Jun 22, 2022 | Report Announcements

Subway Executive Summary

Subway is the largest sub sandwich chain by far with an ad budget larger by multiples than the other sub chains. Core brand equity includes: interaction between sandwich artists & guests as they move along Subway’s iconic make line, customizing their meals by choosing bread carriers, meats, cheeses, veggies and condiments/dressings; sub sandwiches which include lots of veggies (“Eat Fresh”); and bread baked in-house. The chain’s Eat Fresh Refresh 7/21 menu upgrade (largest in the company’s history) included: 11 new & improved ingredients (including new deli-thin sliced ham & turkey, hickory-smoked bacon, smashed avocado, BelGioioso Fresh Mozzarella & a tangy MVP Parmesan Vinaigrette); 6 all-new or returning sandwiches; 4 revamped signature sandwiches; 2 new fresh-baked breads (Artisan Italian & Hearty Multigrain); and low-carb protein bowls. This menu refresh is supported by the brand’s largest media investment, promoted by athletic legends. A new “Vault” menu (available online or on the app) features exclusive LTO sandwiches like The Dangerwich by Russell Wilson & The Beef Mode by Marshawn Lynch. Brand relevancy benefits from stepped-up innovation which ramped-up in 2021 after a 2020 lull. Notably, a +29% comp rebound in 2021 followed a -20% 2020 decline (75% of the system generated a +7.5% 2-year comp in 2021) and 2021 digital sales are triple 2019 levels, supported by its FreshBuzz App and loyalty program. Having said all this, the chain has its work cut out for it, having lost -13% of segment market share over the last 6 years. An average check which significantly underperforms the segment average reveals the brand’s lack of pricing power among its lower income demo and this represents a challenge as the system has moved away from value/discounting as part of its Eat Fresh Refresh upscale pivot. Currently, Subway is confronted with an urgent need to figure-out value/discounting given the impact of severe economic weakness on its lower-income demo. This will be difficult given a unit-level EBITDAR margin that is not close to recovering to system highs, stressed by: dramatic AUV underperformance; significant COGs underperformance which reveals a lack of pricing power & explains operator aversion to national discounting; and 13% royalty & ad contribution requirements. In conclusion, Subway’s well-conceived upscale Refresh must now pivot to value if the system is to endure an economic downturn that is disproportionately afflicting its lower income core demo.

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Traffic as a Gauge of Consumer Strength

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December’s preliminary retail sales release spooked investors who smell a recession. Normally, this would be a boost to stocks because of expectations that the Fed might start to adopt a more dovish stance. However, this represents the first time that investors have finally come to believe that Powell & company intend to keep interest rates inflated, even if hell freezes over. 

The Middle Class is Losing Share Post-Covid

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