, who was just 17 years old at the time, was looking for a way to fund his college education when he approached Buck, a family friend, for a loan of $1,000. Buck agreed to lend him the money, and in return, he asked DeLuca to start a business.
DeLuca and Buck opened their first sandwich shop with the aim of making enough money to pay for DeLuca’s college tuition. Their initial investment was used to purchase ingredients and equipment, and they started making sandwiches that quickly gained popularity among locals.
In 1968, the duo decided to expand their business and started franchising the Subway brand. The first franchise was opened in Wallingford, Connecticut, and soon the company began to grow rapidly. By 1974, Subway had over 16 locations in Connecticut.
In 1982, Subway introduced the “Subway Club,” a sandwich made with turkey, roast beef, and ham, which became an instant hit among customers. Two years later, the company introduced the “footlong” sandwich, which was twice the size of the regular sandwich and quickly became the company’s signature product.
By the mid-1990s, Subway had become a global brand, with more than 8,000 locations in the United States alone. The company continued to innovate and introduced the “Fresh Fit” menu, which offered low-fat and low-calorie options for health-conscious customers.
In 2007, Subway surpassed McDonald’s as the world’s largest restaurant chain, with more than 30,000 locations worldwide. The company’s success can be attributed to its focus on fresh ingredients, healthier options, and customization of sandwiches, allowing customers to personalize their orders.
Today, Subway continues to expand its brand globally, with locations in more than 100 countries. The company has also diversified its menu offerings, introducing salads, wraps, and breakfast sandwiches.
Franchising a Subway restaurant has several advantages that make it an attractive business opportunity for entrepreneurs. While there are pros and cons to running any franchise, some of the specific advantages of franchising a Subway restaurant include the following:
Ease of Getting Foot in Door: As mentioned above, there are a lot of Subway locations throughout the world. In fact, Subway is the largest fast food chain in the world. While this development is partly due to the quality of the Subway product, more credit is due to the ease of owning a franchise.
Comparatively Low Startup Costs: Opening a Subway franchise can be expensive, with startup costs ranging from $116,000 to $263,000. While this amount of money can certainly be a barrier to entry for some entrepreneurs who may not have access to the necessary capital, it is comparatively lower than other fast food chains. For example, franchisees looking to open a Five Guys will have to invest at least half a million dollars before anyone even orders a milkshake.
Established Brand and Business Model: Subway is a well-established brand with a proven business model. Franchisees can leverage the brand’s reputation and established systems to attract customers and build a successful business.
Training and Support: Subway provides comprehensive training and ongoing support to its franchisees. This includes both classroom and hands-on training, as well as ongoing support in areas such as marketing, operations, and management.
National Advertising: Subway conducts national advertising campaigns, which can help to build brand awareness and drive customers to individual franchise locations.
Economies of Scale: As part of a large franchise network, Subway franchisees can benefit from economies of scale in areas such as purchasing, marketing, and advertising. This can help to reduce costs and improve profitability.
Access to Financing: Subway has relationships with a number of lenders who specialize in franchise financing. This can make it easier for franchisees to secure the funding they need to open and operate their business.
One of the main sources of financing for Subway franchisees is the Small Business Administration (SBA). The SBA provides loans to small businesses that can be used for a variety of purposes, including starting a franchise. Subway has a preferred lender program with the SBA, which means that franchisees can access SBA loans more easily and at more favorable rates.
Another financing option for Subway franchisees is through the company itself. Subway has a financing program that allows franchisees to borrow up to 80% of the total costs associated with opening a new restaurant. This can include costs for real estate, equipment, and other expenses. The terms and conditions of this financing program vary, but Subway may offer lower interest rates and more flexible repayment terms than traditional lenders.
In addition to these options, Subway franchisees may also be able to secure financing through other sources, such as banks, credit unions, and private investors. However, it’s important for franchisees to do their research and shop around for the best rates and terms. They should also be prepared to provide a detailed business plan and financial projections to lenders in order to demonstrate the viability of their business.
Flexibility and Autonomy: While franchisees must adhere to Subway’s guidelines and regulations, they also have some flexibility and autonomy in areas such as hiring and menu offerings. This can allow franchisees to tailor their business to local market conditions and customer preferences.
In summary, franchising a Subway restaurant offers many advantages, including an established brand and business model, training and support, national advertising, economies of scale, access to financing, and flexibility and autonomy. These advantages can help entrepreneurs build successful businesses and achieve their financial goals.
While owning a Subway franchise can be a great opportunity, there are also some potential disadvantages that franchisees should be aware of. Some of the specific disadvantages of owning a Subway franchise include the following:
Limited Territory Protection: Subway may allow multiple franchise locations to open in close proximity to one another, which can lead to competition and potentially cannibalize sales. Most other fast food chains will not allow another of the same brand to open within a certain radius to protect the franchisee.
Abysmal AUV: According to data from QSR Magazine’s 2021 QSR 50 report, Subway’s Average Unit Volume (AUV) in 2020 was $393,000. This AUV is lower than all the other leading fast food chains by a significant margin. For example, Chick-fil-A boasts an AUV of $4.7 million, McDonald’s brings in an average of $2.9 million, and Starbucks, $1.8 million.
Loss of Control: Franchisees are required to follow the franchisor’s operating system and procedures and may have limited flexibility in making decisions about how the business is run. This standard operating procedure can be frustrating for entrepreneurs who want to have more autonomy and control over their businesses.
High Extraneous Subway Franchise Costs: Even though the initial franchise fee is low, the franchise royalty fee and marketing fee are higher than the industry standard. Subway franchisees will have to pay over 12% of their weekly revenue in royalty fees, 33% more than the fast food industry standard of 9%.
In order to get your foot in the door as a potential Subway franchisee, you need to have a minimum net worth of $80,000 and $30,000 in liquid capital. This net worth floor is required to cover the initial investment and startup costs of the restaurant. Compared with other fast food chains, this requirement is extremely low. Most other franchisors require a net worth of nearly a million dollars with hundreds of thousands of dollars in liquid assets. Therefore, as far as initial requirements go, Subway offers the lowest bar for getting started.
In addition to these financial requirements, Subway prefers franchisees to have experience in the restaurant or retail industry, management experience, or past experience being a business owner, especially if that business was their own business. While it is not a strict requirement, this experience can help franchisees understand the complexities of running a successful restaurant. If these initial requirements are met, a potential franchisee can begin the formal process for applying to obtain a Subway franchise.
Once you have decided to pursue a Subway franchise, you need to submit an application to the company. The application requires detailed information about your background, finances, and experience, as well as a franchise fee. If your application has been accepted, there are additional steps that need to be completed for your grand opening.
First, all Subway franchisees must complete a comprehensive training program that covers all aspects of operating a Subway restaurant. This program includes classroom and on-the-job training in food preparation, customer service, and management.
Once training is complete, you will need to find a location for your Subway location. You will work with a Subway Development Agent (DA) who will provide guidance and support in selecting a suitable location for the restaurant. A DA is a person or entity responsible for overseeing the development and growth of Subway franchises within a specific geographic region. Development Agents are independent contractors who work with Subway’s corporate headquarters to help identify potential franchisees, evaluate franchise applications, and provide ongoing support and guidance to franchisees within their region. Franchisees must secure a lease or purchase a property for the location and ensure that it meets Subway’s requirements.
After training, franchisees need to purchase or lease all necessary equipment and supplies to operate the restaurant, including ovens, refrigerators, and other kitchen equipment, as well as furniture, fixtures, and signage.
After completing the training program and obtaining all necessary equipment and supplies, franchisees can open their Subway restaurant. This opening step will include hiring and training staff, ordering supplies, and promoting the restaurant.
Once you have opened your Subway, Subway will provide ongoing support and management to franchisees, including marketing and advertising materials, access to a network of suppliers, and regular visits from field consultants. Franchisees must also adhere to Subway’s standards and guidelines for food quality, cleanliness, and customer service.
According to the Subway franchise disclosure document (FDD), the average annual revenue for a Subway restaurant in 2019 was $423,778. This number dropped during the 2020 pandemic but has rebounded since then. This AUV figure varies depending on location, size of the restaurant, and other factors, but it provides a good estimate of the potential revenue that a Subway franchisee can generate.
To determine profitability, we need to consider the costs involved in running a Subway franchise. We have determined the initial investment to open a Subway restaurant ranges from $116,000 to $263,000, which includes the franchise fee, equipment and supplies, and other startup costs. Additionally, we determined that the annual cost of operations and inventory combine to an estimated $132,000-$300,000. There are also ongoing fees, such as a royalty fee of 8% of gross sales and a marketing fee of 4.5% of gross sales. Therefore, with a revenue of around $400,000, franchisees will have to pay around $50,000 in fees.
If we assume an average revenue of around $400,000 and account for the ongoing fees and expenses, a Subway franchisee could potentially earn a total franchise profit of around $50,000 to $200,000 per year. However, this estimate is highly speculative because the subways that are on the lower end of the cost range will most likely not reach a $400,000 annual revenue. Even though this estimate has a wide range, running a profitable Subway seems rather feasible especially compared to other franchise opportunities such as running a Wendy’s or Five Guys. That being said, there are certainly more lucrative opportunities in this field. At the end of the day, however, Subway offers a different product with a different barrier to entry than these giants in the chicken finger space. In other words, Subway seems to be in a league of its own in low cost, low profit, in the franchise business space.
According to a 2020 report by Franchise Business Review, the average income of a Subway franchise owner is around $68,000 per year. However, this figure can vary significantly based on a number of factors, including the number of employees the franchise has, the location of the franchise, and the level of competition in the area.
The Subway training program consists of both classroom and on-the-job training. The classroom training takes place at Subway’s headquarters in Milford, Connecticut, and covers topics such as food preparation, health and safety, customer service, and franchise management. The on-the-job training takes place at an existing Subway restaurant, where franchisees and their employees can learn the practical skills necessary to operate a restaurant.
The training program covers all aspects of food preparation, including sandwich assembly, baking bread, and handling and storing food safely. The program also covers customer service, teaching franchisees and their employees how to provide a high-quality experience for customers. Other areas covered include inventory management, marketing and advertising, and financial management.
One of the key benefits of the Subway training program is that it provides franchisees and their employees with the skills and knowledge they need to run a successful restaurant. This includes understanding Subway’s brand and values, as well as the company’s policies and procedures. The training program also teaches franchisees and their employees how to handle customer complaints and how to manage inventory effectively, which are critical skills for running a successful restaurant.
The Subway training program is designed to be flexible, allowing franchisees to tailor the program to their specific needs and goals. This flexibility ensures that franchisees and their employees receive training that is relevant and useful for their specific restaurant. The training program also provides ongoing support and resources to franchisees, including access to a network of suppliers, regular visits from field consultants, and marketing and advertising materials.
The terms of agreement and renewal for a Subway franchise are outlined in the Subway Franchise Disclosure Document (FDD). The franchise agreement is a legal document that outlines the rights and obligations of both the franchisee and the franchisor.
The initial term of the franchise agreement is typically 20 years. During this time, the franchisee has the right to operate a Subway restaurant at the agreed-upon location. The franchisee must adhere to the terms of the agreement, including paying ongoing fees and following Subway’s policies and procedures.
Subway franchise agreements are renewable and subject to certain conditions. To renew a franchise agreement, the franchisee must meet Subway’s standards for performance, including maintaining high levels of customer satisfaction, meeting sales targets, and complying with all policies and procedures. Additionally, the franchisee must pay a renewal fee, which is typically a percentage of the current franchise fee.
The renewal process typically begins 12 months before the end of the current franchise agreement. The franchisor will review the franchisee’s performance during the current term, including sales figures, customer satisfaction ratings, and compliance with policies and procedures. If the franchisee meets the franchisor’s standards, the franchisor will offer to renew the franchise agreement for an additional term.
The terms of renewal are subject to negotiation, and the franchisor may adjust the fees and royalties based on market conditions and other factors. The franchisee must also agree to any updates or changes to Subway’s policies and procedures, as well as any modifications to the franchise agreement.
In conclusion, franchising a Subway restaurant can be a costly but potentially lucrative investment. The initial cost of franchising a Subway ranges from $147,050 to $320,700, depending on the location and size of the restaurant. This initial investment includes the franchise fee, equipment, inventory, and other start-up costs. However, additional ongoing costs, such as royalties, marketing fees, and training expenses, should also be considered.
When compared to other fast food franchises, Subway’s initial franchise fee is relatively low. However, Subway’s royalty fees and marketing fees are higher than many other fast food franchises. Additionally, the training program for Subway franchisees is rigorous and comprehensive, which can be a benefit for those looking for a thorough education in running a restaurant.
Overall, franchising a Subway restaurant requires a significant investment of both time and money. However, the potential for high returns on this investment, as well as the comprehensive training and support provided by Subway, make franchising a Subway an attractive opportunity for many entrepreneurs.
Ultimately, the decision to franchise a Subway should be made after careful consideration of the costs, potential benefits, and risks involved. This means that you will need to do your research, exploring not just the FAQs of the franchisor itself but a wide array of views and opinions on the franchise (including current Subway franchise owners that may be willing to talk with you). Further, you don’t want to be too narrow-minded. You should compare and contrast different franchise options and brands that are available to you. That way, you can make sure you choose the best franchise for your circumstances to give yourself the highest probability of success.
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