added, the more challenging it became to manage them all.
One Monday night in 1974, rather than meeting at World Headquarters, Pete and I met in the office of attorney Mario Rubano where we wanted to discuss the future of our business. Mario was a family friend who occasionally handled some legal work for us. As we evaluated our options we talked about franchising, particularly because McDonald’s and Kentucky Fried Chicken were opening a lot of franchised units in the Bridgeport area at that time. As we left Mario’s office, we agreed to think further about franchising.
We knew nothing about the topic although we had discussed it previously. A couple of years back my uncle John DeLuca asked if he could buy a Subway franchise to open in New York. After thinking it through we turned him down, explaining we didn’t think franchising was for us. He went to another small submarine sandwich chain, bought a franchise from them, and then sold it a couple of years later when he realized he didn’t like the fast food business.
We thought franchising was for bigger companies that built free-standing units, like McDonald’s, so we didn’t think it made sense for our little take-out business. At the time we did not include tables or booths in the shops. So the first couple of times we discussed franchising, we rejected it without much more consideration than that. However, now, because we were behind schedule, we were willing to look into it again.
One Monday night, after weighing the pros and cons, we decided that franchising was the best way to get from sixteen to thirty-two restaurants. We could recruit people who would invest their money and use our management system to open and run Subway franchisees in their neighborhoods. Maybe franchising wasn’t just for big companies, we told ourselves. Maybe little companies could franchise, too. What we didn’t know at the time was that there were many other small businesses that used franchising as a method of expansion.
Rather than go out and hire consultants and lawyers to prepare us for franchising I figured that the simplest way to get started was to find a franchisee. That’s when I spoke to my friend Brian Dixon. Our wives both worked as nurses at the West Haven Veterans Hospital. Occasionally we got together to play cards or go to a hockey game, and I knew Brian wasn’t happy with his job and I thought Brian would do a terrific job with one of our restaurant.
One night between periods at a hockey game in New Haven I made Brian an offer he couldn’t refuse. I told Brian about our franchising plans and offered to loan him the money to buy our Wallingford, Connecticut location. I even said that if he didn’t like the business for any reason he could return the store to us and not owe us a penny.
He refused! Even though he didn’t like his job, he explained that he got paid every Thursday and he didn’t want to risk going into business. On several other occasions I tested Brian’s interest in becoming our first franchisee and he repeatedly turned me down. So I continued to devote my time to managing our existing restaurants and decided to worry later about franchising. Expansion would have to take care of itself.
But then one day Brian changed his mind—later you’ll read how it happened—and after he did, we changed Subway. We rented office space, hired my aunt Lucy DeLuca as our first secretary, set up shop as a franchisor, and began advertising our opportunity in the classified sections of newspapers throughout Connecticut. We set our franchise fee at $1,000—that was the amount of money a franchisee would pay for the use of our name and management systems, as well as initial training—and our ongoing royalty at 8 percent of the restaurant’s sales. Leasing space, buying equipment and supplies, signage, inventory, and other site-specific components required an additional investment.
Since Subway was already well known in Connecticut, the response to our tiny ads was immediate and steady, and the sales process was straightforward. People called us, I provided them with information, and if they were interested we met personally. Within a few months we sold franchises in Danbury, Middletown, and Waterbury. That first year, we didn’t advertise outside Connecticut and we didn’t open restaurants outside the state because our new franchisees had the fear that people were different out there!
Going Beyond Connecticut
However, we quickly broke through the boundary barrier when my wife’s brother, Marty Adomat, graduated from college and decided to open a Subway shop in Springfield, Massachusetts, in 1975. Almost simultaneous to his decision, my aunt and uncle, Tony and Louise Scotti, opened a Subway shops in Staten Island, New York. Both locations were ninety minutes from our office, still a manageable distance for our fledgling franchise operation.
But then, in 1976, Aunt Louise introduced us to Jerry Smith, who was a customer in her restaurant. He and his brother, Jim, wanted to open Subway Restaurants in Baltimore, Maryland, where they had grown up and where Jim still resided. Baltimore was a four-hour drive, and I thought it would be difficult to provide adequate service to a franchisee so far away. By this time, I had learned that frequent communication and guidance was an important element of franchising. Also, I knew that as we franchised further from home it would be more difficult to service the locations, just as it was more difficult to operate company-owned restaurants that were far away from our home base. In addition, I was concerned that the Baltimore unit would be all by itself in a big city and until we could sell additional restaurants in the area, and have someone nearby to service those restaurants, it didn’t make economic sense to expand to Baltimore.
But then I considered another approach. I told Jim that we would agree to sell him and his brother a franchise, but to do so we would need someone locally to take on more responsibility. I suggested that Jim should be that person, and I said if he was willing to do so, we could work out a deal. Jim was willing and it took only a day or two for us to work out the details. That’s when we created the position of Development Agent, a person who would help us build and service restaurants in a specific territory. Jim liked the idea, and that’s how we planted Subway’s flag in Baltimore.
Right after we developed this new servicing concept the Scottis became Development Agents in New York and my brother-in-law, Marty, became a Development Agent in Springfield, Massachusetts. Later, Brian Dixon became a Development Agent for Rhode Island and New London County, Connecticut. These pioneers are still Development Agents and Subway owners today.
.. During one family vacation in Florida Marty and his wife, Lasha, told me they no longer wanted to live in the Snowbelt so we talked about Subway opportunities in other parts of the country. Houston sounded interesting to them, so on the ride back home from Florida they turned left to check it out. Soon thereafter Marty traded his territory in Massachusetts for Houston, Texas and due to the size of that city, he teamed up with a partner, Bill Horner. Marty, has since retired as a DA but serves as a mentor for our Development Agents in Germany and is still involved in the Subway business.
Setting Another Big Goal
As we celebrated Subway’s tenth anniversary in 1975, the fact that we were several restaurants shy of our goal wasn’t much of a disappointment. We knew it was only a matter of time until we would surpass that goal and set a new one. We opened our thirty-second restaurant in 1976; in two more years we opened our 100th restaurant; and by 1982 we doubled our network to 200 units. The rapid growth created numerous challenges that required the resolve of our talented home office team. Subway was no longer a tiny operation. It was on track to expand far greater and faster than Pete and I could imagine.
So now what do we do? How were we doing? Was 200 restaurants a lot or a little? What else was possible? If we set another goal, what would it be? After conducting a market study of the fast food industry in 1982, sizing up other chains and their growth, and considering Subway’s growth, I decided our new goal would be 5,000 restaurants by 1994. It was an aggressive goal. Most of our employees were stunned when I announced it, and some of them thought I was absolutely crazy. We only
