Subway in trouble before Jared mess

Show Caption Hide Caption Subway has bigger problems than Jared Subway was reeling from declining sales before its spokeman Jared Fogle was charged with child pornography, reports Kaja Whitehouse

The troubles surrounding Subway's longtime spokesman Jared Fogle couldn't have come at a worse time for the sandwich maker.

After a meteoric rise to become one of the nation's largest fast-food chains, Subway has been suffering from falling sales and declining customer satisfaction amid increased competition. Last year, for the first time ever, it lost its long-held spot as the nation's second-largest restaurant chain by sales to Starbucks, according to research firm Technomic. And now the brand's most public face has been tarnished by criminal charges.

Fogle appeared in court Wednesday on charges of traveling for sex with minors, and for receiving and distributing child pornography.

"Jared Fogle is agreeing to plead guilty to the charges filed against him today," said Fogle's attorney Jeremy Margolis in a statement.

Fogle, famous for losing about 245 pounds on a diet of Subway sandwiches in college, also crossed state lines to pay for sex with minors, prosecutors said.

"We no longer have a relationship with Jared and have no further comment," Subway wrote in a tweet Tuesday.

The scandal comes ahead of Subway's 50th anniversary next week and as the chain seeks to beat back rising competition from fast-food sandwich makers, like Chick-fil-A, as well as fast-casual restaurants like Chipotle. The competition resulted in a 3.3% sales decline at Subway last year, to $11.9 billion from $12.3 billion in 2013 — marking the largest loss across the restaurant chain industry, as tracked by Technomic.

The sales drop pushed Subway from the nation's No. 2 largest restaurant as measured by sales to the No. 3 slot, according to Technomic's 2015 Top 500 Chain report out in March. Starbucks stole the No. 2 slot. McDonald's remains No. 1.

Whether Jared's tarnished reputation will affect sales this year remains to be seen, but experts say it can't help.

"They've already been struggling, and with what we have seen with the negative publicity around Jared, I think that isn't going to help," says Darren Tristano, executive vice president with Technomic. "It very likely is going to have some negative impact."

Subway's ascent to the top was boosted by its early image as a healthy fast-food option, spurred in good part by the slimmed-down Fogle, who began starring in ads for the company about 15 years ago. The sandwich shop became the nation's fourth-largest restaurant chain by sales in 2007 and then jumped past Wendy's and Burger King in 2008 to take the No. 2 slot, according to Technomic data.

But along with other large fast-food chains, Subway has been losing traction with customers who are increasingly enamored with newer chains that boast fresh, natural or local ingredients. According to the American Customer Satisfaction Index, as of June Subway's customer satisfaction rating has fallen 6.1% since 2012, the first year ACSI started tracking the chain.

Subway may have been offering customers the "build-your-own" meal model and an assortment of vegetables long before chains like Chipotle and Chop't, but established chains have lost some allure, said ACSI's June 2015 Restaurant Report.

"As the economy improves, consumers with more disposable income — but squeezed for time — want higher-quality ingredients, freshness and better service at a reasonable price. They also are willing to pay a bit more," the report said.

Plus, consumers' hankering for a sub sandwich has started to fade. Traffic to submarine sandwich shops — including chains like Subway and Quiznos — was down 4% in the 12 months ended in June, with 95 million fewer visits than the year before, according to market research company NPD Group.

While Subway has traditionally been viewed as a healthier option in terms of having fewer calories than many mainstream fast-food options, consumers don't put as much stock in calorie counts anymore compared to other health attributes, said Molly Harnischfeger, a director in the restaurant and food services practice at consulting firm AlixPartners.

She said consumers are more focused on "local ingredients, food with integrity, having fresh produce. Those are the types of things that consumers are demanding of companies now. It's not just about calories."

Also, what consumers consider good value is no longer just about low prices. Most consumers define value as quality of ingredients for the price, according to a report from AlixPartners. Bundled offerings, large portion sizes and lowest prices have become less important over the last year, the report said.

Technomic's Tristano attributes Subway's woes in part to the rising cost of its famous $5 Footlong, a 12-inch sandwich that ran into trouble in 2013 for being under the 12 inches advertised by its name.

The higher price of the footlong forced people seeking cheap, healthy meals to look elsewhere, Tristano says.

Contributing: The Indianapolis Star