Subway Corporate Grabs for Advertising Control

Franchisees Wary of Power Play

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CHICAGO ( -- Subway restaurants is trying to wrest control of its $400 million advertising fund away from its owner-operators in a bold power play that overshadows recent franchisee flaps at rivals.
Franchisees have controlled Subway's advertising budget since 1978.
Franchisees have controlled Subway's advertising budget since 1978.

Franchisee control
Advertising Age has learned that a new contract from Subway's franchiser, Doctor's Associates, attempts to usurp the Subway Franchisee Advertising Fund Trust, the group that directs the chain's advertising. Unlike most of its fast-food peers that have advertising staff within their employee ranks -- allowing franchisees input through advisory councils, but not control -- 100% franchised Subway's independent SFAFT, controlled by franchisees and with a few corporate members, has held sole sway over the budget since 1978.

Now Subway's making a grab for the green with a new franchisee contract effective April 1. The contract upholds its traditional 4.5% gross sales contribution requirement to the fund, but adds a clause that "This amount will be placed into an advertising fund managed jointly by us and elected franchisees."

'Always had problems'
Susan Kezios, president of the American Franchisee Association, sees it as a power play. "The SFAFT has always had problems because Fred [DeLuca, Subway's founder] would never listen to SFAFT and try to get around SFAFT decisions," she said. "Now, in the contract he's writing in his own control."

Perhaps most onerous is the stipulation is that signing the agreement amends all existing franchise agreements retroactively. "That's crap," said Ms. Kezios. "It's more akin to indentured servitude when contracts start being drafted so narrowly that the franchisees become almost employees of the franchisor."

SFAFT itself is mum on the issue. "We are aware of the pending changes and we are addressing it through the appropriate channels," said Tony Pace chief marketing officer of SFAFT, which represents 25,564 restaurants in 84 countries. A spokesman for Doctor's Associates declined to comment.

Parade of ad agencies
It is unclear what Subway's parent hopes to change by moving the funds in-house. Doctor's Associates could be hoping to eliminate its handsomely paid spokesman, Jared Fogel, or to wage a discounting war with swarming rivals. Subway has had a parade of agencies, including Goodby, Silverstein & Partners, San Francisco; Fallon, Minneapolis; Messner Vetere Berger McNamee Schmetterer/Euro RSCG, New York; and Publicis Midwest, Chicago. In the past, the company has tried to set a new brand position without its famous dieter. Independent agency McCarthy, Mambro Bertino, Boston, currently holds the account.

Restaurant consultant Technomic pegged Subway's system sales at $7.17 billion last year, up a healthy 14.3%. While it's the largest player in sandwiches, its share is being chipped away at by Quiznos, with sales of $1.38 billion, up 23.2%.

Franchisees could refuse as a group to sign the agreement. "One of the most contentious issues for franchisees and franchisors is control of the ad fund," said franchise consultant Dick Adams. "I can't blame the franchisor for wanting to get control," he said. "Franchisees could bring the system to its knees because it has a voluntary ad fund."
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