Up close and personal with Subway’s co-founder Fred DeLuca

Saturday April 6, 2013

Up close and personal with Fred DeLuca

By Liz Lee

Star Publication (M) Bhd

WHEN he started, he had only five sandwiches on the menu, all foot-long and served cold.

Today, he heads the world’s largest food chains, beating McDonald’s in 2011 and not showing signs of giving up that position.

Subway co-founder and president, Fred DeLuca’s story is the epitome of the proverb “slow and steady wins the race”.

Even though Subway is growing at a rapid-fire pace especially in Asia, DeLuca says the main focus is to look at building the business one store at a time.

“The foundation for success is to understand what customers want, and that is good food, service and cleanliness,” he adds.

At the Asian level, Subway’s business is also undergoing strong expansion with an ambitious target of 10,000 stores by 2020. These stores would generate US$3bil (RM9.26bil) sales.

Subway’s Asia business is now worth over US$500mil (RM1.54bil), with 1,600 stores operating in the region. It enjoys a 29% year-on-year revenue growth.In the western side of the globe, North America, Latin America and Europe remained the biggest markets for Subway International, in that order.

DeLuca says Asia is catching up very quickly. The regional division is confident of opening 600 more outlets this year.

“Last year was the biggest growth year we had in Asia, increasing at a rate of one store per day, making it 365 stores in total,” he says, noting that the China, India and Japan franchisee teams have grown well.

Last year Subway opened 2,500 stores worldwide, the biggest achievement in its history and DeLuca believes that this year could be bigger for them.

“We may have over 3,000 stores this year globally. And over the next three years, we could have 50,000 stores.”

Subway overtook McDonald’s as the biggest fast-food franchise in 2011. It is a privately-owned company by DeLuca and Peter Buck worth more than US$17bil in terms of global sales.

DeLuca could join the ranks of Bill Gates and Steve Jobs, living the story of a man who made it albeit dropping out from university.

The co-founder and president of the world’s largest fast-food chain has come a long way since selling only five selection of cold sandwiches on Subway’s first menu.

One store at a time

Subway is, as he puts it, not only about sandwiches, wraps and cookies on its menu, it offers customised menu according to the local appetite.

For example, Subway India has vegetarian and non-beef or pork menus where the supplies and sandwiches are prepared separately to suit the local culture while Muslim countries have halal menus.

DeLuca says the challenge of introducing an American submarine sandwich culture into foreign markets lies mostly in supplies and maintaining its standard at the store-level operations.

“Every new market is a challenge, for example to get the supplies some of the food is not available in the country or if available not up to our standards,” he recalls from the extensive ventures into Europe and Asia.

As a franchise business, DeLuca says the company normally has to import the equipment used in the stores.

“It’s a challenge to do it according to Subway standards,” he says of assisting and training store owners to execute according to the Subway standards.

The Subway philosophy, according to DeLuca, is very straightforward: do a good job for each customer and build the success one store at a time.

“I really struggled with the first store, it was terrible location,” he recalls, “I was 17 and I didn’t know any better.”

He says retrospectively it was operated the best he could, “which was not that good”.

Six months into the business, DeLuca’s first Subway store in Connecticut had only a few customers. It was then decision time for him and his business partner Peter Buck.

Instead of calling it quits, DeLuca decided to follow through with their goal of setting up 32 stores in ten years.

Forging ahead, DeLuca and his team wanted to see what a second store could bring to the business.

It was only a year into the business that DeLuca realised the sandwich business was a seasonal one, especially in the 1960s, winter being the toughest months.

“We continued like this for a few years, but every summer I would open a new store and learn along the way by modifying what didn’t work,” he says.

Though one may consider Subway as a chain-outlet business when DeLuca opened the third store, he considers the fifth store his breakthrough store. While every store gave DeLuca different insights into running the chain outlet, it was the fifth store that taught him the importance of strategic locations.

“When it opened that first day, it did twice as much as the other stores,” he says of the store that sealed DeLuca’s financial capability to grow the business comfortably.

“It was the store that did well in summer and winter and gave us the foundation (to move forward).”

DeLuca is in a business that does not wear out. “The thing about food business is that it’s not a matter of whether people are going to eat, it is a matter of where they want to eat.”

With consumers spoiled for choice when it comes to food and beverages outlets, he believes that the key is to provide great service to make them want to come back for more.

“And you don’t need to have a lot of variety to retain customers. A big business can have a narrow focus as long as what it is offering is really good,” he says.

Given its order-and-go service, Subway is considered a fast-food chain, albeit with a health component.

DeLuca says the Subway menu has been more or less the same for decades. It was never set up as healthy food.

“Over the course of time, people recognise that there’re a lot of vegetables here and those with dietary concerns can select what they want to eat,” he says.

“By allowing people to pick what they want to have in their diet, we got a reputation for being healthy.”

In many ways, society’s increasing demand for healthy food has worked in favour of Subway, as DeLuca points out: “Nowadays, it is more important to people than it was back then when we started.”

He confesses that although he is a cautious and moderate eater, he “likes to try the bad stuff”.

At 66, DeLuca has not tire of the sandwich business yet. He still visits the Subway stores about three to four times in a week and deems the headquarters in Connecticut as his favourite place.

Foot-long sandwich

On movie dates with his wife, they both would grab a foot-long sandwich on the way and split it to share. His number one Subway sandwich is the turkey sandwich.

He says they used to drive around the stores to see how things were doing. We’re really doing the same thing now, only on a bigger scale,” he says.College to cold sandwiches

Looking back on his achievements with Subway, DeLuca considers himself “just lucky and timely”.

“I was doing a part-time job at a hardware store during my high school days and I knew I wasn’t going to make enough money to pay my tuition fees as I came from a poor family,” he says.

After completing high school, one summer afternoon, we looked up a family friend called Buck.

“He said to me So you starting college this fall?’ I said yes but I have a little challenge. I’m not sure what to do because I need to figure out how to get enough money to pay my way through college.”

Then he cheekily softens his voice: “I was secretly hoping he would say Oh don’t worry, I’ll let you borrow some money which you can pay me back when you graduate’.”

Instead, Buck suggested DeLuca open a submarine sandwich shop.

At that point, DeLuca felt it was just a conversation about possibilities but when he asked Buck a few more questions about starting a food outlet, Buck offered to be a partner if he was genuinely interested.

“I didn’t have any alternatives, so I said I’ll do it.”

His parents were supportive of the idea and thus Subway was born.

“It happens a lot in life. As you go through it, opportunities happen or events happen and they change the whole direction of your life in the way you never imagined,” he says, “but you have to be open to opportunities.”

Although DeLuca signed up for the Subway venture, he went on to start his pre-medicine course, running Subway’s first stores simultaneously.

“Within two years of starting college, I knew I was not going to be a physician because I didn’t like some of the courses, in particularly the laboratory work and sciences,” he says.

Dropping out of the academic world, DeLuca gave his all to grow Subway with his investor partner.

He now calls Buck, who was trained as a nuclear physicist, the smartest investor who “with a little investment created a big company”.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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