SUBWAY got its start in a fluke. Fred DeLuca was graduating high school and wanted to go to college, but he didn’t have the money. He didn’t know what to do. Finally, at a social event, DeLuca screwed up his nerve and sought help from family friend Dr. Peter Buck.
Buck, a nuclear physicist, had a different idea. “I think you should open a submarine sandwich shop,” he told DeLuca — and emphasized his enthusiasm for the project by writing a check for $1,000 to fund a start-up. Suddenly, DeLuca was a partner in a Bridgeport, Connecticut, sub shop.
Today, DeLuca presides over the nation’s largest fast-food business, and some estimates of his net worth reach $1 billion. With more than 19,700 locations in 74 countries, Subway is at the top of the franchise heap. In the 15 years Entrepreneur magazine has rated franchise businesses, Subway has ranked first 11 times.
So how did DeLuca turn that $1,000 investment into a fast-food empire? And how did he turn the sub sandwich, once a hand-held heart attack, into a heart-healthy, low-fat health food?
Part of the answer is pure satisfaction: Subway knows how to keep its franchisees happy and the company’s repeat business tells a tale of contentment. “Over 70 percent of [DeLuca’s] new franchises are bought by existing franchisees,” says Entrepreneur editor-in-chief Rieva Lesonsky.
And then there’s DeLuca himself. “He’s quirky, brilliant, and one of the most inquisitive people you’ll ever meet,” says John Hayes, who coauthored DeLuca’s handbook for microentrepreneurs, Start Small, Finish Big. “Part of his success is that he is so interested in so many things.”
Listen to DeLuca, though, and he’ll say this adventure in pull-yourself-up-by-the-bootstraps American capitalism was a series of serendipitous accidents that started with Buck’s check.
All right, maybe chance played a role, but maybe DeLuca is also a modest, incredibly goal-oriented entrepreneur. American Way took a rare opportunity to ask in person, so read on — and decide for yourself.
AMERICAN WAY You rarely give interviews. Why?
Fred DeLuca When we began franchising, I gave a lot of interviews. That helped increase the visibility of the franchise offering. But there came a point where the franchise had an enormous amount of interest, and still does. And interviews generally don’t do a lot for the consumer side. It’s not too often somebody gives a business interview and you read it and say, “Let’s run out and get a sandwich.”
So I asked myself, “Gee, do I want to do the celebrity entrepreneur thing? Could I get on Jay Leno?” People on the street would recognize me, but I don’t think I’d want that. I don’t want that high profile where I can’t walk down the street. So now I only do interviews every so often, when the idea sounds interesting.
AMERICAN WAY Go back to ’65 when Dr. Buck said, “You should open a sub sandwich shop.” You were 17 years old. Why didn’t you do what most normal kids would have done — say uh-huh, and then walk away and forget about it?
DeLuca There was an element of that in my mind. Just to be sociable I asked him how it worked, and he said to me, “It’s pretty simple. You get a little store, you build a counter, and ...” And I kept asking him questions.
After five minutes, he said something that made the difference. He said, “You sound interested. I’d be willing to be your partner.”
Those magic words caused me to realize that I hadn’t any better opportunities, and I immediately said sure. I didn’t even know what it entailed exactly, except I had been to stores that sold subs. Actually, I’d only been to one, a place in upstate New York called Mike’s. But it didn’t look that terribly hard. I also had the good fortune of being a kid and not knowing that it could be risky going into business, or that there was a possibility of failure.
AMERICAN WAY What happened when you wanted to go out on a date on Friday night, but you had to keep the store open? Most 17-year-olds would have decided they’d made a dumb mistake.
DeLuca Before getting into the sandwich business I worked in a hardware store where I had long hours, and I was used to the sense of responsibility, of showing up for the job. I met my wife in high school and some of our dates were driving around to the stores to make sure things were okay. Obviously, she’s a saint for having put up with that, and obviously, it’s good to marry a saint.
AMERICAN WAY Why did you decide to open more stores? Why not just stay with the one?
DeLuca On the first day when Dr. Buck and I talked about opening a sub shop, we set a goal of 32 stores in 10 years. We knew about Mike’s Submarine Sandwiches, and we knew he had been in business for 10 years and he had 32 stores. We thought he’d probably figured it out, and it would work for us, too.
But what happened was, we were running behind schedule. After eight years we had 16 stores. We decided we would franchise. Franchising allowed us to think beyond the immediate Bridgeport region, where our stores were.
Some of our first franchisees were family members in neighboring states. My aunt and uncle who lived in Staten Island opened our first store in New York. My wife’s brother had just graduated from college, and he didn’t have a job, so he opened a store in Springfield, Massachusetts.
Of course, with franchising you get people calling to ask about the opportunity. And they’re not always from the neighborhood. I remember when we got a call from Baltimore. I drove down to meet the person and I thought, My, this is far away! How in the world are we going to provide guidance for a store way down in Baltimore? But we thought it through and figured out an approach.
AMERICAN WAYBut Brian Dixon opened the first franchise, right? Is he still a franchisee?
DeLucaYes, he is. Brian was our first franchisee. He’s now a franchisee and he is also a [business] development agent who helps put new stores in Rhode Island and eastern Connecticut.
AMERICAN WAY As the story is told, you begged Dixon to take over a franchise. You loaned him the capital and also told him that if he wanted out for any reason, you’d buy back the store. How did you zero in on Dixon?
DeLuca Brian’s wife and my wife worked together at the Veterans Hospital. We’d get together as friends, and Brian was a nice guy, but he wasn’t satisfied with his job [installing air conditioning ducts and insulation].
When we first began franchising, I knew we needed a first franchisee, and the only person I could think of was Brian. So I went to him and said, “I’ve got this opportunity for you.” He gave a practical response, which was, “Even though I’m not crazy about [my job], I get paid every week.” He didn’t feel comfortable taking the risk of quitting.
Then one day he showed up for work and his employer had gone bankrupt. So he called me and said, “Hey, is that offer still available?” That’s how we got started.
Sometimes I ask myself, “If Brian’s company hadn’t gone out of business, would we have ever franchised? It might seem obvious, that of course we would have, but I’m not so sure. We had talked about franchising, but other than talking with Brian, I didn’t take any steps toward doing it. We weren’t actively pursuing it.
AMERICAN WAY How do you size up a potential franchisee?
DeLuca You know, that question’s not that easy. I have an easier time hiring employees than deciding who’s going to do well as a franchisee. I suspect I gravitate mostly to people who have what I would call reasonable expectations and who know that the business will be hard work. If somebody comes in with that outlook, they have a lot better chance of being successful than somebody who has grandiose ideas and thinks success will come easily.
The other thing that we do is we always test all of the franchisees to make sure they have the basic skills necessary — have they reached a certain educational level so that they’ll be able to understand our materials and use the control systems properly? Because the question is not only “Can you make a sandwich?” It’s also “Can you make a profit?” So we want to make sure our franchisees are able to exercise controls over the business.
AMERICAN WAY How do you keep franchisees happy?
DeLuca We focus on points of contention with franchisees, places with likely friction. For instance, I saw almost from the beginning of franchising that advertising was one of the points of contention. At first we planned all the advertising. That’s what we did before we had franchisees, so we just kept doing it. Except it triggered a lot of unhappiness. Why did you choose this radio station? Why did you run that ad? So we created a board of directors [composed of franchise owners] and put them in charge of the advertising fund.
For years after I did this, I was told it was the dumbest move anybody could make. People said franchisees couldn’t possibly make the right kind of advertising decisions; that’s something that has to be left to the professionals. I thought, Well, I think I did the right thing, but, boy, I don’t know. Even now, all these years later, I’ll say to myself, “You know what? I did do the right thing.” But I would bet you today that in franchising, more people would say we took the wrong course than the right one.
AMERICAN WAY In the early ’70s, did it ever occur to you to go to Dr. Buck and say, “Give me $50,000 for my share of Subway and I’m out of here. I want to buy a new convertible, chill out.”
DeLuca Maybe I wasn’t a very crea-tive thinker, but that never occurred to me. I know that at some early stage I went into this thing thinking, Okay, we’ll open a submarine sandwich chain with 32 stores, but I remember when I first thought this might be a career. It was 1969 and I was in the Army Reserves at basic training. I was quite impressed with the people in training. A lot of them were in grad school, and they had all kinds of plans for the future. This guy wants to do this, that guy wants to do that, and the other guy wants to do something else. And I said, “I wonder what I’m gonna do?” By then I had five stores, and I remember thinking, Well, maybe I’m already doing it. Maybe this could indeed be a long-term career!
AMERICAN WAY It indeed turned out well for you.
DeLuca The interesting thing is that it is really all accidental; it’s not as though it was planned. But at some point I did get serious about goal-setting. This was probably in the early 1980s. In ’82, we had 200 stores, and I remember saying to myself, Two hundred: Is this a lot of stores or a little? What should we be planning for the future? After doing a little research into the fast-food industry and thinking about the possibilities, I set a goal of 5,000 stores by 1994. So that was real serious goal-setting — and that’s when we started a growth spurt.
AMERICAN WAY To an outsider, it looks like your company turned on a dime with the Jared ad campaign. Jared, of course, lost 245 pounds on a strict Subway diet — two low-fat subs a day — and, as those reports hit print, you repositioned a sub sandwich from a delicious but high-fat, greasy thing to a heart-healthy, low-fat food. What led you to do this?
DeLuca It’s another one of those lucky things. It started about six years ago when one of our local markets, Houston, said that they’d like to focus on the low-calorie counts and fat content of our sandwiches. They came up with this idea of “seven under six” [seven sandwiches with six fat grams or less]. We had never really looked at it that way. And they said, “Let’s test market this in Houston.”
They ran some TV commercials and sales did well, and I liked what they were doing. So we said, “Let’s print this information about the seven under six on our cups and napkins.” So we did that, and then along comes Jared who had tried every diet but couldn’t stick to anything. He was living near a Subway, and one day he sees our seven under six, and of course a year into the Subway diet he had lost a lot of weight.
AMERICAN WAYHow did you decide to use Jared’s diet success as a key marketing tool for the chain?
DeLuca We’d heard about Jared early on, but frankly weren’t doing anything with it. There were people internally, in marketing, who didn’t think anybody would be interested in this. That’s how bureaucracies sometimes work.
But Jared got written up in the Indiana University newspaper [where he was a student], and that was picked up by Men’s Health. One of our Chicago franchisees saw the article, and he said, “Hey, let’s contact this kid and see if we can make ads with him.” So they made this ad, they ran it locally, and it was successful. And our marketing people said, “Oh, maybe people are interested in this.” And they started using it nationally. Yes, that became a big repositioning for us.
AMERICAN WAY One of the things that is most ingenious about Subway is that it lets consumers custom--tailor their sandwiches. The customer gets to pick jalapeños, pickles, olives, and a lot more toppings, and this happens while you are standing in front of the sandwich maker.
DeLuca This personalization for us is a tremendous strength, but it’s also a weakness. Consumers absolutely love to be able to get what they want. It’s a rare customer who’s not watching you develop the sandwich and making sure that it’s developed properly.
On the downside for us is that we have food production issues. You can only make so many, so fast. Unlike the standardized products offered by many of our competitors, we cannot make our sandwiches in advance. So at lunchtime, we wind up with limitations as to what we can produce, and that’s when the big business gets done in fast food. It’s a trade-off that we deal with. We want to deliver service. And our customers like it, and for us it happens to work.
AMERICAN WAY For a kid from the projects, you’ve done very well financially. For anybody, from anywhere. Why do you keep doing this?
DeLuca That’s a darn good question. For years I’ve asked myself the same question, and obviously I don’t have to work. But I think if I didn’t do this, I’d have some drive to do something else. I don’t think I’d be a sit-around-the-house kind of guy or a play-golf kind of guy. I’d probably want to get into a business. I’m thinking to myself, maybe I do this through a protective mechanism [Laughs]. At least I know I can do this, and I’m pretty good at it.
john emerson is a new york-based editorial and advertising photographer whose clients include fortune small business, forbes, and personalities ranging from sir edmund hillary to dale earnhardt jr.
deluca's recipe for success
in start small, finish big, deluca itemizes his lessons for would-be entrepreneurs. here are a few of them.
start small. deluca has collected hundreds of stories about successful businesses that started with next to no capital (for instance, kinko’s launched with $5,000 in borrowed money). money is never a barrier.
earn a few pennies. pulling in small profits builds discipline that helps you rake in big bucks later.
ready, fire, aim. don’t fret about getting it perfect before launch. start now, and then fine-tune the idea.
continuously improve your business. thirty years ago subway didn’t carry a turkey sub — it would have been sub sandwich heresy. now that low-fat bird is its best seller.
believe in your people. it takes a team to win anything today. value good people and they’ll value your dreams.
never run out of money. borrow before you need to, because no one lends to the really needy. anticipate cash-flow crunches and borrow before needs are urgent.
build a brand name. subway used to be just a public conveyance; now everybody knows it’s a sandwich shop, too.