California’s minimum-wage law could shrink Subway further: experts

Subway shrunk its sandwich chain in the US by 443 stores last year, a surprise downsizing that experts said could continue as the chain’s California shops face an increased minimum wage.

The fast-food giant closed a total of 733 US stores in 2023 while adding 396 locations and reacquiring 79 stores among other activity, according to a regulatory filing late last week. The net total of restaurants dropped to 20,133 US stores from 20,576 a year earlier, the filing shows.

That’s worse than what CEO John Chidsey had predicted at a Yahoo Conference in November just weeks before the end of the calendar year, when he said he anticipated Subway would close between 300 to 400 US stores while also adding 200 to 300 locations in other areas of the country, resulting in a net loss of only 100 stores.

“We’ll be treading water in the US at worst,” Chidsey said.

Instead, 2023 was Subway’s eighth straight year of shrinking its store count since it hit a peak of 27,000 in 2015. Having weathered a slew of woes — including the sex scandal embroiled ex-pitchman Jared Fogle and lawsuits over alleged fake tuna and its footlong subs being an inch short — Subway is now operating its fewest stores since 2005.

The threat of further closures hangs over 2024, according to John Gordon, a restaurant analyst at Pacific Management Consultant Group — and a major reason is the increased labor costs in California, he said.

There were 2,719 Subways in California at the beginning of 2017. That number had plunged to 1,934 as of Dec. 31 — although Subway still operates the most locations in the state behind Starbucks. On April 1, the state’s minimum wage rose to $20 an hour from $16 an hour.

Profit margins for Subways are tight, with labor representing about 28% of a Subway operator’s costs, sources said. Accordingly, the minimum-wage hike could wipe out profits for many operators in the Golden State who have few ways to increase earnings.

“You’ll see a lot more people deciding to close when their leases expire,” a California franchisee said, explaining that Subways lease their spaces usually with five-year options. “Why would I choose to stay open if I was only scraping by?”

After learning in the fall that the minimum wage was increasing, Subway locations started raising prices, with some hiking them as much as 7% to 10%, according to the source.

“A lot of us started tweaking our prices in November so we could do targeted small increases,” the franchisee said.

Fast-food prices in California overall rose 7% in a six-month period leading up to the state’s new $20-an-hour minimum wage law, according to a study by analytics firm Datassential.

Other fast-food chains in California are taking their own steps.

McDonald’s franchisee Scott Rodrick who owns 18 outposts in California, for example, said he is considering reducing store hours, hiking menu prices and delaying renovations to offset the impact of the state’s $20 hourly fast-food minimum wage. And Burger King operator Harshraj Ghai with140 locations says he will slash workers’ hours and expedite the rollout of self-service kiosks to reduce labor costs.

California Subway area managers, known as development agents, have formed a task force to help them try to help local franchisees survive, sources said.

Some Subway franchisees want permission to cut back their mandatory 91 hours (13 a day) weekly hours of operation. Subway generates most of its business from lunch, and about one-third from dinner, and very little from morning and late-night, sources said.

Another way Subway could help operators lower costs is to offer fewer promotional deals in California to its MVP members, the franchisee said.

On the positive side, a Subway spokeswoman noted that the company’s growth overseas offset the decline in US locations last year, sparking the company’s first positive global growth since 2016. Last year’s closures marked a deceleration from a year earlier, when Subway shuttered 995 US locations and 2021, when it closed 1,505.

“In the US, we are optimizing our footprint by using a strategic, data-driven approach to ensure restaurants are in the right location, image and format,” the spokeswoman said. “This includes opening new locations, relocating restaurants to maximize guest traffic and closing locations when needed.”

Some experts aren’t convinced the company has turned a corner.

“They are still hemorrhaging stores.” Gordon told The Post. “Subway is still a troubled brand in the U.S.”

Starbucks, meanwhile, is closing in as the No. 2 US chain with 16,352 US locations, while McDonald’s is third in the country with 13,449.

The most recent data show that 3.6% of US Subways ceased operations in 2023 — a number that remains well above the fast-food industry average of 2.6% to 2.8%. said Jeff Lefler, CEO of Franchise Grade, a consulting firm that analyzes chains for operators.

“It looks like they are starting to right the ship — it’s trending towards stability,” Lefler told The Post. “But this is still a higher turnover rate than its competitors. There is still a calculated risk associated with opening a Subway.”

Subway, which provides limited financial information in its annual public filings, said in a February press release that same-store sales in North America rose in 2023 by 5.9 percent. Last week, the parent company, which owns no stores, said its revenue rose more than 10% to $972 million.

Still, 40% of that increase came from contributions and discounts from vendors that supply franchisees, according to filings.

Private equity firm Roark Capital, which owns Dunkin’ Brands, Arby’s and Jimmy John’s, agreed in August to buy Subway for up to $9.6 billion. The Federal Trade Commission is investigating the merger and there is concern the regulators could block the deal because it would give Roark too dominant a position in the fast-food sandwich space, sources close to the situation said.

Subway franchisees choose their own menu prices. The parent company makes an 8% cut of royalties regardless of whether a franchisee is profitable.