When John Chidsey took the reins of Subway in 2019, the sandwich store chain desperately needed a refresh. The company, led by the chain's founding family from 1965 until then, hadn't updated its menu or invested in technology in the decade before Chidsey's arrival.
And it had lost ground to quick-service rivals like McDonald's and Panera. As a privately held company, Subway—the largest restaurant chain in the world by store count with 37,000 locations—is not required to disclose its financial results. But between 2015 and 2021, as business cratered, Subway closed 6,000 of its U.S. stores, almost one-quarter of them. The company has now resumed opening new ones. Four years ago, it tapped Chidsey, a turnaround artist who had fixed Burger King some years earlier as CEO, to work his magic again, with owners now eyeing a sale to private equity that reportedly could fetch $10 billion.
"I use the words stale and static," says the 61-year-old, who came out of retirement after eight years to fix Subway. "Both consumers and franchisees were screaming for more menu innovation."
Recent moves to modernize the menu include adding delicatessen-style items and offering new sandwich series made in a set way rather than the traditional do-it-yourself customizable manner customers are used to. On the corporate side, Chidsey has pushed for creating features that were shockingly absent at such a large company, like an equity compensation plan to attract top talent.
His strategy, so far, is paying off, though that's not saying much, given the company's straits when he first joined. While sales per restaurant, excluding newly opened or closed ones, are close to where they were in 2012, they've risen in each of the last ten quarters. After years of decline, it's Subway's best streak in over a decade.
This interview was edited and condensed for clarity.
Fortune: Subway is staging a big turnaround under your leadership. But why do consumers need Subway at all?
With quick-service restaurants in general, people like convenience and speed. But what makes us unique is that in the world we live in today, we are the healthier option when you think that there is McDonald's everywhere, there's Burger King everywhere, there's KFC, there's Domino's. We don't necessarily have to be healthy. We just need to be healthier.
It seems that Subway's restaurants and menu hadn't changed for years, and it was just a static business. Is that fair criticism?
I use the word stale. There was a time when founder Fred DeLuca was ill for years and put his sister in charge. Between his illness and death and not having a succession plan, there was a period when there wasn't much menu innovation. When my team and I came in, we did our research. Both consumers and franchisees were screaming, 'We need more innovation.'
Restaurant chains, notably Chipotle and McDonald's, have used tech and apps to spur sales and loyalty program adoption. But here, Subway feels way behind.
We were behind even though we had all the money in the world, but the brand didn't choose to focus on digital. About three years ago, we started to focus on it. The nice thing was that we could look at what everybody else had done, see what worked, and take the best of it. Now digital sales have quadrupled as a percentage of total sales.
Your restaurants are 100% franchisee-owned, even as Chipotle touts its flexibility because it owns all its restaurants and McDonald's tries to reset relations with its franchisees. What's the case for a franchisee model?
If you look at public QSR companies, clearly, those that are more heavily franchised trade at higher multiples. Why? Because I think Wall Street likes that they generate so much free cash flow and are not capital-intensive businesses. There is no way we could have 37,000 restaurants and own them. I mean, the amount of capital and brainpower it would take.
Your sales per restaurant are still close to 2012 levels. What will it take to lift them in a big way?
Sales can get a lot bigger. We can double or triple our digital business again. And catering. I have no idea why Subway never built a big catering business because our food is extremely portable, unlike a soggy burger and fries.
Subway's restaurants are notoriously ubiquitous partly because they are so small compared to other QSR chains. Could you see room for some larger restaurants to offer more of a dining experience?
The beauty of Subway is that to run a Subway, literally, all you need is electricity and water. There are no fryers, no broilers, no grease traps or hoods. So you can fit one in Jakarta or downtown Tokyo, where you could never have fit a McDonald's or a Burger King. That's an advantage. But the flip side is that, yes, they need to be small. Remodeling the rest of the U.S. restaurants is a huge necessity and opportunity; some will focus on dining in and some on picking up orders.
You're leading a turnaround at Subway, and earlier in your career, you revamped brands like Burger King and Avis, the rental car agency. What do you like about turnarounds?
It's just more fun. You can make a bunch of decisions, and if it fails, I really can't be wrong because it was clearly screwed up in the first place. So I have license to try anything and everything with a lot of urgency. I like that much better than, 'Oh, you screwed up something that was running really, really well.'
Part of Subway's challenges came from being a family-owned company that, despite its size, didn't follow all the usual corporate governance practices. What did you do to remedy that?
We put in a much more professional management team and created a board with independent directors. Shareholders clearly own the company, but we have board members with lots of different experiences, so the owners are hearing not just from us but from people with other retail and restaurant experience.
You also had to make Subway competitive in the job market. What did you do to achieve that?
The founder had some interesting rules, like not having an equity program. They didn't even pay bonuses until Fred, the founder, passed, and the biggest bonus paid was 5% of your salary. So you can imagine you couldn't get somebody to leave McDonald's or leave Hertz to come here. At the same time, some people have been here for decades. That's usually not a good thing because new ideas are not coming in. So things were kind of ossified and patriarchal for a long time.
Get to know Chidsey:
- Chidsey is the first CEO in Subway's 58-year history who's not a founding family member.
- He held senior finance roles at worked at PepsiCo earlier in his career.
- He is a chartered public accountant and lawyer by training.
