Franchising and the Entrepreneur

Case 10

Firehouse Subs

How can the owners of a franchise reverse declining sales?

Robin and Chris Sorenson are the owners of Firehouse Subs, a

chain of submarine sandwich shops with more than 400 locations

in 21 states. The Sorensons, both former firefighters, opened their

first Firehouse Subs restaurant in 1994 in Jacksonville, Florida,

and used a firehouse theme and authentic firefighting gear to dec-

orate it. Their menu followed suit, featuring sandwiches with

names such as the Hook and Ladder, the Firehouse Hero, and the

New York Steamer. In 2001, the Sorensons operated 30 Firehouse

Subs restaurants across Florida and began selling franchises to

expand across the Southeast and beyond. Their goal is to have

2,000 locations by 2020.

Sales at Firehouse Subs restaurants were growing until

2008, when year-over-year sales declined throughout the chain

by 3.4 percent. “In our entire history, we had never had a period

like that when our entire system was running negative sales,”

says Don Fox, the company’s CEO. “It was something com-

pletely foreign to us.” The sales decline was particularly puz-

zling because lower-priced restaurants such as Firehouse Subs

normally are well-positioned in economic downturns to attract

customers who continue to dine out but look for less expensive

options. Something besides the recession was causing sales to

decline.

Firehouse Subs provides franchisees with a complete busi-

ness system, strong brand name recognition, and the opportunity

to own their own restaurants with investments that range from

just under $200,000 to $425,000. In return for the franchisor’s

support, Firehouse Subs charges franchisees a $20,000 initial

franchise fee, a royalty of 6 percent of sales, and a 3 percent

advertising fee (2 percent goes toward local advertising). When

the executive team met to discuss the company’s declining

sales, Robin Sorensen had an unconventional idea: eliminate the

2 percent local advertising fee and allow franchisees to create

and execute their own marketing strategies. The Sorensons and

Fox presented the idea to franchisees, who approved it over-

whelmingly. “It was pretty radical,” admits Fox. “Some people

thought it was insane to give the money back. We didn’t have an

ego about who has the money. We wanted results.”

Six months after giving franchisees control over their local

advertising budgets, the sales decline at Firehouse Subs had

worsened. System-wide sales were down 6 percent from the

previous year. The chain’s top managers believed believed that the

problem stemmed from a lack of brand awareness and a very successful “$5 Footlong” campaign that Subway, the largest

company in the submarine sandwich business with more than

33,000 restaurants around the globe, had launched.

Firehouse Subs’ executive team discussed their options and

narrowed them to three: continue the existing local marketing

efforts by franchisees, begin discounting sandwich prices, or

launch a new marketing campaign. They were hesitant to continue

the local marketing campaigns, because over 6 months sales had

continued to decline. Discounting sandwich prices would cut into

the company’s already thin profit margins and might damage the

reputation for quality ingredients that the company had built over

the years. The management team began exploring a new market-

ing campaign and met with an experienced advertising company

based in Fort Lauderdale, Florida. The advertising agency showed

them that other submarine sandwich chains, including Subway

and Quiznos, spend more on advertising per store and collect

higher royalties and advertising fees. The agency recommended

that Firehouse Subs not only reclaim the local advertising fee

but that they double it to 4 percent! That would increase the

payments that franchisees make to Firehouse Subs from 9 percent

of sales to 11 percent of sales. The executives wondered whether

franchisees would resist the move when many of them already

were struggling with lower sales and profits.