Subway threatens to yank run-down stores from franchisees as company searches for buyer

Subway has ordered some franchisees to spend as much as $100,000 on remodeling their sandwich shops as the company scrambles to sell itself — and is threatening to take away their stores if they don’t comply, The Post has learned.

The struggling fast-food giant — which has faced a lackluster response as it attempts to auction the chain for $10 billion, according to sources — is meanwhile demanding that some franchisees make major investments to upgrade their shops in a matter of months, sources said.

“Franchisees are getting letters from Subway saying you have 120 days to pay for materials and plan out remodeling or Subway is taking your stores for breach of contract,” one angry franchisee fumed in an interview.

The idea, according to sources, is force smaller franchisees to bankroll a massive overhaul of the aging chain’s increasingly dilapidated store fleet as bigger franchisees and prospective buyers alike have lately balked at the potential costs of such a revamp.

“Why would any multi-unit type want to join up with Subway with such low margins, just to pump in a lot of dollars for remodeling?” said John Gordon of Pacific Management Consulting Group, a firm that’s focused on the fast-food sector.

The Post reported exclusively in February how Subway had begun forcing smaller franchisees to foot the bill for expensive store upgrades and was making it harder for them to close money-losing stores as the chain attempted to put more locations in the hands of multi-unit operators.

The Miami-based chain — which operates more than 20,000 restaurants nationwide — is stepping up those efforts as it preps for a sale of the company, according to a Reuters report this week.

“It seems like the business is not terribly healthy and there is a fair amount of renovation to do,” an investment banker source following Subway’s sale process said confirming that the condition of the stores is a concern for investors circling the company.

Seven years ago, former CEO Suzanne Greco announced a chainwide renovation initiative called “Fresh Forward” that called for upgrading stores with new furniture, reconfigured service areas, drink stations and point-of-sale systems.

However, with the average bill per store estimated between $50,000 and $100,000, fewer than half done the work, according to the company. After years of lax enforcement, Subway has begun to clamp down in the form of a tersely worded letter to selected franchisees.

“You are in default of the franchise agreement for failure to both remodel the restaurant … and otherwise operate the restaurant in accordance with the operations manual,” Julie Hidalgo, a lawyer for Subway parent Doctor’s Associates, wrote in a recent letter to a franchisee that was reviewed by The Post.

“If you do not comply Doctor’s Associates will terminate the franchise agreement,” Hidalgo added, noting the 120-day deadline. “Time is of the essence in response to this notice.”

Subway confirmed in a statement that it requires its shops to be remodeled every seven years — and noted that it had extended deadlines during the pandemic. The company also said it handed out “tens of millions of dollars in grants between 2019 and 2021” to help franchisees with renovations.

“The feedback from guests and franchisees about the remodels has been overwhelmingly positive, saying that the new image is bright and welcoming,” the company said in a statement.

Nevertheless, the timing is painful for smaller franchisees who don’t have large amounts of cash lying around, and who would be forced to take out construction loans at stiff interest rates to get the work done.

“I’m not paying 7% to 9% interest with a regular bank,” one franchisee grumbled, adding that “Subway is pushing their own financing that, when including fees is 12% to 14%”

Subway owns none of the 20,576 US locations it had at the end of the year and depends on its franchisees to run their restaurants. As many as half are making little, if any, money, according to sources. The parent company collects an 8% royalty fee on gross revenue and not profits.

Meanwhile, the process to sell Subway which was supposed to be over by May is taking longer than expected as the company haggles with its remaining suitors over price. The company not yet in exclusive talks with any one suitor, a source close to the situation said.

America’s biggest restaurant chain initially sought $10 billion but is now believed to have lowered its threshold. After taking an initial round of bids in late February, Subway was expected to choose a winner by mid-April, sources at the time told The Post.

That deadline has now been pushed back again to what will likely be next month, Bloomberg reported over the weekend.

Private equity firms Advent International, Roark Capital and Sycamore Partners along with others are believed to still be circling the company, sources said.

Private equity firm TPG Capital — which once owned Burger King when it was being run by current Subway CEO John Chidsey — has dropped out of the process, according to Bloomberg.