Subway’s success story started with a single sandwich shop

The problem, Mr. DeLuca explains with his immutable grin, is that he’s still full from Subway’s fastest growing “day part” (also known as breakfast). The egg white sandwich on flat bread, which is still making its presence felt, is part of the solution to 20 years spent “wandering lost in the desert, with a horrible breakfast offering,” he says. Finding ways to reach customers at a new time of day is one of the key strategies for the chain’s future growth.

But that does not mean Mr. DeLuca has taken his eye off of lunch. Just a few years ago, Subway was under assault as Quiznos aggressively expanded, with its selection of elaborate toasted subs. While that battle is now over – the recession hit Quiznos hard and last year it narrowly avoided bankruptcy – the war is far from won.

Former coffee-focused giants, including Starbucks and Canada’s No. 1 fast-food chain, Tim Hortons, are launching products all the time in a fight to attract the lunchtime crowd. And in a bid to appear more health-conscious, other fast-food chains have begun adding sandwiches and wraps to their menus. Reports suggest the company has seen its sales slip; its share of the Canadian fast-food market fell just over one percentage point last year to 5.2 per cent, according to market research firm Euromonitor.

“I see the sandwich competition,” he says. “Tims has sandwiches, and lots of them. Then of course McDonald’s has got hamburgers and now wraps and even salads.”

The company Mr. DeLuca created was among the first to present the idea that fast food could be relatively fresh and healthy. Now, it will have to fight to keep its footing as the strategy upon which the brand’s success is built becomes the industry standard.

But none of this seems to particularly worry Mr. DeLuca, who still speaks with a slight New York accent from being born in Brooklyn and raised in the Bronx and later upstate, in Schenectady. His gentle, casual manner makes him seem like somebody’s grandpa who is thoroughly bemused at having created an empire – one that has made him the 194th-richest person in America, according to Forbes, with a fortune of $2.6-billion (U.S.)

“When you think about it logically, this is a bad business model,” he says, pointing to the long lineup of customers, slowly choosing their sandwich ingredients. “Everyone wants to get in, get their food, and get out; so this is inefficient.”

The chain has experimented with premade sandwiches, but Mr. DeLuca says customers would not leave the back of the line to pick them up. “They want their sandwich made their way. Even though it’s the same food! It’s just astounding to me.”

Bad business model or not, Subway has become ubiquitous. In 2010, it surpassed McDonald’s to become the world’s largest fast-food chain by store count. This week, the company opened its 40,000th location, in a gas station in Britain. It’s an unlikely success story, given its humble beginnings.

In 1965 at the age of 17, Mr. DeLuca was looking for a way to pay for college. He asked for advice from a friend of his parents, secretly hoping for a loan. Instead, Pete Buck told him to open a submarine sandwich shop, and offered to be his partner. Mr. Buck put up $1,000, and Pete’s Super Submarines opened in Bridgeport, Conn., as Mr. DeLuca entered university.

The company born out of that agreement seems to hint at the health theme that would later become one of the pillars of Subway’s marketing: It’s called Doctor’s Associates Inc. But it was actually a nod to Pete Buck’s PhD in nuclear physics. “He was the doctor, I was the associate.”

Nine years later, he convinced a friend, Brian Dixon, to become the first franchisee. Mr. DeLuca credits the small format of the stores, and the relatively inexpensive franchise fee, for the pace of expansion since then. (In Canada, the fee to purchase a franchise is between $10,000 and $15,000, while other chains often charge double or more.)

In 1997, the company hit upon what would become a blockbuster marketing strategy. It began advertising “seven subs under six grams of fat.” Meanwhile in Indiana, a college student named Jared Fogle, weighing in at 193 kilograms, decided he wanted to slim down and created a diet for himself based on those lighter sandwiches. He lost more than half his body weight.

The story was picked up by his college newspaper, then by Men’s Health magazine. When the company’s ad agency got wind of it, they enlisted Jared for his first commercial in 2000. “There’s a lot of interest in the Jared story,” Mr. DeLuca says. In the two years following Jared’s commercial debut, sandwich sales at the average store rose roughly 30 per cent. He remains a spokesman more than a decade later.

“We had all these vegetables, so people intuitively knew that there were good choices there. That really worked in our favour because when we finally figured out that maybe we should advertise it, it wasn’t a stretch,” he says.

But Subway is far from unassailable. In recent years it has been operating in a culture where one of the biggest health demons is bread. But that doesn’t worry Mr. DeLuca much either. In 2011, the company experimented with gluten-free options at 500 stores in Dallas, and across Oregon and Washington. It won the company a lot of free press and social media chatter, but not much more.

“When it got down to the store level, we maybe sold one per day,” he says. “By and large, we’re a bread-eating culture. People like sandwiches. We don’t really over-think that one.”

The much bigger challenge is introducing that American-style sandwich culture to other cultures. Subway has had some success in emerging markets – 10 years ago, it had three stores in Brazil and is now at more than 1,000 and growing fast.

But the company will have to be much more aggressive in other high-priority markets, if it wants the brand to be as ubiquitous as it is in North America. India, for example, has roughly 400 locations – “a drop in the bucket” in such a huge and influential country, Mr. DeLuca says. (Toronto alone has about 600 stores.) Its presence in China is also in need of growth.

“Way back in the early days, even putting a store 30 miles away was hard. We didn’t have any customers there. Nobody knew the name. That gets magnified going to a new country. You don’t know the laws, you don’t have trained staff, you don’t have a franchisee. You have no customers,” he says. “They have to know the store exists.”

He also scoffs at the old trend of fast-food companies marketing themselves in new markets with localized menu offerings. While Subway makes some changes in international locations – such as a separate vegetarian counter in India – globalized marketing has evolved.

“Back in the early days of international, everybody wanted to customize the menu for every place,” he says. “Think about Japanese restaurants. At some time, there was no Japanese restaurants in the U.S. Then they started to come, and people started to learn to eat raw fish. Imagine if the Japanese restaurant guy said, ‘Hmm, we’re opening in Pittsburgh. What do they like in Pittsburgh? I think they like Kielbasa.’ And they put Kielbasa on the menu in a Japanese restaurant. That would not work.”

As emerging markets grow in influence, he is betting that consumers there will also develop an appetite for the custom-made sandwiches – even if the lineups are a little longer.

“I think that is a big strength we have. It’s a weakness too, but it’s a strength.”

CURRICULUM VITAE

PERSONAL

Born in Brooklyn, N.Y. in October, 1947.

Married high-school sweetheart, Elisabeth, in 1966.

One son and one grandchild.

Lives in Fort Lauderdale, Fla., and splits his time between there and Connecticut, where Subway is headquartered.

Last month, the company announced Mr. DeLuca is receiving treatment for leukemia. He is doing well and “focusing on his health,” while the senior management team runs the day-to-day of the business.

EDUCATION

Early ambition was to be a doctor, but he did not enjoy the labs in science classes.

Graduated with degree in psychology from the University of Bridgeport.

In 2002, he was awarded an honorary doctorate in humane letters by his alma mater.

QUOTES

On how Subway has changed: “I was 17 years old when I built the first store … A very simple, basic store with a basic counter – not very much equipment, all purchased second-hand. And the menu was very simple. We only had five sandwiches on the menu. They were all foot-long. And the other thing you could buy was a can of Coke. … Now we have 20 choices. We have salads, some other beverages. But in reality, it’s still fundamentally the same business. The most likely thing the next person will buy is a sandwich and a soft drink. After a half-century of glacial change, we’re still pretty much the same business.”

On retirement: “I set a mandatory retirement age for myself, of 100. That’s only 35 more years. No, I don’t have any thoughts of retirement. I wonder about that. There’s a lot of people, and I find it interesting, they actually look forward to the day that they will retire. That’s dreadful to me. What would I do when I wake up every day forever, without a purpose? Sometimes I think about Hugh Hefner, and the mansion, and all the bunnies. [Laughs] That sounds horrible. Okay, so I can’t do that. The golf idea doesn’t get me excited. I like doing this. Maybe part of it is I started it. … I get a kick out of it.”