Subway Wants Longer Hours. But Who Really Benefits?

By Sean Goldsmith

Subway now requires US restaurants to open at least 98 hours a week. The question is whether those extra hours deliver extra profit.

Subway has increased minimum opening hours at US restaurants from 91 to 98 a week. For some franchisees, that could uncover sales they have been missing. For others, it could mean hundreds of extra hours each year spent chasing revenue that leaves too little profit behind.

Subway wants more from the restaurants it already has.

The sandwich chain now requires its US restaurants to operate seven days a week for at least 98 hours, up from the previous minimum of 91. For a franchisee who was trading at the old minimum, that means finding another seven hours every week to keep the restaurant open, staffed and ready to serve customers.

Over a full year, those seven hours add up to 364 additional trading hours. That is more than nine standard 40-hour working weeks, which makes this considerably more important than simply asking franchisees to stay open for another hour each day.

There is a sound business argument behind the move. Subway does not need another lease, another kitchen or another franchisee to generate sales during those hours. The restaurants are already there and the equipment has already been installed. If customers want sandwiches later in the day, there is money being left on the table while the doors are closed.

The problem is that Subway and its franchisees do not experience those extra sales in quite the same way.

Subway charges an 8% royalty on gross sales and a 4.5% advertising fee. That means another $1,000 in gross sales produces an $80 royalty obligation and a further $45 advertising contribution. The franchisee then has to account for the food, wages, packaging and other costs involved in producing those sales.

That difference sits at the heart of the 98-hour debate. Subway benefits when additional trading produces additional sales. The franchisee needs those sales to produce enough profit to justify the cost of keeping the restaurant open.

Why Were These Restaurants Closing Earlier?

The new requirement should have little effect on Subway restaurants already trading for 98 hours or more. The interesting part of the system is made up of stores whose operators had previously decided there was a reason to close earlier.

That reason matters.

A Subway near a university or hospital may have customers well into the evening. Restaurants in busy city centres could also have strong late trade, while delivery can bring orders into locations long after passing foot traffic has disappeared.

A quiet suburban restaurant can be a very different business. There comes a point in the evening when fewer customers arrive, but employees still need to be paid and the restaurant still needs to operate.

Franchisees have every reason to remain open while they can make worthwhile money. Rent does not stop when the doors close, so an additional profitable hour gives an operator better use of an asset they are already paying for.

That is why the restaurants that previously closed earlier are so important. If they were shutting because they had simply underestimated late demand, Subway may have spotted a genuine opportunity. If they were closing because years of experience told them that the final hour was weak, the economics will be much harder to change through an operating requirement.

The Argument Is About Profit, Not Sandwiches

Subway is a mature franchise system, and mature systems eventually have to find more growth from the restaurants they already operate.

Opening another store is expensive. A new Subway needs a suitable location, a lease, equipment, construction, recruitment and franchisee capital before it produces its first dollar of sales. Increasing the productive hours of an existing restaurant can happen almost immediately.

There is nothing wrong with that strategy when the additional hours work for both sides.

The difficulty comes when system sales are used as the measure of success. An extra $1 million of sales across a franchise network sounds impressive, but it tells us nothing about what franchisees spent to generate it.

That is particularly important when the franchisor collects royalties from gross sales. An additional trading period can generate royalty income even when the franchisee considers the profit from that period disappointing.

Subway itself promotes its franchise opportunity around lean operations and low labor costs. That makes the economics of these extra hours even more relevant. A restaurant can remain lean while staying open longer, but only if the sales justify the additional operating requirement.

Franchisees are constantly told to manage labor, protect margins and remove unnecessary costs from their businesses. They should be entitled to apply exactly the same discipline to an operating requirement coming from the franchisor.

Give the 98th Hour Its Own Numbers

The good thing about Subway's decision is that it should be relatively easy to test.

Operators who have extended their hours can separate those additional periods from the rest of the trading day. They can see how many transactions came through, how much customers spent, how many employees were needed and how much of the business arrived through delivery.

They can then look at what was left after the additional costs were paid.

If those restaurants produce worthwhile profit during hours when they were previously closed, Subway will deserve credit. It will have found additional revenue for franchisees without asking them to invest in another restaurant, and the company will benefit from the resulting increase in system sales.

If the numbers repeatedly show weak returns, Subway should be willing to listen to them. A franchisee should not be expected to keep funding an unproductive trading period simply because the additional sales look good when added to a national system total.

Subway's own documentation allows waivers in certain circumstances, including locations where trading hours are restricted. The bigger question will be whether store-level economics eventually influence how rigidly the wider policy is applied.

This Is Bigger Than Subway

Other franchisors should watch what happens because the pressure to extract more sales from existing locations is hardly unique to Subway.

Restaurant brands can increase prices, add products, push promotions, grow delivery, enter new dayparts or extend opening hours. Each can increase sales without opening another unit, which makes them attractive options when new-store development is expensive or slower.

But every additional initiative creates work somewhere inside the restaurant. Somebody has to prepare the product, serve the customer and manage the extra complexity.

That is why franchise growth should never be judged from system sales alone. A healthy franchise system needs its franchisor to grow, but it also needs the people who have invested their capital in individual locations to earn an acceptable return.

Subway's new opening-hours requirement gives us a useful test of whether those two objectives remain aligned.

What We Can Learn From This

Franchisees affected by longer trading requirements should separate the new hours from their normal weekly results and measure the profit they produce, not simply the sales. Franchisors should study the same information across different markets and store types because a policy that works in a busy city restaurant may make little sense somewhere else. If Subway's additional hours consistently improve franchisee profitability, the company will have found a relatively inexpensive way to grow its existing system. If they increase sales without leaving enough profit for operators, the industry should ask whether franchisors have too much control over operating costs they do not ultimately pay.

The answer should become clearer over the coming months as restaurants build enough trading history under the new requirement. If the stores that previously closed earlier begin producing meaningful profit from those additional hours, Subway will have proved that valuable demand was being missed. If franchisees spend hundreds of extra hours each year chasing marginal sales, the lesson will be much less comfortable because growth that works on the franchisor's sales report can look very different on the franchisee's bank account.

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