Subway’s location savvy and broad market share may be of appeal to a range of suitors.
As I write this, news is getting out that the ubiquitous QSR brand, Subway, is exploring a sale. With nearly 37,000 outlets in more than 100 countries, Subway may command an asking price of $10 billion or more, at a time when food costs are high and recession yet looms.
This begs two questions: who might buy Subway, and why?
To explore the possibilities, we analyzed footfall patterns to Subway and some of their competitors to see how each brand’s strategic market fit may align. Based on that analysis, we’ll put the spotlight on two potential Subway suitors: #3 global burger chain Wendy’s, and our wildcard, Starbucks.
Wendy’s
Wendy’s is the world’s third largest burger QSR with about 6,000 U.S. locations and another 1,000 worldwide. Wendy’s has a long history of acquiring some or all of the assets of several other chains, including Arby’s, Tim Hortons, Baja Fresh and Cafe Express.
In areas where the two compete, Wendy’s often finishes behind Subway in terms of total footfall. So, by acquiring the brand in those areas, they’d essentially be acquiring market share. If I’m on the board, I am less concerned with the risk of cannibalization than I am intrigued by the opportunity of securing greater total market share. I’m just not sure we can afford it.
One sticking point in any deal between Wendy’s and Subway may be the latter brands’ plethora of locations in markets that Wendy’s would generally consider too small to touch -- places where Subway may be the only option in town. Does entering these markets make sense for Wendy’s portfolio?
The brand has not discussed a ‘small town America’ push, but that doesn’t mean it wouldn’t make one given the correct circumstances. We’ve recently seen Chipotle commit to a similar growth strategy. I don’t know that Wendy’s has the financial wherewithal to acquire Subway, but I’d be surprised if the brand isn’t doing its homework.
Starbucks
Starbucks is controlled by a group of institutional investors, including Vanguard, BlackRock, State Street and Magellan Asset Management; these guys can put together $10 billion over lunch if they need to, so price is not an issue.
With ~34,000 stores worldwide and perhaps 16,000 in the U.S., Starbucks foot traffic is about a third greater than Subway’s, though it sells more than 2x as much per store. Like Wendy’s, Starbucks usually leans towards avoiding smaller markets where Subway thrives, but they really should look into it.
Turns out, the upscale coffee retailer does pretty well in small town America when they choose to locate there, i.e. when Subway and Starbucks are the only two of our studied brands in town, the margins of victory get very thin. Of course, Starbucks may not think their clients and Subway’s have much in common. Though, to my mind, that’s kind of the point.
The key question is, do the institutional investors that control Starbucks want to run a category leader, or build a portfolio of them? If it’s the former, then keep dropping lines with one kind of bait and pull what you can. If it’s the latter, then switch to a net fishing approach and take everything, no matter how small the grounds.
Summary
There are a number of possible suitors we haven’t mentioned here. McDonalds could do the deal in a heartbeat but I doubt that happens. Burger King seems like a possibility but that’s still a wonky spreadsheet that BK is working from. I personally love the small market harmony with Chipotle’s vision, but that brand has enough on its plate with a 4,000 store expansion of its own planned.
In the end, Subway may just go the route of Starbucks to become an institutional holding. It’s tough to say. What is clear is that, when the brand changes hands, an enormous amount of footfall and its associated revenue will follow. Whether that is accretive to Wendy’s, Starbucks or another existing QSR brand remains to be seen.
