The iconic sandwich chain Subway has entered into an agreement to be acquired by private equity firm Roark Capital for $10 billion. The deal comes as Subway aims to revamp its brand and menu offerings amid changing consumer tastes.
Overview of the Deal
- Roark Capital, an Atlanta-based private equity firm, will purchase Subway from its current owners, Doctor’s Associates Inc.
- The all-cash deal values Subway at $10 billion. This represents one of the largest recent restaurant acquisitions.
- Roark Capital is acquiring both Subway’s franchised locations and corporate-owned stores.
- The deal is expected to close by the end of 2022, pending regulatory approval.
Reasons for the Sale
Several factors motivated Subway’s decision to sell to Roark Capital:
- Declining sales: Subway has experienced falling revenues and foot traffic in recent years as consumers shift away from classic sandwiches. Their 2021 sales dropped to $7.5 billion, down from $11.5 billion in 2015.
- Increased competition: Rival chains like Arby’s and Jimmy John’s have taken market share through delivery partnerships and menu innovation.
- Franchisee discontent: Some franchise owners have been unhappy with promotions and redesigns under current management.
- Limited innovation: Subway has struggled to keep pace with food trends and update its offerings beyond core sandwiches.
Details on Roark Capital
Roark Capital is poised to leverage its experience revitalizing franchise-focused restaurants to revamp Subway.
- Founded in 2001 by entrepreneur Neal Aronson. Based in Atlanta.
- Has over $20 billion in assets under management. Focuses primarily on investing in franchise/multi-location brands.
- Current restaurants portfolio includes Arby’s, Jimmy John’s, and Cinnabon. Also owns pet retail chains Pet Supermarket and Pet Valu.
- Known for driving franchise profitability through updated branding, new menu items, improved locations, and digital efforts.
- Aronson aims to help Subway “realize its full potential” through elevating guest experience and menu innovation.
Subway’s History
Subway was founded in 1965 and experienced rapid expansion as a franchise model:
- Original Connecticut store opened in 1965 by 17-year-old Fred DeLuca with investment from family friend Dr. Peter Buck.
- By 1974, they expanded to 16 locations across Connecticut through franchising.
- Reached 1,000 total US locations in 1987.
- International growth began in 1984 with stores in Bahrain, Canada, and the UK.
- Hit 40,000 stores worldwide in 2019, before closing locations during Covid-19 pandemic.
- Currently has approximately 37,000 stores in over 100 countries.
Subway’s Recent Challenges
Subway has faced declining traffic and sales in recent years as it lags competitors in menu innovation and marketing.
- Foot traffic dropped 25% from 2016 to 2021 according to analytics firm Placer.ai.
- Store count dropped by 2,000 US locations from 2019 to 2022.
- Has struggled to attract customers under age 35 who often perceive Subway as lower quality compared to newer chains.
- Marketing promotions like $5 footlongs have lost effectiveness and strained franchisee profitability.
- Supply chain disruptions during Covid negatively impacted operations.
Turnaround Potential Under Roark
As a specialist in franchise restaurant turnarounds, Roark Capital purchased Subway with a revitalization plan in mind:
- Roark sees opportunity to upgrade Subway locations, improve customer experience, and re-engage franchise owners.
- Will likely introduce more digital ordering, loyalty programs, personalized promotions, and menu innovation.
- Plans to convert unsold Walmart in-store Subway locations into different restaurant brands also owned by Roark.
- Could expand menu with trendy offerings like salads, bowls, and breakfast items.
- Will re-evaluate unprofitable locations and look to add drive-thrus and smaller express stores.
- New marketing campaigns and collaboration with celebrities/influencers also anticipated.
- Firm has good track record of stabilizing and growing concepts like Arby’s and Jimmy John’s.
Challenges Ahead
While Roark Capital has the resources to invest in Subway’s revitalization, uncertainties remain:
- Turning around such a large chain with ongoing sales declines presents challenges.
- Franchise relationships strained in recent years will take time to repair.
- Growing prevalence of ghost kitchens and virtual brands creates new competition.
- Health concerns around some ingredients like processed meats are mounting.
- Convenience of food delivery continues to disrupt casual, counter-service restaurants.
- Time will tell if brand reinvention will resonate with newer generations.
Outlook for the Future
The Roark Capital acquisition starts a new chapter for Subway as it seeks to modernize its brand and menu. With over 37,000 locations globally, Subway maintains a strong foundation to build upon. The new ownership expects to inject fresh thinking and capital into Subway’s operations while preserving core menu offerings. However, the chain faces stiff competition in the crowded sandwich category it pioneered. The deal’s success will depend on breathing new life into its franchises and enticing back customers looking for healthier and convenient options.