Wednesday, February 14, 2007

For M Ali

It was the summer of ’65. "Help Me Rhonda" was blasting from the speakers of newly minted Mustangs and T-Birds. Lyndon Johnson was in the White House and The New York World’s Fair was offering a hope-filled but commercialized glance into the future.

It was that very future that Fred DeLuca was concerned about. Having just graduated from high school, young DeLuca turned his thoughts toward achieving a higher education. An education would no doubt be the key to success; the type of success that not even Fred himself dared to dream about. At this moment in time, a college education seemed as far-flung as the prospect of a man walking on the moon.

It was a typically hot and humid summer day in Bridgeport, Conn., when the DeLuca family’s phone rang. Dr. Peter Buck, a family friend called to announce that he had changed jobs and was moving his family to Armonk, New York, only 40 miles away. It was time for celebration, indeed, for it had been almost a year since the Bucks and the DeLucas had parted company.

Plans were quickly made for a reunion. It was on that fateful Sunday afternoon in July, 1965, during a barbecue at the Buck’s new home, that a business relationship was forged between young Fred DeLuca and Dr. Buck that would forever change the landscape of the fast food industry.

During the summer of ’65, there wasn’t that much hope that the eldest DeLuca child would have enough money to pay for his college tuition. He was a hard-working, competent and dependable young man but the $1.25-per-hour minimum wage job that he had at the local hardware store wouldn’t begin to pay for an education. As they pulled into the Buck’s driveway, it occurred to Fred that perhaps he could ask Pete for some advice. He half expected Dr. Buck to offer to loan him the money. After all, they had known each other for years and when Pete would learn how badly Fred had wanted to go to college, to study to become a medical doctor, there might be a good chance that he would offer to help.

"I think you should open a submarine sandwich shop," said Buck.
"What? What an odd thing to say to a seventeen-year-old kid," thought Fred.
Before Fred could respond or express his surprise, he heard himself say, "How does it work?"

Pete explained the submarine sandwich business. He said that all one had to do was to rent a small store, build a counter, buy some food and open for business. Customers would come in, put money on the counter and Fred would have enough to pay for college. To Pete, it was just as simple as that, and if young Fred was willing to do it, Pete was willing to be his partner.

As the DeLuca’s were getting ready to leave, Dr. Buck pulled out his checkbook and wrote a check for $1,000. That was his investment in their new venture.

On the drive back home, little did Fred know that if he succeeded at opening a submarine sandwich shop, he would accomplish more than funding his education. Success would mean financial independence and everything that comes with it, not just for him, but for many other people around the world. Success would mean adventure and excitement on a non-stop roller coaster ride that would eventually be called SUBWAY® Restaurants.

The duo had worked hard over the years. In fact, they had a goal of opening 32 submarine sandwich shops within 10 years. By 1974 they owned and operated 16 units throughout the state of Connecticut. Although it seemed unlikely that they would double that number in two years, DeLuca concentrated on expanding SUBWAY® Restaurants.

On a Monday night in 1974, Buck and DeLuca met with their attorney. With him, they discussed the future of their business. As they evaluated their options, talk turned to franchising. Franchising, they had previously thought, was for the big companies and had dismissed the idea. Now, being behind schedule, they were willing to look into it. All there was to do was recruit people who would invest their money and use Pete and Fred’s management system to open and run SUBWAY® restaurants in their hometown.

Rather than hiring consultants, DeLuca figured that the fastest way to expand the business was to go out and find a franchisee. That’s when he spoke to his friend Brian Dixon. DeLuca made him an offer that he couldn’t refuse. He told him about their franchising plans and offered to loan him the money to buy their restaurant located in Wallingford, Conn. DeLuca even said that if he didn’t like the business, he could return it to them and owe them nothing.

Dixon refused. He was used to getting a paycheck every week and didn’t want to risk going into business. DeLuca devoted his time to managing their existing restaurants and decided to worry later about franchising.

One day, Brian Dixon changed his mind. When he reported to work that morning, he was shocked to discover a padlock on his boss’s office and a sheriff’s note that stated that the business was closed. It was bankrupt. Brian didn’t panic. Somewhere in that sheriff’s notice, he saw the word "opportunity" and decided to call DeLuca and take him up on his previous offer to become the very first SUBWAY® franchisee. From that day forward, not only did Dixon’s life change, so did the way that SUBWAY® did business.

In the year 2004, the SUBWAY® chain entered its 39th year of operation. The SUBWAY® name and its products have even appeared in numerous television and motion picture productions. Not bad for a seventeen-year-old kid from “the projects”!

###

Fred DeLuca described Subway’s tentative early days and dispensed advice for young professionals, speaking to about 40 students in the Dunster House Junior Common Room.

DeLuca said he co-founded the Subway franchise in 1965 in hopes of covering his college expenses. When DeLuca hit hard financial times early in Subway’s history, he faced a choice between shutting down the original location or trying another location, according to DeLuca, who attended University of Bridgeport, Connecticut. The founders took a risk and chose the latter, which proved to be successful.

“I was able to solve enough big problems along the way that the sheriff didn’t come along and put the ‘bankruptcy’ sign up,” he said.

As he faced early financial uncertainties, DeLuca had to juggle his Subway responsibilities with a romantic life, he said.

“Basically, my dating life was driving around from store to store,” DeLuca said, telling of personal sacrifices he and his then-girlfriend, now wife, made while operating Subway before it became a franchise.

###

Fred DeLuca was a recent high school grad looking for a way to pay for college when he founded a sandwich store in Bridgeport, Connecticut. He had $1,000 in his pocket. He didn’t sign a lease, in part because the $25 lawyer’s fee was too steep. Three decades and 25,818 stores later, DeLuca’s company, Subway, is one of the largest privately held businesses in the world and he is worth at least $1 billion. DeLuca shared his experiences with writer Tom Nawrocki.

Before they made their first submarine sandwich, Subway CEO Fred DeLuca and his partner, Pete Buck, toured other sandwich stores to see how their business operated, down to watching how they poured oil onto the meat. But until the morning of Aug. 28, 1965, they hadn't yet put theory into practice - the sandwich that Deluca made for his first customer was the first submarine sandwich that he'd ever made, he claims.

In 1965 Pete Buck, a friend of your family’s, gave you $1,000 and suggested you open a sandwich shop. Why sandwiches?
When Pete was a kid up in Portland, Maine, the big treat on Sunday was to go down to an Italian delicatessen. Then, where our families had met in upstate New York, there was a small chain called Mike’s. The day we talked, he pulled out a little newspaper clipping about Mike Davis, the guy behind Mike’s. He started with nothing, and after 10 years, he owned 32 stores.

How quickly were you able to open your first store?
I talked to Pete on Sunday. I borrowed my dad’s car on Monday and drove around a little bit and found a vacant store. Pete came over on Saturday, and we rented it, with no lease — you probably couldn’t do that today. Then, I built a counter and a partition, using eight-foot studs. I didn’t even carry it to the ceiling or put Sheetrock on the back.

I put ads in the newspaper saying something like, “Student needs refrigerator,” and I’d buy old household refrigerators for 10 bucks apiece. Never had plans drawn, never went to the city for building permits.

Really? You opened without official approval?
Somewhere in the middle of construction, somebody came by and said, “What are you doing here?” I said, “I’m building a sandwich store.” They said, “You know, you can’t just build a sandwich store without getting some approvals.” I walked to town hall and said, “I have to get some kind of license for the store I’m gonna open.” The lady behind the counter said, “We need some kind of plans for your store.” I said, “Well, I don’t have any plans.” She said, “If you could draw something out, that would be great.” So I drew a sketch, gave it to her, she stamped it, and that was it.

The city didn’t require anything else of you?
This was almost a backbreaker: We learned that we had to install a special sink that cost $550, so Pete had to give me a second thousand dollars.

And operating capital?
You’d sell the sandwiches for cash today, and you’d pay the employees and the food bill tomorrow. So we had the float.

How were your vendors?
Every Friday, my mother and I would pay a visit to the people who sold us meat, vegetables, bread, and paper. It was a little social call. We’d come with a check and they’d say, “How’s business?” and we’d say a little something. They knew we were always there to pay the bills, even though we never paid as much as we bought and balances always built up. If we didn’t drive around to deliver checks, which is a totally inefficient thing to do, I am positive that we would not have built the kind of relationship that allowed them to be as comfortable with us.

Subway had its struggles, but I know opening day was busy. What happened?
On the first day that we opened, I had to go to the university to take an English exam. I make the first sandwich to show my buddy how to make a sandwich, then I go to take the test. I come back, and there’s a line of customers out the door. And Pete is walking across the parking lot holding this paper bag. He said, “I had to go buy some knives.” I worked in a hardware store, so I knew that knives could be expensive or cheap, so I looked in the bag and said, “Oh, Jesus, there goes the budget.”

Was it hard being a 17-year-old who didn’t know anything about business?
I had a lot to learn. One time, my car broke down. This kid picked me up, we get to talking, and we passed by my store. He says to me, “That is a great place to eat. They make terrific sandwiches, and you get all the soda you want for free.” I said, “How does it work?” He said, “You order some sandwiches, and when the kid”—he was referring to me—“when the kid turns around to make them, you just take a case of soda out of the cooler and sneak it out to your car.” So, you see, the lessons I learned back then—they were so simple.

After that first day, your sales dropped pretty much continuously for a long time. How did you make it through that period?
Number one, I didn’t have big family expenses. Number two, I didn’t have high expectations. I was willing to try solutions that other people may not even have thought of -- I’m not saying they were all smart solutions, but I tried them. I didn’t know enough about business to realize how bad we were doing. And I didn’t have the concept that you should quit at something. I can think of so many reasons why we shouldn’t have made it. We were on the edge continuously.

What happened when you opened the second store?
The business in that second store was good from the day we opened it -- and the business in the first store picked up also.

Could the same kind of success happen today?
Today, it just doesn’t work like that. There is so much bureaucracy that it would have broken our backs. We would not have gotten it open.

On that first day, you spent part of the afternoon sitting in the back, chopping up vegetables with a three-dollar knife, using an old sheet of plywood for a cutting board. I don’t think that would pass muster with the health department today.
There’s nothing in that store that would pass muster today.

Since Davis had owned 32 stores, you and Pete Buck planned from the beginning to open 32 stores yourselves. How important – and realistic - was that goal?
It was an extremely serious goal in that it never changed. We never had a discussion about changing the goal, we always talked about the goal, we always kept it in mind. We thought it was achievable because the other guy had done it.

###

Doctor's Associates Inc. operates the Subway chain of sandwich shops, the second-largest quick service chain behind McDonald's. It boasts more than 26,500 franchised units in 86 countries as of November 21, 2006, with more US locations than the Golden Arches, and is the fastest growing franchise in the world. This rapidly growing chain added over 2,000 locations in 2005. McDonald's has more than 30,000 restaurants in 119 countries. Fred DeLuca says that he wants 30,000 outlets worldwide by 2010.

In comparison, the second-largest submarine sandwich shop chain in North America, Quiznos Sub, has an estimated 5,000 locations worldwide. (Although Quiznos' growth has been spectacular - as recently as 1996, they had only 100 locations. In 2000, they had a thousand locations; in 2003, two thousand; and by 2004 they had opened their three thousandth location).

Subway has been voted as #1 franchise in Entrepreneur magazine 15 times as of 2007. Virtually all Subway restaurants are franchised and offer such fare as hot and cold sub sandwiches, turkey wraps, and salads. Subways are located in freestanding buildings, as well as in airports, convenience stores, sports facilities, and other locations.

Doctor's Associates is a private corporation, owned by co-founders Fred DeLuca and Peter Buck, who opened the first Subway in 1965. Fred DeLuca still runs the company.

In 2005, revenues for the Subway chain were $ 9.05 billion.
In 2005, revenues for the publicly-traded McDonald's Corp. were $ 20.5 billion, and for the twelve months ending on Sep. 30th, 2006, revenues were $ 21.8 billion. As of Feb. 13th, 2007, McD had a market cap of $ 55.5 billion.

So, if Doctor's Assoc. Inc. were a publicly-traded company, it's reasonable to estimate that they'd have a market cap of somewhere around $ 30 billion, given their high growth rate. That would make them more valuable than Ford & GM combined, or American Airlines, Delta Airlines, Southwest Air, and United Airlines combined.

Or to use some examples from less troubled industries, they'd have a larger market cap than the combined value of North America's #2 & #3 burger chains, Burger King and Wendy's, plus KFC and Taco Bell, plus No. America's three largest pizza chains: Dominos, Papa John's, and Pizza Hut.

Their revenues and market cap are/would be about the same as Starbucks.

Sources: The Harvard Crimson; Hoovers; Inc.com; the Organic Consumers Association; Quiznos; Subway; Wikipedia, also here; Yahoo! Finance

3 Comments:

Blogger M Ali said...

Cheers, Oro.

Interestingly enough a friend of my brother's owns four Subway franchises in London. His biggest complaint is that the parent company makes its' money from selling new franchises so he'll have multiple other Subway outlets competing in the same space.

February 14, 2007 3:23 AM  
Blogger Harry Eagar said...

I wrote a story about the first Subway operation in Maui 19 years ago.

Couple of refugees from Wall Street signed an agreement that required them to build 5 shops within a couple of years.

At that time, Maui did not have any kind of sub shop, but it also had only 4 communities that looked big enough to support one.

My question to the entrepreneurs was, Where are you going to put the fifth one? Their answer was, We have no idea.

They did something smart -- instead of going for tourist traffic, they opened their first shop in a blue collar part of town and went after the locals.

Within two years, they had 7 shops.

They are now out of sandwiches and into real estate.

Subway has certainly been a source of opportunity here. The current owner of the original Maui shop is in the slammer on $500K bail. He was found with a trunkful of methamphetamine and cocaine. It was the biggest drug bust in county history.

'You want ice in your Coke?'

February 14, 2007 8:36 AM  
Blogger Oroborous said...

LOL

February 14, 2007 2:21 PM  

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