020821 How Subway Became #1 Fast-Food Chain

At least one fast-food chain is happy about all the comparisons between burgers and Big Tobacco these days. After all, who could accuse Subway of fostering obesity when poster boy Jared Fogle lost 245 pounds by eating at the sandwich chain every day for almost a year? Those who condemn McDonald's and Burger King are fast to praise the emergence of chains with fresh food and low-fat items on the menu.

Over the past year, Subway has actually surpassed McDonald's to become the country's largest fast-food chain, boasting 14,000 outlets, vs. about 13,000 for McDonald's -- though Subway's $5 billion in global sales hardly matches its rival's $40 billion tally. Outside the U.S., meanwhile, the chain is just starting to make inroads in countries where McDonald's already dominates.

HOMES OF HEROES.

Another difference between the two chains: Subway has no plans for an IPO. "We talked about it for half an hour [in the late 1980s]," co-founder Fred DeLuca says. "Do we want a bunch of additional people -- shareholders -- to distract us from our mission? We did the calculations and decided we didn't have to go public."

No reason to think he'll change his mind -- although, if he did, DeLuca wouldn't be the first entrepreneur to reverse course on that front. Subway does have some advantages that are hard to beat. It helps that some outlets are as small as 300 square feet, often nestling in gas stations, convenience stores, even schools. The total investment for franchise owners can be as low as $65,000, a mere fraction of what it costs to launch a McDonald's.

Ron Paul, president of Technomic, a restaurant consultant, also notes that Subway's same-store sales performance is much stronger than burger rivals, and also that it's on the money in terms of food trends. "Subway is hitting the consumer's hot buttons right now," says Paul, who points to the growing preference for fresh, custom-made casual food.

RICH DIET.

Indeed, low startup costs and overhead expenses don't account for the success of a menu based largely on cold meats and bread. After the first outlet opened in Bridgeport, Conn., in 1965, Subway was relatively slow to take off. Admits DeLuca: "We were never very sophisticated as business people."

A particular low point, at least as far as DeLuca is concerned, was a mid-'90s marketing campaign featured two purported taxi drivers named Bucky and Vinny, who used humor to hawk the sandwiches. Not only were the Showtime cable-TV characters downscale -- anything but aspirational -- they weren't very funny. Says DeLuca: "When the commercials were shown, sales would go down."

Then, in 1997, Subway took a particularly savvy marketing turn in focusing on healthy offerings that taste good, thereby putting the focus on its line of low-fat sandwiches. "Our customer base is, on average, more affluent than people who eat fast food in general," notes DeLuca, who adds: "We're a little more expensive and more customized."

FOOD FOR THOUGHT.

The nutritional benefits remain a key selling point. That message really began to resonate in 1990, when the chain found spokesman Jared Fogle. DeLuca says he learned about Fogle's eccentric weight-loss diet when his mother wrote a letter of thanks to the company.

The somewhat nebbishy college graduate has become a household name since appearing on national commercials for the chain. As an Indiana University student, Fogle lost more than half his body weight by eating two sandwiches with no oil, mayonnaise, or cheese, baked chips, and diet soda from Subway every day between March of 1998 and February of 1999. He had previously dined on megasized burger meals or Subway's more fat-filled offerings, complete with extra mayo and double cheese.

Since then, Fogle has appeared in numerous commercials and is even working on what he calls an "inspirational" book about his experience. The 6-foot-2 former fattie, who now weighs about 190 pounds, has also taken to concealing his newfound celebrity behind disguises. "I can't go anywhere anymore without people recognizing me," laments Fogle, who maintains his weight with regular Subway outings, although he admits to adding extras like cheese or honey mustard every now and then.

TASTES GOOD, LESS FILLING.

The next challenge is to move beyond Subway's good-for-you image and expand its market appeal. Bill Schettini and Chris Carroll, the marketing duo behind the low-fat campaign, are now trying to play up Subway's appetizing side.

The outfit has launched a series of seasoned-bread offerings, such as honey-oat, roasted garlic, and jalapeno cheese breads, as well as several new sauces and fillings. Along with continuing to feature the real-life Jared in commercials, Subway has introduced an edgier character named Jim, who emphasizes the freshness angle by mocking fast-food rivals. For the first time in its 37-year history, Subway also has revamped its shops to create a warmer and more upscale, Tuscan-themed look.

All the same, the letters from customers who lost weight continue to roll in, usually between 200 and 250 of them every month. Some newly svelte Subway enthusiasts get congratulatory letters and gift certificates. Others, like New Yorker Sheryl Hymowitz, appear in the chain's local commercials. By eating around 10 six-inch turkey subs each week, Hymowitz shed 75 pounds in less than a year.

HUNGRY WORLD.

Another goal, of course, is global expansion. The company opened a location in India earlier this year, and has been accelerating its push into markets like Germany and Britain. Still, even the U.S. has its challenges. Boston, for instance, has proved disappointing, while cities such as Los Angeles eat up the concept. Subway execs say that, as a general rule, areas with greater concentrations of outlets do better because strength of numbers raises the chain's profile while increasing consumer convenience.

In any case, the basic formula of offering foot-long and six-inch sandwiches stuffed with assorted meat, veggies, and toppings is clearly a winner. With weight-conscious consumers losing their appetites for french fries and grilled burgers -- even going so far as to sue chains that allegedly made them fat -- it can only bode well for outfits like Subway. Of course, low-fat food alone won't draw customers through the door and eating the same meal every day for months at a time seems like a strategy reserved for the few. Even health-seekers like to feel they're in for a treat.

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