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Why Big Mac should not worry about Subway
Despite losing out to rival subway on the number of global outlets, McDonald’s still scores on key business metrics and is easily winning the palate game in key emerging markets. B&E gets through to subway and global analysts for an insider into the famed rivalry.
Issue Date - 19/01/2012
In February the Milford, Connecticut-based sandwich maker Subway sprinted past its famed burger-flipping rival McDonald’s to become the head honcho in the world of quick eats. With 34,410 restaurants in 97 countries, the Fred DeLuca-led Subway is now the largest restaurant chain globally in terms of number of units. The Oak Brook, Illinois-based McDonald’s has some 33,737 restaurants in 117 countries. In the race for fast-food world domination, the ‘health oriented’ Subway is having a great run, thanks to its successful franchised business model emphasising small, low-cost outlets.

While the face-off between the two fast food giants has aroused great interest – and media and analysts alike have gone over each other in announcing that this latest Subway benchmark marks the beginning of the end of McDonald’s CEO James Skinner’s global dominance – the truth of the matter is that Subway isn’t bigger or better than Ronald (the McDonald) in terms of profits or even sales. McDonald’s continues to be the industry champ, reporting $24 billion in revenue and close to $5 billion in net profits in CY 2010. Subway generated roughly $15.2 billion in sales during the same period. Despite facing stiff competition from Subway, Yum! Brands, Starbucks, Wendy’s and Burger King – McDonald’s still commands a mind numbing 19% market share of the global QSR (quick service restaurants) industry.

In other words, neither does the Subway record signify anything more than, well, a record (well, Subway had already beaten McDonald’s in the total number of US outlets way back in 2002), nor does it signify that McDonald’s is going to fall over itself trying to analyse what went wrong. Even the Subway representative, while talking to B&E from the US for this article, at least on the face of it was clear that the McDonald’s business model was and would remain critically different from Subway’s. And the reasons are quite explicit. Although McDonald’s is still growing at home and in a big way overseas, it has made a concerted effort over the past few years on getting “better, rather than bigger” – and hidden in that one statement lies one strategy that has ensured McDonald’s superlative profitability. One has to understand that McDonald’s for years had been the “bigger – and don’t care about better” visioning giant, attempting to position the behemoth as reaching the largest chunk of humanity – in lbs too. It was a mammoth shift – perhaps their biggest ever. The genesis of this can perhaps be found in the year 2002, when the company was facing problems from all quarters: lawsuits and criticism for its fried, fatty food. As a result of these headwinds, the firm posted its first ever quarterly loss ($344 million) in 2002. But the company moved with decisiveness. Jim Cantalupo took over as the new CEO, and started the biggest restructuring in the company’s history. He closed more than 100 under-performing restaurants, changed the traditional growth strategy of opening more outlets to focusing on increasing the turnover from existing units. The menu was refurbished and expanded with the introduction of more fresh and healthy eating options like entree salads, McGriddles breakfast sandwiches, et al.

Today, much of McDonald’s success in beverages has come from speciality coffees such as lattes, which are sold at relatively higher prices. And to top it all, the company introduced the “I’m lovin’ it” campaign – its largest global campaign ever – in over 100 countries. But McDonald’s has been careful to not let go of the old guard. One example; according to Ad Age, Subway spent about $400 million from January to November 2010 in advertising, of which about $58 million went to support its new breakfast line. McDonald’s US advertising has been estimated at about $1.2 billion annually. Wonder of wonders, its biggest campaigns continue to focus on the old ‘unhealthy’ guard – for example, the new “Made Just for You” TV commercials promote its Big Mac and Quarter Pounder with Cheese core-menu items. But who’s complaining? The results speak for themselves. Since 2003, McDonald’s has remained Wall Street’s darling, posting rising same-store sales for 30 consecutive quarters. Even during the depths of the recession in 2008, its same-store sales rose by more than 6%. McDonald’s stock has risen nearly 40% over the past three years.

Despite the Subway franchise model being widely successful, returns are greater for McDonald’s. A Subway franchise cost about $150,000, while it’s $1-2 million for a McDonald’s franchise. But if a Subway franchise makes roughly $450,000 per restaurant, McDonald’s franchise revenue is over $2 million per store. The choice of location of Subway restaurants has also raised a few eyebrows. Often, Subway restaurants are found in locations that even the most gumption driven competitor might not touch. Outlets have sprung up in the unlikeliest of places: on a riverboat, inside a church, at car dealers, bowling alleys and casinos. “We are proud of the fact that we have more convenient locations available to offer variety and choice to consumers,” says Les Winograd, Subway to B&E. On the process front, owing to its small restaurants, Subway emphasises on the take-away format. On the contrary, McDonald’s is all about (well, almost) providing the best dine – in QSR experience to its customers – and in profitable locations. Its stores are found in upscale locations, are big in size, draw larger crowds and create better brand recall. For Subway franchisees, it’s not uncommon to directly compete with one another by having multiple outlets in an area that effectively cannibalises business. Winograd counters: “Our growth is a result of our ability to offer franchisees the opportunity to own and operate their own businesses that follow a proven and simple operational model, coupled with all the hard work, dedication and support provided by our team members around the world.”


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