Corporate Insight: Subway success dives in Asia-Pacific, by Euromonitor International
The Subway fast food chain has experienced an exceptional period of growth since 2001 in prominent Western markets. Pitching healthy convenience food to increasingly diet conscious consumers, the chain's aggressive franchising tactic has seen it achieve dynamic sales growth and even overtake an established fast food giant within the competitive US market. With global expansion central to Subway's agenda, its current formula is stumbling in Asia-Pacific, questioning the portability of its hitherto successful strategy.
Subway, owned by Doctor's Associates, is the number one franchising opportunity of 2006, according to Entrepreneur Magazine. After opening its first US franchise in 1974, a modest nine years after its original site, the company's major growth period has occurred during the past five years, with 4,000 franchises opening worldwide in 2004 alone.
Despite a general slowdown in the US fast food industry, which grew at a mere 3% per annum average between 2001 and 2004, Subway bucked the trend with an impressive average annual growth rate of 12% during the same period, making significant progress against the industry leviathans. While Burger King's value sales were nearly US$4 billion more than Subway's in 2001, Subway grew by a healthy US$1.8 billion in absolute terms for the period. In 2003, it overtook Wendy's to become the US' third largest fast food brand.
With global Subway sales totalling $7.8 billion in 2004, almost 81% of that value is generated in the US. Despite operating in 83 countries worldwide the figures suggest Subway's overseas potential was obvious and its plans to expand abroad could come as no surprise.
A healthy taste for growth
In a crowded US fast food market, the Subway brand filled a key niche as health awareness among consumers rose, driven by panicked media coverage of the rapid rise in obesity. Almost 65% of the adult population within the US is overweight or obese, contributing to 300,000 deaths each year. The finger was pointed squarely at fast food market leaders, including McDonald's, Burger King and KFC, as key contributors to the obesity epidemic.
Subway was perfectly placed to step into the breach, marketing on its ability to offer fresh produce and tasty low-fat options that are just as quick and convenient as high-fat menu staples such as burgers and fries. Subway even began serving up eight sub sandwiches that contain less than 6 g of fat – six times less than a McDonald's Big Mac. While McDonald's suffered under a barrage of lawsuits and exposés including the 2002 book Fast Food Nation and 2004's Super Size Me documentary, Subway's advertising focused on Jared Fogle, who debuted in January 2000 and credited his 245 lb weight-loss to his Subway diet in a series of high-profile advertisements.
Hungry for global success
Subway has already forged an important place for itself within the North American market. Besides its high-profile presence in its home market, the US, it is also Canada's third largest fast food chain behind Wendy's and McDonald's.
With a rise in obesity also evident in Western Europe, the UK and Germany leading the way, it made sense that it was here that Subway looked first for global expansion opportunities. Subway has found the UK particularly receptive to its product. The largest of its Western European operations, sales topped US$92 million in 2004. Still a long way behind similarly positioned local bakery fast food chains, including Pret a Manger and Benjy's, Subway is fast catching up, growing 45% in value sales terms in 2004, more than twice that achieved by Pret a Manger.
The sandwich giant has enjoyed a similarly rapid rise in Germany, its second most valuable Western European market. In just three years, Subway has gone from value sales of less than US$6 million in 2001, to almost US$66 million in 2004, a phenomenal 1,029% rise. With this kind of growth trajectory, it will not be long before Subway surpasses KFC to become Germany's seventh ranked fast food chain.
East meets west
Witnessing Subway's bullish worldwide growth, fast food juggernauts like McDonald's and KFC have responded to the healthy-eating trend by diversifying their offerings with some success. In Australia, for example, Subway's 917 outlets are now losing ground to McDonald's, who successfully launched a competitive range of toasted deli sandwiches last year.
However, it is in Asia-Pacific where Subway's expansion plans really fall down. With much lower obesity rates, at just 4% of the population of over-15s in China, the bad press associated with high-fat fast food has not carried the same weight it has in the heavier, Western markets. The likes of McDonald's and KFC in key Asian markets such as China, Japan and South Korea continue to perform strongly. While Subway has opened a limited number of outlets in each of these countries, the freshly prepared sandwich idea and consequent market development has not taken hold. Bread and sandwiches simply are not staples of the Asia-Pacific diet, with bakery fast food products worth just US$4.8 billion in 2004, compared with the US' US$36.4 billion market. Fredrick A. DeLuca, co-founder and president of Doctor's Associates even admitted in a 2005 interview that Subway's growth in Asia-Pacific is “still very slow” and “not as profitable”, although he still believes that China in particular has “huge potential”.
Can subway sales surface?
Subway needs more than its current lure of competitive franchising start-up costs to make its mark in what is a potentially lucrative market. McDonald's has made strides by diversifying to include salads and fruit as well as burgers and fries in its most difficult health-conscious Western markets. But while Subway could diversify its menu to appeal directly to Asian consumers, it would run the risk of diluting the core values and strong selling points that have proven instrumental to its current success.
The alternative would be to accept that the highly competitive Asian market does not exhibit the same characteristics that precipitated such rapid success in the West, and instead capitalise on its already strong position across the Americas and Western Europe. By focusing on its current momentum across these established territories, Subway may become the little sandwich chain that overtook the fast food giants to claim the number one spot.
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