Why the $5 Footlong Failed: How Franchising Works


This video is sponsored by Dashlane. Protect your passwords free for 30 days with
the link in the description. When the United States gets hungry, and, we
do that a lot, we like to hop in our car, preferably not get out of our car, and pay
an absurdly small amount of money. Fast food, or Quick Service restaurants, are
a $256 billion a year business made one or two or five dollars at a time. Globally, there are 20,000 KFCs, 30,000 Starbucks,
37,000 McDonalds, and, more than any other, 43,000 Subways. There’s one in every U.S. state, every U.S.
territory except American Samoa, schools, churches, and casinos. One, even, was hydraulically-lifted above
New York’s Freedom Tower during its construction to accommodate workers who didn’t have enough
time during their lunch break to go down to ground level. Subway, like many companies, got so big by
outsourcing its growth – allowing just about anyone, just about anywhere to open their
own location. It’s the poster child for franchising – growing
22% during the worst recession in 75 years. But it’s also a perfect example of what
can go terribly wrong. In 2017, Subway lost over 900 U.S. stores,
and the $5 footlong, the catalyst behind the company’s insane growth, became the source
of its downfall. So, why do some companies choose to share
their business model when they could just keep all the profit themselves? If you a) like the idea of being your own
boss and b) know how to cook, you might be tempted to start a restaurant. Something like 1,000 new independent restaurants
open each year in the U.S. and it’s easy to see why. The average American spends 13% of their income
on food. Nearly half of which is eating out. Gyms and travel agencies are fickle, but almost
everyone needs to eat. And starting a restaurant can cost as little
as $100,000, which, while not exactly cheap, is relatively accessible for many people,
with loans. But, of course, it’s much easier said than
done. The idea of not having a boss sounds great
until you realize that means working long hours, getting paid last, and being responsible
for every little thing that goes wrong. People often choose to open a Mexican restaurant
because that’s what they like or a gym because they like working out, but soon find that
managing a business and eating tacos are two, very distinct skills. Restaurants also have extremely high turnover,
and often employ family members, which makes firing them especially difficult. It’s a myth that 90% of restaurants fail
in the first year, but the truth is still not very promising – about a third in the
first year and two thirds after three. Although, this does include change of ownership,
and sometimes owners are just ready to move on. Regardless, it’s not an easy feat. So, if you do succeed, you tend to get a little…
confident. If you can turn a hundred thousand dollar
loan into a hundred thousand profit in a few years, why stop there? A second restaurant could double your income! At least, because now you have experience! The truth is, no matter how successful you
are, you haven’t yet proven the business model. You’ve proven the business model at this
location, with these employees, this year. Breaking into a new market isn’t easy, even
for the biggest companies on earth. Amazon failed in China, Uber in Korea, and,
for a long time, Dunkin’ in California. A smart business owner knows each and every
new location is a huge opportunity and a huge risk. Enter: the franchise! It’s easy to see a company like Subway as
an unstoppable giant, but one day it was just a 17-year-old kid in Connecticut trying to
pay his way through medical school and opening a second location meant gambling everything. The beauty of franchising for the Franchisor,
that is, the larger company, is that it shifts some of that risk to the Franchisee, the person
who pays to open a new location, and usually buys or leases the land, building, and equipment. Every franchise is different, but here’s
how it generally works: First, anyone who meets the minimum requirements
can apply to open a new location. The potential franchisee and an agent representing
the franchisor will then interview each other, deciding whether it’s a good fit. This culminates in what’s called a Discovery
Day – where the candidate flies to the company’s headquarters, meets its executives, and see
its operations firsthand before making a final decision. If both parties are satisfied, they sign a
Franchise Agreement – which has three main components. First – it sets the length of the contract. A franchise is really a lease, and when it
expires, usually in 5-10 years, both parties have to agree to renew it. Otherwise, the franchisee is simply out of
luck. Second – it outlines the costs. There’s an upfront, one-time Franchise Fee,
think $10-50,000, and an ongoing royalty, say 4-15% of all revenue. Finally, the Franchise Agreement lays out,
in great detail, exact requirements for doing business, from how everything is made, what’s
on the menu, and often, what hours it must be open, sometimes on Christmas. The goal is to maintain consistency – every
McDonalds and Subway and Dunkin’ should look, smell, and feel the same. Without these strict standards, individual
stores could coast on the success of the brand as a whole, while cutting corners and saving
money. For the franchisee, this model is attractive
because it’s relatively safe. If people like McDonald’s fries in D.C.,
so you can pretty safely bet they’ll also like them in Portland. And, when the time comes, it’s much easier
to sell a Pizza Hut than a generic Bob’s Local Pizza. You probably won’t be as rich as, say, a
successful tech startup, but you’ll also sleep much better at night knowing that while
your income ceiling is much lower, the floor is much higher. The secret to Subway’s success is that stability
combined with low barriers to entry. Its franchise fee is just $15,000, in total,
about a tenth of the cost to open a McDonalds. They’re also quite small – just 1,200 square
feet on average, compared to McDonald’s 4,500. In 2013, Subway opened 50 new locations a
week – that’s seven every single day, on average. But don’t confuse Subway’s success with
its Franchisees’. Companies like to portray franchising as a
sort-of economic marriage – both wish the other success, while the corporation provides
support and guidance. The reality, though, is often much different. The local owner of a Subway, for example,
might argue that while he or she is in the business of selling sandwiches, Subway, the
corporation, is really in the business of selling its logo. Because it doesn’t own any of its stores,
but makes a minimum of fifteen grand no matter how successful they are, it’s incentivized
to open lots of locations, regardless of how qualified the applicants. Unless they have exclusive territory agreements,
longtime franchisees may find themselves competing with another Subway or six within a mile radius. And they often find franchise agreements overly
restrictive. Sure, you don’t have to come up with new
recipes or find the right equipment, just follow the instructions, but you also don’t
get to if you have a better idea. This tension became an all-out war with the
$5 footlong. It started as a brilliant idea. Something about that clean, even $5 price
attracted customers like nothing else in company’s history. Now, one would assume a $6 footlong would
sell about 20% worse, because, ya know, math! But one would also assume no-one would eat
disgusting cashews and yet you goons gobble them up like crazy! The point is people are weird, and in the
15 years since the $5 footlong was introduced, haven’t gotten any less weird, in fact,
weirder probably, but while we still like nice, round numbers, because of inflation,
5 2004 dollars is now equivalent to about $6.78. Not to mention the rising cost of labor, land,
and health insurance, which also vary considerably by region. In other words, Subway is making a lot less
money for the same price. Well, Subway Franchisees, that is, because,
remember, Subway Incorporated takes a cut of revenue, not profit. The promotion was great for the corporation,
it even threatened to sue other chains who used the term “footlong” in advertising
the length of their sandwiches. And when an Australian teenager complained
that his sandwich was only 11 inches long, Subway argued it’s “Footlong”, not foot-long. Clearly it’s a descriptive name for the
product, not intended to be a measurement of length. Duh! In 2014, Subway switched to a $6 combo with
a drink and cookie or chips, but it wasn’t nearly as successful. And, after much fighting, the company finally
made the $5 promotion optional for franchisees in 2018. The damage, it seems, was already done. Subway fell into the franchise trap – focusing
only growth, to the detriment of its existing locations. Meanwhile, people’s preferences simply moved
on. At their best, franchises represent the American
dream – anyone with an entrepreneurial appetite and even the most modest savings can go from
working in a convenience store to owning one in a matter of years. But, like anywhere money is made, there tend
to be a few big winners – the owners of 5, 10, 50 locations who’ve optimized for everything,
and many others barely scraping by, despite, not uncommonly, making a million dollars in
revenue, per store, each year. Franchising can be a great opportunity, but
it’s important to remember that each new location is a new risk – not just that it
will fail, but everything you own will. Likewise, every time you sign up for a new
website or app, you risk having not just it but all your accounts hacked if you use the
same or similar password. Dashlane protects you by generating a new,
unique password for each and every website, and then remembers and fills them for you
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and a VPN for less than the price of each separately. The truth is no-one wants to think about security,
you just want to be automatically protected, and Dashlane makes it all so seamless that
there’s really no reason not to. Use the link in the description to get a free
30-day trial of Dashlane Premium and if you like it, use my code polymatter to get 10%
off. Thanks to Dashlane and to you for watching
this video.

100 comments on “Why the $5 Footlong Failed: How Franchising Works”

  1. Brandon Stennett says:

    Can you explain why Sweden has no bail ? Would help us understand ASAP.

  2. d12parson says:

    motherfucker took 10 minutes to say that inflation made the footlong almost 7$ in 2019. then somehow used the whole fucking video purpose to gear towards an ad at the end.

  3. kingdomheartsguy44 says:

    Nobody:
    Wawa: $5 hoagiefest Hoagies

  4. Michael Lords says:

    Meal items are almost $10, these are not low prices.

  5. thomas says:

    Subway are smart McDonald’s customers, who relized their getting fat and do something about it.

  6. Neil Adrian Gomez says:

    I’m only watching your videos just to copy your accent or the way you speak because you sound appealing

  7. Arthur O'Brien says:

    Subway IN a church? How postmodern do you have to make that fit with the New Testament?

  8. Vikalp Gupta says:

    Promotional vdo of Subway to how easily you can get its franchise and how it depends on you to succeed and not on the Subway's dis-repute it earned on "footlong" debacle.

  9. sean oloan says:

    Can you not slabber about cashews, they are gifts from god.

  10. A Dogtor says:

    18 second unskippable ad. ok.

  11. 311 Jazzy 🌸🎀💖 says:

    I’m amazed it failed. I couldn’t stop singing the song when I was a kid.

  12. Brice says:

    Business insider plagiarised this video.

  13. RIGHT4PLUM says:

    I came here for the Jared from subway jokes

  14. Reid Buchanan says:

    who the fuck calls it a quick service restaurant

  15. Iacon Dawnshire says:

    Stopped eating at Subway ever since the Jared fiasco

  16. StapleCactus says:

    When all you have is $5 in 2004 and $5 in 2019, it's hard to understand how business think inflation is the cause of their problems. When you haven't had a raise in 15 years, inflation is an excuse. You have to wonder how it's even a problem when no one has had a raise, yet somehow costs keep climbing. People are at every step of the process, so where's the increased cost coming from? It's just labor at farm A, labor at transportation B, labor at factory A to make parts for factory B to labor at produce from farm A, etc, etc. The only costs that are increasing are the fake "gotta keep inflation down" fees from the government. And then I have to wonder, why do companies think "Oh, they have X amount of money to spend now, so we can raise our prices!" like the money isn't already accounted for.

  17. Raul: Trashlord says:

    your channel feels like Microsoft PowerPoint but sentient

  18. interested says:

    I would title it "Franchising meets inflation: why the $5 footlong failed". Plus, am I the only one noticing the shift to more footage on Pm's videos?

  19. Jerome Alday says:

    These guys don't know how to make video essays. This video was never about the $5 footlong? It was just the carrot at the end of the stick.

  20. Pavor says:

    Franchising and Chain stores destroyed any hope of Capitalism ever working. Franchising doesnt work, it is toxic to economies, as long as things are allowed to grow so large no measure of free market anything will ever be viable.

  21. Russell Davis says:

    TLDR: It succeeded for years, but inflation exists. It didn't fail. Shitty title.

  22. RAYZ MOBILE CARRIER NEWZ says:

    Peanuts aren't real nuts! They're BEANS, you moron!

  23. Kev Chino' says:

    "people are weird" lmaooo so true .

  24. Minusartifact55 says:

    There are franchise and then there is corporate. I work at a subway

  25. omega says:

    They got one in a church here in buffalo. In ze ghetto

  26. omega says:

    He didn't cut that sub properly. Yes, I worked there at 17.

  27. omega says:

    Yo that is a LOT of inflation. You know that, under a properly functioning economy, wages tend to rise with prices, right? It's only when you're printing more money to represent the same amount of aggregate value that "inflation" increases in what we might term an 'empty' way. Of course, orchestra players will want more money to scale with other fields, even when basic costs don't increase (a Stradivarius is still a Stradivarius), but even so, increased efficiency and innovation is what's driving that, not increases in prices. Everything only costs more if the world is poorer, or someone is making artificial liquidity. It's logic. We accept inflation as a fact of life, but is it really?

  28. Connor Aalto says:

    All these transitions have ne thinking I'm getting notifications

  29. FooBar Maximus says:

    Bullshit clickbait.

  30. N H says:

    I still cant believe their chicken is not real chicken.

  31. Unknown O_o says:

    Watch "the Founder" with Michael Keaton. Amazing movie.

  32. howtobebasic 2 says:

    I LOVE THERE FOOTLONGS!!!!!

  33. howtobebasic 2 says:

    I want them my footlongs https://www.youtube.com/watch?v=l9mEgFnKxyM

  34. n2meows says:

    But the 200 calorie chocolate chip cookies are great.

  35. Jordan Kelly says:

    It was never really 5$?

  36. TopShelf Pipe says:

    Cashew Gang fuck what you heard

  37. Walter Melon says:

    Wow! So the 5 dollar foot long failed because dashlane remembers all your passwords!? Far out!

  38. Mark Schultz says:

    Soobway

  39. 12 GPM says:

    9:12 what kind of driveway is that?

  40. Ricky Cunningham says:

    I am sorry did you say in the video that "almost everyone has to eat"? Last time I checked everyone had to eat food lol.

  41. Warren Lehmkuhle says:

    Seven Subways a day? Uh………………… there is no way that could backfire.

  42. wHaTs0uuup says:

    15 in a week makes 7 per day? (6:20)

  43. QuestWalker KO says:

    6:56 boi i heard ur phone ring for a sec

  44. Ishmaa'iyl Perez says:

    So aint nobody gonna mention that this dude is like a Real-life lore wannabe?

  45. Doggo Nation says:

    0:58 ah yes, my favorite fast food restaraunt.

    Ace hardware. Gotta admit, their screwdrivers are delicious.

  46. ChainsGoldMask says:

    Peanuts are legumes. Not a real nut. Cashews are awesome.

  47. Danny M says:

    what about $5 hot n ready

  48. Danny N. says:

    This video barely answers the question of its title, but I'll assume it is because of inflation.

    But how much does it affect? In recent years, how much does it cost to make a footlong compared to its sale price? What is the profit margin, and are the stores profitable or are they not?

  49. FirstName LastName says:

    sOOubway

  50. StevOwn Sturdevant says:

    Watched a couple videos, was considering subscribing, then the cashew thing came up and I was like WTF? If you are that biased about something like a cashew, then how can I trust anything you say?

  51. Maximillian Sbabo says:

    I love you videos but that shilling at the end is always super cringy…. hahaha

  52. Chris Hunter says:

    Sooooo Little Caesars is somehow defying inflation for even longer. interesting

  53. 10 thousand subs with no Video says:

    SOOUUBBBWAY

  54. Gilberto Animation says:

    What about in n out burgers?

  55. A Casual Gamer says:

    I’m so confused. What’s wrong with cashews?

  56. joseph melton says:

    God soooooo many of you bitch about how a FREE video didn't meet your standards. Jeusus find another video then? God people can be so whiny and unsatisfied in the best time to be alive

  57. HeavyIzThaCrown - says:

    ❤️👍🏾

  58. rck ism says:

    whats wrong with cashews? that took a strange turn.

  59. MrStamford78 says:

    Who spotted the Seinfeld restaurant at 3:40

  60. dariusdareme says:

    Why do you find cashews disgusting?

  61. TheChopLobster says:

    Cashews are great
    How dare you slander such a noble stone fruit

  62. Funaoe24 says:

    I wish they still had the $5. *sigh The good old days.

  63. L G says:

    I hope that comment about peanuts was a joke.
    Embarrassing

  64. Jeff W says:

    Why does the audio on your videos "pop" so much? It makes them unwatchable.

  65. Teawisher says:

    Peanuts are lentils. But cashews aren't actually nuts either(they are a seed of fruit).

  66. AJtheory says:

    I think it was the song on the commercial that made people not want to go there, looked and sounded like some Sesame-Street bullshit

  67. Gabriel Lowenthal says:

    9:11 so they converted a garage to a second front door and windows and put that fence through the middle of their driveway because _______?????

  68. Kadeem A Thomas says:

    Cashews are delicious BTW🤷🏾‍♂️

  69. MafiousBJ says:

    Subway has more restaurants than Mc Donalds globally? Damn that's impressive. I wouldn't have imagined it since they are failing hard where i live while Mcdonalds has been the staple fast food chain

  70. Lord Jaraxxus says:

    I saw that dashlane advertisement coming from a mile away.

  71. Charles Jannuzi says:

    Five dollars–too much for a hotdog. Hotdog–something seen as the most unhealthy example of bad fastfood meat.

  72. iwanttodie says:

    u h8 cashew ? i guess i'm a hater now.

  73. Sam Treat says:

    You don't like cashews?!?!?!?

  74. austin bevis says:

    One of my professors once told us that there were 2 in her office building alone.

  75. The Puppet Of Everything says:

    Cuz um inflation. 5$ back then is $6.75

  76. Juan Ferreira says:

    Because of Jared lol

  77. ResidualSelfImage says:

    A franchise makes money by selling supplies and PR support…. but if a franchise has a bad business pricing model the franchise owners will  fail on a massive scale BUT  not the franchise itself is not at risk.

  78. Hannah Mortensen says:

    I can’t believe I got a subway add wtf

  79. Wrel Rel says:

    Subway use to be awesome. But now thay all have nasty bread.

  80. ari yuh says:

    I work at subway and you don’t know how quickly I clicked on this video

  81. Ed Fulginiti says:

    Wow…good info that slides into a commercial…just saying…

  82. HORDAK SKELETOR says:

    🔥🌭🔥🌭🔥🌭🔥🌭🔥🌭🔥🌭🔥🌭🔥🌭🔥🌭

  83. Media Guy says:

    I stopped going there when the deal ended. Not that I ever ate there on a regular basis anyways. Plus, I can go to a local sub shop and pay the same price for something that tastes 2x better.

  84. Phobos Maelstrom says:

    Did you just diss cashews my guy?

  85. Alpha Omega says:

    Damn that transition was smooth, how much these mofo from dashalane paying you cuz that’s quality advertising right there !

  86. KendrickMan says:

    Without taking the time to watch this before commenting, how did it fail? I can't remember going there since they had 5$ footlongs because the subs literally double in price without it. It wasn't a slight, 8% adjustment, conservatively it jumped at least 10x more than that, more like 80%

  87. KendrickMan says:

    Keep bashing cashews, the demand will lower enough that I can afford to buy the expensive fuckers again.

  88. Been Cxzy says:

    That shit was never $5 😂😂😂

  89. l l says:

    Subway has bad food. Real hoagies are better.

  90. MetroManMelbourne - says:

    I hate subway.

  91. Having Tea With the Devil says:

    First of all, the 17 year old paying his way through medical school had money to open a second location?

  92. Paty Vargas says:

    Inlove this channel!❤️

  93. PeechieMeechie11 says:

    I came here to learn about subway not for you to drag cashew eaters

  94. zengseng says:

    In Latin America it’s literally called “12 inches” (12 pulgadas) so the 11 inches guy had a point!!!!!

  95. Christian Samayoa says:

    Skip the whole video! 5 dollar footlong failed because it comes out to almost 9 dollars

  96. the_true_dad_bod says:

    Cashews are the candy of nuts. You take that back.

  97. KNow to Code says:

    hate subway : salty and gave me food poisioning

  98. Kodukula Anirudh says:

    Misleading tittle

  99. BlackShampoo75 says:

    Segway 7/10

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