the 17 year old founder of Subway had never made a sub sandwich in his life and his first restaurant failed miserably so how did Subway overtake McDonald's and become the biggest fast food chain in the entire world this is a story of both struggles and success a tale of lawsuits and lies this is the controversial history of subway [Music] in 1965 a 17 year old Fred DeLuca wanted to become a doctor but he had a problem he was the son of poor Italian-American immigrants and earned just 1. 25 an hour at a hardware store so he had no idea how he was going to pay for medical school he'd grown up in public housing in the Bronx and his family barely had enough money to scrape by but then one day Fred and his parents got invited to a barbecue at the house of an old family friend a nuclear physicist named Peter Burke from the size of his house it was clear that Peter was well off and so Fred decided to ask him how he could make enough money for college secretly hoping Peter might give him a loan instead Peter's answer was not what he expected Peter said you should open a submarine sandwich shop now a couple of issues here number one Fred had no money number two he'd literally never made a sub sandwich in his life but Peter explained how it would be pretty simple open a small store build a counter and then buy some different fillings and bread Peter had actually had this idea for a while but didn't have time to run it himself so he said they could be business partners Fred would run their day-to-day management of the store and Peter would give him a 1 000 loan to get started this was not how Fred had expected this family Barbecue to go but he was now in business unfortunately it was a business he knew absolutely nothing about but still in 1965 17 year old Fred used that initial loan from his new business partner along with some help from his mother to open his first sandwich shop it was located in Bridgeport Connecticut although originally it wasn't called Subway they named it Pete super submarines to drum up interest in their launch Fred handed out flyers all across the local area and on the first day of trading they sold 312 sandwiches costing less than a dollar each unfortunately after the initial hype in the first couple of weeks cell started to fall to make matters worse when Fred spent money to run some local radio ads potential customers couldn't even properly understand them because of his heavy Brooklyn accents Fred's lack of business experience meant their sandwich shop was failing in fact by the end of Fred's first summer of running Pete super submarines he had just six dollars for many people this would be the point where the story ends the business closes and they move on but not for Fred and Peter instead they made an extremely bold business move despite their first store in Bridgeport clearly not going well at all they decided to open another restaurant to create the image of success they figured if they had multiple locations people would assume they must be doing really well and have great products it was also around this point in 1968 when they rebranded to the much shorter and simpler name Subway Peter and Fred were so adamantly idea could work they set themselves an ambitious goal of opening 32 Subways in the next 10 years both of them believe the key to success was visibility and marketing so they made sure their next Subway restaurants were much more visible prominent locations this led them to their first profitable year earning seven thousand dollars not a lot of money considering the work they put in but proof this business could be profitable so they continued to reinvest money into opening more locations and advertising Subway was on the app and their persistence was paying off by 1974 this unlikely Duo had grown from a single failing sandwich store to 16 different Subway branches throughout Connecticut however their expansion had caused a problem each of their restaurants were quite inconsistent in how they looked and operated depending on which Subway restaurant you visited the experience could be very different as they couldn't properly manage them all and there was also another problem they'd originally set a goal of 32 restaurants in 10 years and with only two years left on that Target they were only halfway there it would be impossible to hit their goal at this current rate and then Fred had an idea an idea that could solve both of these problems and make them more money for much less work and it was this idea that ultimately transformed Subway into the biggest fast food restaurant on the planet foreign Fred wondered if instead of directly owning and managing their future Subway restaurants themselves what if they franchised and let other driven entrepreneurs have their own Subway restaurant which they were fully focused on but that followed the exact same format and menu that had been successful with their first 16 locations this way Fred and Peter didn't have to worry about operating their own restaurants and dealing with customers staff and suppliers themselves other people would pay to set up a Subway restaurant and use all the subway branding and products this is when Peter's role in the business started to get even smaller he became a silent partner and didn't even have his own office at Subway HQ if someone asked him a question about the business he would famously say talk to Fred Peter did continue to take his share of the profits though earning him an incredible return on his initial 1 000 Investments but still once Fred and Peter agreed to franchise Subway in 1974 they managed to get 15 franchisees signed up that year and by 1981 they'd gone National opening 200 locations across the United States and 100 more the follow year this growth was much faster than what they'd been able to achieve by doing everything themselves franchising was clearly the way forward for Subway and is how the business has been run ever since it helped that in the 80s and 90s Subway franchises were one of the cheapest to set up costing a fraction of the amount it takes to set up at McDonald's Taco Bell or Wendy's that need more expensive equipment and like those fast food chains Subway wanted its franchise locations to be fast to build cheap to run and inconvenient sometimes unconventional locations you can find Subways in petrol stations airports post offices hospitals universities and even on military bases it gets weirder too a fake Virginia Town built by the FBI to train its agents is home to a very real Subway there's an entirely kosher Subway and a Jewish Community Center in Ohio and you can even get your hands on a foot long in a German river cruise ship a Subway no location is too strange or small it'll open a franchise virtually anywhere and this enabled them to expand more rapidly than competitors and remember Fred and Peter not only got an upfront fee for every new franchisee they also got eight percent ongoing royalties of all the money the franchise made at its peak Fred was receiving checks worth roughly seven million dollars every Monday which were his royalties from all the different Subway stores however whilst this franchise model was proven great for Fred and Peter for the franchisees actually running Subway shops things were not so great foreign had an extremely Hands-On approach and was known for micromanaging his franchisees in fact it's claimed Fred had no personal boundaries at all and reportedly felt like he could come onto the wives of franchisee owners at Subway conventions because he believed their husband's success was all down to him one business associate claimed if he wore a skirt and had a pulse he would chase you meanwhile many franchise owners had accused the company of defrauding them or tricking them into binding uncompromising contracts in 1998 40 of Subway franchise owners said they were just getting by and making a few dollars part of the problem is that Fred was so Keen to expand Subway and open more stores but it was very common for them to set up multiple Subways in a small area making it very difficult for one restaurant to make much profit because there was just too much competition when asked about this Fred said it bothers me that people lose money but I don't lose sleep over it this is America the subway sales team who signed up new franchisees also seemed to be quite targeted in their sales approach a former Subway executive said 30 to 50 percent of franchisees are immigrants and many struggle to understand the complex contracts they were signing because they were written in their second or third language when one Subway exec suggested maths and english comprehension tests to check franchisees fully knew what they were signing up for Subway's management rejected the idea for many of Subway sales Executives all that mattered was signing up more and more franchisees it didn't matter if those people understood the risks and costs they were taking on one ex-subway employee even said I've seen over 300 franchise agreements and Subways is the worst in fact some of the contract terms were even declared illegal in certain U. S states it gave Fred the power to seize any franchise and its assets if he wanted to stated he could set up franchises close together making the restaurants fight each other for business and ban franchise owners from ever talking to the media in 2017 some Subway franchises decided to break this Rule and told Business Insider that Subway's slogan eat fresh was far from True the ingredients they were forced to order only arrived once a week leading to mushy and rotten vegetables if they tried to order from different suppliers or schedule more regular orders some had their franchises taken away and licenses revoked if even the Cucumbers weren't sliced correctly franchisees could risk having their royalty rates increased or losing their restaurant altogether considering all this you may assume many franchise owners would want to take legal action but their contracts forbid them from ever suing Subway meanwhile things were going great for Fred and Peter Subway was going International opening its first restaurant outside the US in 1984.
but unlike many other chains they didn't choose Europe or Asia the first International Subway opened in Bahrain a small Arab state made up of over 30 individual Islands it's never been confirmed why Subway chose this unlikely location but it's been speculated that the small size made it a great place for testing out Subway's products in a new territory Fred was constantly obsessed with opening more stores he'd set goals for how many stores they should open each year and all the employees would think it was insane but then they'd actually achieve it and instead of going on holiday Fred would go abroad to find new locations for Subway to expand so despite some unhappy franchisees Subway's plan for fast Global expansion was in full flow and to cement their reputation and boost sales even more the company was about to take advantage of one of the greatest promotions in fast food history unfortunately it would end up causing a gigantic scandal before we get to the next chapter I think we can all agree that good customer service is crucial for any business as happy customers means more repeat purchases and referrals and that's why you're going to want to know about today's video partner tidio tidio helps you grow your business by helping you grow your sales and delivering the best customer experience thanks to their chat Bots and live chat that you can easily integrate to your website or any popular platform like Shopify or WordPress no coding is required at all and you can get started within 10 minutes what I think is so great about tidio is they have so many ready-to-use chatbot templates for different scenarios like turning passive users into active buyers improving lead collection and streamlining your customer service and if you use my link in the description you can sign up for a video account for free with no card details or personal info required and after you try their free plan and you see how it's helped you make more money you'll also get 20 off any Premium plan so click the link in the description to start generating more sales and create an incredible customer service experience right now in the 1990s and early 2000s Subway developed a key marketing strategy that made it stand out from the rest of the fast food crowd it pushed the message that its sandwiches were pretty healthy after all the ingredients all look fresh they baked their bread on site nothing was deep fried and the customer could choose exactly what to put on their sandwich from ingredients laid out right in front of them according to Subway there are technically 4. 9 billion possible combinations so in 1997 Subway started to advertise seven sandwiches it claims were low fat comparing them to the high calorie Burgers and Tacos made by their Rivals not only that but Subway could claim something really impressive a customer of theirs named Jared Fogle claimed to have lost 245 pounds by eating two Subway sandwiches each day it was such great marketing that Subway hired him as their spokesperson in 2000. Jared Fogle became the successful face and body of Subway representing the subway diets his ads were a massive hit in fact sales increased by 20 after its first commercial social ads at one point Subway's Chief marketing officer reportedly claimed Fogel was responsible for up to half of Subway's recent growth fogel's Subway diet made him a celebrity and he featured in Subway ads for over a decade often holding up the giant pair of jeans he used to fit into Jared Fogle was starring in TV commercials boosting sandwich sales and even meeting Oprah Subway had seemingly hit the jackpot by finding this guy to be the face of their brand and then just about the absolute worst thing that could happen involving your company's spokesperson actually happened in 2015 fogle's home was raided and they found explicit images and messages with young kids he was convicted of possessing and distributing child abuse images and grooming and exploiting miners he was sentenced to 15 years in prison Subway abruptly cut ties with Fogel and of course denied any knowledge of this and to be fair when I first heard this my first thought was this was just really unfortunate for Subway as of course they wouldn't have known and having the face of your brand associated with something so horrific is a brand nightmare however then I dug a little deeper it turns out that fogel's ex-wife actually sued Subway claiming the company had been told about fogle's interest in children but since they were making so much money from his ads they did nothing about it and Subway's controversies didn't stop there as their health claims soon started to come under severe criticism as well this is when the lawsuits and accusations began Subway was accused of using a chemical found in yoga mats to make its Bridge using a substance that wasn't really tuna and having chicken that contained more soya than Meats not to mention they were accused of selling footlongs for actually only 11 inches long Subway challenged all these statements and settled some of them out of court although they did agree to phase out the yoga mat chemical but then another PR disaster for Subway came When an Irish Subway friend Jose had the idea of claiming that the Brand's bread should be vat exempt because bread is classed as a staple food so shouldn't be tacked the same way the Irish government decided to investigate and its analysis of Subway's bread recipe found it contained five times more sugar than the average Loaf and so it could actually be taxed as a dessert so the whole idea to try and pay less tax massively backfired and Subway's reputation as a healthy choice was in tatters okay it's time for a very quick break while I ask you a favor if you're enjoying this video so far please turn on the notification Bell for magnates media I'm posting many movies about business money marketing and more but just subscribing doesn't always mean you'll see them so please consider turning on notifications and I love you forever thank you foreign Fred had big goals from the very early days of the company even back when it was called Pete's super submarines in fact according to their very first employee Fred always wanted his company to be bigger than McDonald's and would never be happy until he achieved there and by 2011 Subway had done it was McDonald's still dwarfed them in Revenue Subway was winning in terms of total locations in 2016 the chain hit its peak with 44 000 locations worldwide serving an estimated 5 300 sandwiches every minute unfortunately Fred would not be there to see that as he died of leukemia in 2015 by the time of his death his net worth had passed three billion dollars and yet he was still incredibly Frugal one person even recalled him refusing to pay two dollars for a bottle of water on principle whilst he was at times a controversial figure there's no doubt he'd played the pivotal role in turning Subway from one failing sandwich shop into the world's biggest fast food Empire the problem was he'd always refused to relinquish much power and control unless when Fred died there was no real succession plan and nobody else understood the business as well as Fred had it's perhaps then not surprising that Subway's location count has declined every year since Fred died in 2015.
franchisees interviewed by Business Insider in 2018 claimed that one-third of its U.
