Joe Raedle/Getty Images

Subway's US store count fell by more than 900 this year.

Franchisees tell Business Insider that hundreds more stores are in danger of closure and that up to one-third of Subway locations in the US could be unprofitable.

Subway's crisis is linked to many factors: changing trends, a disgraced spokesman, internal conflict, and intense discounts.

"They can't just toss a bunch of stuff on random bread products and expect it to impress an increasingly discerning public," one marketing executive says.



Subway is in serious trouble.

The world's largest restaurant chain is being left behind as consumers seek healthier, fresher food and as competitors offer them better options. Franchisees are protesting its promotions, and some are complaining about the quality of its products.

The chain is also struggling with oversaturation and internal conflict, making a quick turnaround difficult and more store closures likely in 2018.

The sandwich chain's US store count has dropped by 909 this year, almost three times as many locations as the year before. Subway has 25,835 shops open and operating in the US, according to a representative, compared with 26,744 at the end of 2016.

But this year could just be the tip of the iceberg for Subway's closures.

Business Insider spoke with three franchisees from different regions of the US about the state of the chain. They all say others are bracing themselves for more bad news and speculating on the state of the business.

Citing internal conversations and national sales numbers, one estimated that up to one-third of Subway's locations were unprofitable.

Another cited conversations with Subway's development agents - franchisees responsible for developing an entire region - who are speculating that many more closings are on the way.

All the franchisees spoke on the condition of anonymity because of their relationship with the company. Subway is not publicly traded, so it doesn't have to disclose much of its financial details.

Last week, the New York Post reported that roughly 400 franchisees were protesting the chain's plan to bring back the $5 footlong deal. On Monday, Subway's head of North American marketing, Karlin Linhardt, resigned from the company.

And traffic has fallen 25% over the past five years, the Post reported, citing an internal memo it obtained.

Subway said it was "realigning markets to ensure the right Subway restaurants are in the right locations," remodeling restaurants, introducing new products, and refining operations. A spokesman wouldn't comment on the number of store closures expected in 2018.

But despite Subway's efforts, recent problems at the company suggest an uphill battle.

"The brand is tired," said Joel Libava, a franchise consultant. "The employees even look tired."

How Subway got stale

A redesigned Subway store. Courtesy of Subway

Experts and insiders say Subway has struggled to keep up with trends in recent years.

Subway once advertised itself as a fresh, healthier alternative to chains such as McDonald's. Now, however, even some franchisees say it's falling short.

"Years ago, we ordered local produce daily," a franchisee who owns two locations told Business Insider. "They forced us to stop doing that."

Instead, the franchisee said, produce is delivered once a week - twice if sales are especially high.

"By the end of the week ... the lettuce is just a massive problem," she said, describing its taste after a few days as "shredded paper."

"I can't eat the lettuce, and that's a problem, and I've told them," she said. "They're just not listening."

The franchisee said the company's reliance on specific suppliers and refusal to entertain the idea of adding fresher options was especially frustrating as customers demand cleaner labels and higher-quality food.

In a statement to Business Insider, Subway said it worked with more than 100 family farms and suppliers in the US to help make sure its restaurants have fresh produce. But the company would not say whether shipments were delivered only once or twice a week.

"Today, people are ever more educated on nutrition, food sourcing, and ethical, holistic business models," Sara Bamossy, the chief strategy officer at the ad agency Pitch, told Business Insider. "To create or to rekindle loyalty and sales, it is not enough to label something as 'natural,' and it's not enough to be affordably priced."

Complicating Subway's desired brand perception is the proliferation of fast-casual upstarts in the past decade. In 2017, few think of a Subway sandwich as a fresh or trendy option when they could get something like a salad from Sweetgreen, a growing chain that says it has fresh fruits and vegetables delivered daily.

While some sandwich rivals have managed impressive growth through innovation - Arby's adding gyros to the menu, for example - Subway's sandwich lineup hasn't seen any showy changes as sales have slumped in recent years. Most of its new products have been either antibiotic-free updates to existing menu items or pretty standard sandwiches.

What's more, as grocery chains increasingly add takeaway options, freshly prepared sandwiches are becoming ubiquitous. Subway went from a staple for health-conscious Americans to forgettable.

Subway needs "to step up and really do something game-changing," Libava said.

Bringing back the $5 footlong deal - which Subway retired in 2016 to customer fury - is a good start, he said, to persuade people to visit stores. But it's a first step.

"Do something! Get on TV with some really fresh-looking stuff - the lunch meats are just nasty-looking," he said, adding that Subway's food quality is better than it looks.

Bigger factors at play

Jared Fogle. Matt Sayles/Invision for SUBWAY Restaurants/AP Images

Then there's Jared Fogle, the chain's former spokesman.

Fogle is serving a nearly 16-year prison sentence after pleading guilty to paying for sex with minors and possessing child pornography. Subway cut ties with him in 2015 but has since failed to find a replacement with as much impact.

The chain's attempts to turn around business after Fogle's guilty plea have, in some ways, complicated problems instead. Some franchisees have rebelled against the many deep discounts the chain has rolled out to boost traffic.

Even the Subway franchisee who created the iconic $5 footlong deal in 2003 says he doesn't like the direction the chain is going.

"Once you keep pushing a low price point in the minds of the consumer, it's hard to sell sandwiches for what they're really worth," Stuart Frankel told Restaurant Business.

While the deal has its detractors, other franchisees say that it's necessary to bring in customers and that Subway has bigger issues it needs to address.

With 25,835 locations in the US, Subway is a behemoth. For comparison, McDonald's has about 14,000 locations in the US and 37,000 worldwide.

For years, Subway has seemed more invested in opening locations than making sure stores can increase sales. Subway would sign off on franchisees opening locations near existing stores. The chain would get more money in franchise fees, but franchisees would end up competing against one another for sales.

"I feel their concerns 10 years ago was just opening up locations," the franchisee with two locations said. Fred DeLuca, a Subway founder, "was obsessed with having the most locations, and he achieved it," she said.

"We had people open up on all sides of us," she continued, adding, "That was definitely a problem."

Making significant changes across a chain this large is a process - one that can be made even more difficult by conflict within the privately held company.

Earlier this year, Peter Buck, a Subway founder and owner, told the Post he thought the company should open more sub-brands - an idea Subway publicly rejected in a statement.

"Subway is in the midst of a massive transformation, and change of this size takes time," a representative for the company told Business Insider in a statement last week. "Our goal is to strengthen the Subway brand in every market around the world to give Subway franchisees the greatest opportunity to successfully grow their businesses."

The chain is rolling out a new store design and remodeling locations across the US - a game plan some franchisees say has so far failed to produce results. Subway is also trying to catch up with competitors like Starbucks with an upcoming digitally focused loyalty program.

Can Subway be saved?

Courtesy of Subway

Experts say Subway needs to double down on quality - and fast.

"Subway needs to get back in touch with their roots - freshly baked bread and fresh ingredients assembled with care," said Travis York, the CEO of the creative agency GYK Antler. "These offerings are not only genuine but also different from the competition."

He added: "They can't just toss a bunch of stuff on random bread products and expect it to impress an increasingly discerning public."

However, the restaurant industry is increasingly targeting bargain shoppers as McDonald's prepares to roll out its new dollar menu. And Subway's customers have been demanding deals.

The return of the $5 footlong may be a Band-Aid solution, but it also could help get people in the door during a period of plummeting traffic.

Franchisees say they aren't optimistic about Subway's corporate offices pushing for a necessary, bold change without being forced.

"This year, it's going to be more" locations shutting down, one franchisee said. "There's not a connection, I feel, with the demographics and the target."

Subway is fighting a battle on several fronts. It is possible the chain could make a comeback - but hundreds of stores are likely to shutter as casualties along the way.

"Companies and people don't do things in general unless they're in pain," Libava said. But now, as hundreds of Subway locations close, "maybe there's enough pain."

If you work or have worked at Subway and have a story to share, email ktaylor@businessinsider.com.

NOW WATCH: Popular Videos from Insider Inc.