Will Subway Japan's New Owner Achieve a Turnaround?
Despite being America's No. 1 fast-food chain - even bigger than McDonald's - Subway has struggled in Japan. Its new owner Watami hopes to turn things around.
What’s new: Recently, the major restaurant management company Watami Co., Ltd. signed a master franchise agreement to develop the "Subway" business in Japan and made Subway Japan a wholly-owned subsidiary on October 25, 2024 by acquiring all the shares of Subway Japan G.K. Watami's chairman and president, Miki Watanabe, has announced that he aims to expand the number of Subway stores to 3,000, more than ten times the current number, in the next 20 years, but will he be able to achieve this BHAG1?
By the numbers: Subway Japan needs to put some points on the wall.
Overseas success: In the United States, Subway's birthplace, the chain had more than 20,000 stores in 2023, making it the most popular of any major food chain, including McDonald's and Starbucks. It has about 37,000 stores worldwide, making it the world's second-largest fast-food chain after McDonald's.
A dud in Japan? On the other hand, Subway Japan peaked at around 480 stores in 2014, but the brand has been on a downward trend ever since. Following the global pandemic, the number of stores in Japan has dropped to 178, less than 40% of its peak.
What they’re saying: There has been much speculation about Subway's lukewarm reception in Japan. Some believe that onigiri (おにぎり), or the humble rice ball, Japan's original homegrown fast food, is to blame.
"I heard somewhere that the reason Subway, the world's second-largest fast food chain, is struggling so much in Japan is because of the existence of onigiri. In Japan, the position of onigiri as a quick snack that provides a certain amount of energy is stronger than that of sandwiches. Interesting story." - Random comment on X (As of late November 2024, this post had received 93,000 likes)
The company's premium pricing strategy might be the culprit.
"Well, it's no wonder, because onigiri are cheaper. You can buy three onigiri for just 100 yen ($0.67) at an onigiri shop (seems a little cheap), but you can't even buy a single sandwich at Subway for that amount...Subway is expensive. It's not good value for money. If you could buy a sandwich for about 150 yen ($1.00) like onigiri, I think it would be able to compete well.” - Comment on X
In the thread on X there were also remarks such as "the ordering process is cumbersome" and "the sandwiches are much bigger in America."
Between the lines: Food industry experts are critical of Subway's basic product positioning in Japan.
Japanese preference for finished products vs. customization: Subway is unique in that you can customize your order by choosing from a variety of breads, fillings and sauces. In the U.S., this ability to customize your order and express your originality has been well received, as it fits the national character of a people who value individuality.
"The way Subway orders are taken does not match the Japanese national character. This is because many Japanese people tend to prefer 'finished products' such as standardized products and packaged goods. They also tend to prefer a simple ordering method and want to be able to pick up their products quickly.” - Takao Shigemori, Food Industry Analyst
At Subway, you choose the base product, then the type of bread, the toppings, the type of vegetables, and the type of dressing/sauce, for a total of five processes before the meal is complete. In fact, when it comes to fast food in Japan, there are many set meals, and there is little custom of customizing the food. Thus, there may be a fundamental mismatch between the company's core strategy and the specific market environment in Japan.
Relatively slow service: Japanese consumers expect fast-food to be served quickly. Fast food is characterized by the fact that each menu item is prepared to some extent in advance and the process from ordering to serving is quick. At Subway, however, the food is not prepared in advance, but the ingredients are carefully arranged in the sandwich and the bread is baked after the order is received. As a result, Subway Japan's service is slower than other fast-food chains, which may not be well suited for people who simply want to get in and out of the store as quickly as possible. However, Subway could reposition its unique selling proposition (USP) by focusing on the freshness and quality of its ingredients, which are displayed in a transparent case, similar to how fresh sashimi pieces are visible to a diner before being paired with rice. Other fast-food chains are not even trying to compete on this marketing angle.
Ongiri may not be to blame: Food analyst Shigemori is not convinced that the popularity of onigiri is to blame for Subway Japan's lackluster performance.
"In Japan, onigiri is often considered a staple food, but sandwiches are often viewed as a light meal. For example, onigiri is often eaten with side dishes rather than by itself, and there are many onigiri bento (boxed lunches) on the market." - Mr. Shigemori
Other factors are more likely to be the cause of the problem.
Business model: Subway Japan seems to have placed too many restrictions on its franchisees.
"In the U.S., Subway has achieved success by expanding its scale and raising its profile through franchise management. There are several advantages to franchising, but the main ones are that it doesn't cost much to open a new store, and the store owner has the freedom and flexibility to run the business as he or she sees fit, without having to follow detailed instructions from headquarters. With company-owned stores, you have to follow the head office's instructions to the letter, and there are often a lot of tedious things to do, but franchises like this, which are less tedious, are easy to expand as a business model." – Mr. Shigemori
Franchise management is not as well developed in Japan.
"To begin with, there are very few large-scale franchise chains that have been successful in Japan. The reason for this is that, although they are franchises, owners in Japan are not allowed much discretion, and in many cases they are forced to manage their businesses in a way that is loyal to the head office." - Mr. Shigemori
There have even been a few lawsuits in recent years related to franchise management, and the image of this type of business as something full of problems has probably become widespread in Japan. In this way, franchise management does not work well in Japan, and Subway is no exception, so it is thought that this is the cause of the difference with the US.
What’s next: Subway Japan's new owner, Watami, which owns a large stable of fast food brands across the country, has apparently negotiated an agreement with Subway's U.S. management team that allows for a fairly wide degree of latitude in how the brand is managed in Japan.
The brand must be allowed to adapt to Japanese tastes and preferences.
"I think the first thing we need to work on is improving the ordering system. While making the most of Subway's unique selling point of being able to offer original products, I think we need to make the ordering process a little simpler by increasing the number of set meals for Japanese customers or increasing the number of menus that include bread and sauces as a set of recommended items." - Mr. Shigemori
Localization is important for restaurants in any country. Watami must be given enough leeway to create a "Japanese-style Subway" while making the most of Subway's unique characteristics.
Commentary: As someone who was involved in bringing an American brand to Japan and ultimately achieving dominant market share, I can attest to the fact that simply launching a product designed for the American market in Japan and expecting immediate success is far from guaranteed.
Watami will likely apply the lessons learned from the success of Domino's Pizza to revitalize the Subway brand in Japan. Domino's Pizza has been able to make inroads in Japan with its 30-minute delivery guarantee, which is well suited to Japan's demae (出前) or home delivery culture. Domino's Pizza offers many of its classic hits from abroad, but it has also tailored its menu to Japanese tastes with a wide range of toppings and limited items that vary by season and/or regional geography. They are also partnering with other companies to further expand their local presence in Japan. Domino's Pizza is also known for its operational excellence, particularly in its digital strategy and strong social media marketing capabilities. Most importantly, Domino's Pizza has refined its franchise system by developing a network of diverse managers to rapidly expand its store network.
Although far from the extreme levels seen in the United States, the number of morbidly obese Japanese is definitely on the rise. So, Subway Japan may have a role to play in keeping Japanese people physically fit. Perhaps they can find the Japanese equivalent of Jared Fogel2 (without his criminal record) to become a new weight loss icon.
What do you think? Japan already has many fast-food options, both home-grown and imported from abroad. However, given the brand's success abroad, it seems likely that with the right strategy, Subway Japan should be able to increase its local presence. What's your opinion? All responses are completely anonymous, even to the author.
Links to Japanese Sources: https://gendai.media/articles/-/142102, https://gendai.media/articles/-/142103, and https://prtimes.jp/main/html/rd/p/000001335.000009215.html.
#subway #FastFood #franchise #Watami #MikiWatanabe #サブウェイ #ファストフード #フランチャイズ #ワタミ株式会社 #渡邉美樹
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BHAG = Big Hairy Audacious Goal
As an obese college student in Indiana, Jared Fogel lost 245 pounds on a self-invented diet of Subway sandwiches. Since 2000, he's appeared thousands of times on national television as a spokesman for Subway's Eat Healthy Platform; and he's expected to continue in that role indefinitely. In fact, Subway worried that he might be overexposed and decided to drop him. Sales dropped. Jared was quickly rehired. But to keep him from being overexposed, Subway's program runs Jared for six to eight weeks every three months.
Many years ago, I used to go to Subway maybe once a month because it was close to my workplace. I always ordered the cheapest sandwich because I found it overpriced.
Too many choices and options may be hurting Subway in Japan but not waiting time. After all, MOS Burger seems to be doing fine even though they are relatively slow in delivering your order.
Brand name may also be a factor. I don't remember ever seeing a Subway TV commercial. On the other hand, McDonald's and Domino's are everywhere and seem to be able to sell a lot of their crappy food (sorry, that's my opinion).
I love what Itoen has done with Tullly’s. Example of a failed brand in the US succeeding in Japan.