How Subway Has Torpedoed McDonald's Golden Arches

Subway isn't a publicly traded corporation, but it's completely mopped the floor with McDonald's (NYSE: MCD  ) over the previous decade.

In 2003, McDonald's had 31,129 total systemwide restaurants. By the end of 2012, that figure had jumped to 34,480 for an annualized growth rate of 1%. Considering that we exited the worst recession in 70 years, that's a reasonable and understandable growth rate. Subway, on the other hand, had just 20,260 stores in 2003 and is on pace to eclipse 40,000 stores this year, for an annualized growth rate of nearly 7%!

It hadn't dawned on me just how methodically Subway had dominated the golden arches until I read an article on "The Exchange" over the weekend that highlighted McDonald's chicken McWrap as a "Subway buster." Upon finishing the article I was intrigued as to exactly how the sub chain had come to so thoroughly dominate the global fast-food giant.

This isn't the problem
My first postulation was that Subway's emphasis on fresh meals and healthier eating habits had a lot to do with its surge beyond McDonald's. Fast food is cheap, but it's often associated with high fat content and low nutritional value. However, I'd contend that McDonald's efforts in expanding its menu to include more nutritious foods have been more than adequate to counter Subway's "Eat Fresh" campaign. McDonald's was introducing snack wraps long before many of its peers, and offers a full array of salads and other low-calorie options.

The sign of a trendsetter is emulation, and both Burger King Worldwide (NYSE: BKW  ) and Jack in the Box (NASDAQ: JACK  ) have done a great job demonstrating that McDonald's is the clear leader. Burger King's new menu aimed at reinvigorating its domestic sales is strikingly similar to McDonald's menu, while Jack in the Box followed McDonald's lead in remodeling its restaurants in order to create a more inviting ambience.

My next thought was that perhaps it's because of Subway's price points, or the value offered. Again, I'd have to disagree (you are correct, I am disagreeing with myself!) and point out that the Golden Arches' value menu is practically unsurpassed. The value menu is what initially drives cost-conscious consumers into its restaurants or through the drive-through and gives McDonald's the opportunity to demonstrate its value and generate return business. Wendy's (NASDAQ: WEN  ) is the latest to emphasize the importance of its value menu, focusing on its "Right price, right size" menu. Initial estimates, which include a beefed-up advertising campaign, have been positive according to CEO Emil Brolick.

It's all in the marketing
What I see as the biggest differentiating factor that's propelled Subway well ahead of McDonald's is its dominance in social media and with regard to brand ambassadors.

In determining social media presence, I took to Twitter to see which company, if either, might have the advantage. McDonald's has dished out (as of this writing) 11,660 tweets, is following 12,166 other accounts, and boasts 1,055,061 followers -- an impressive total. Subway, on the other hand, has issued 172 more tweets, follows 22,233 more accounts, and has 43,491 more followers. Simply put, Subway's proactive tactic of following more accounts appears to have resulted in a more faithful following.

Where I really saw a difference between Subway and the Golden Arches was in their choices of brand ambassadors. I've spoken briefly before about the importance of having brand-name, successful, and in-the-news ambassadors heralding the advertising charge of consumer-facing companies. Every company has had its fair share of flubs -- just ask Nike, which needed to deal with the fallout of its Tiger Woods endorsement after his infidelity became a public matter -- but McDonald's lack of progress on the endorsement front is really quite disturbing.

McDonald's did nab an NBA endorsement deal with superstar LeBron James in 2010, but this came shortly after his departure from Cleveland, which didn't help his public image. Tack on an endorsement deal with golfer Michelle Wie, who may be one of the most overhyped golfers of all time given her two LPGA victories since she joined the tour, and you have a very uninspiring advertising campaign. 

Subway, on the other hand, has a very recognizable brand figure in Jared. According to Mashable, using Jared's amazing weight-loss story in Subway's advertising campaign led to a doubling in sales from 2000 to 2008. However, when Subway and Jared scaled back their advertising briefly in 2005, sales dropped 10%.

In addition to having a face to go with the brand name, Subway boasts a lineup of numerous in-the-news athletes, including Washington Redskins quarterback Robert Griffin III, paralyzed Rutgers Scarlet Knights linebacker Eric LeGrand, and the Los Angeles Angels' Mike Trout, who dazzled as a baseball rookie. The point is that these ambassadors are in the news now, not stale like many of the ambassadors on its competitors' endorsement payrolls.

Turning that arching frown upside down
McDonald's definitely can get its swagger back again, but it'll need to focus less on its product and more on how it interacts on a social and advertising basis with consumers. By revamping its brand awareness and taking to the social airwaves, the Golden Arches can shine once again.

Can McDonald's become golden again?
After making investors rich in 2011, McDonald's has been one of the worst-performing blue chip stocks of 2012. Our top analyst on the company will tell you whether you should be worried by this trend, and he'll shed light on whether McDonald's is a buy at today's prices. Click here now to read our premium research report on the company.

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Read/Post Comments (8) | Recommend This Article (3)

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  • Report this Comment On April 01, 2013, at 8:58 PM, Vignates wrote:

    The author's conclusion is full of nonsense.

    Markenting indeed!

    The big, big difference is that Subway lets you specify exactly what you want your food to be like.

    The other fast food places all have standardized, take-it-or leave it foods that give you little or no choice.

    Viva choice. Down with one size fits all

  • Report this Comment On April 01, 2013, at 9:53 PM, stockwatcher0153 wrote:

    McDonald's may be ahead of its peers (BK, etc.) in terms of healthier eating but it's still full of fried foods (the smell hits you when you walk in) and their salads taste like something you get served on an airplane…plus Subway food is easier to take with you (doesn't smash together or drip grease the same way).

  • Report this Comment On April 01, 2013, at 10:20 PM, TMFUltraLong wrote:

    Vignates,

    Appreciate the opinion, but I haven't been inside of a McDonald's that hasn't catered to my requests. If you don't want onions or pickles, you won't get onions or pickles. Both Subway and McDonald's do a good job on the customer service end, so I don't feel that's the differentiating factor.

    TMFUltraLong

  • Report this Comment On April 02, 2013, at 1:42 AM, mitstrebor wrote:

    I'd rather eat a burger anyday than eat at subdouches,

  • Report this Comment On April 02, 2013, at 2:18 AM, hellbound1 wrote:

    1 Million Bucks vs $20,000

    The writer totally missed the boat on this one. If you save aluminum cans or sell copper, sell your car and you can come up with the money for a subway. They have them in every gas station, and several Walmarts now.

    For McDonald's it's a five year waiting list and you had better have tax records, a solid business plan and a credit line for over $1,000,000. Most McDonald's franchise's survive and maintain the same physical location for years and if you own one your very likely to become a millionaire. McDonald's takes steps to protect this brand too... Most 'out of business' McDonald's are torn down the same week they go out of business. I have seen a closed one not torn down but that is few and far between compared to their competitors.

    Subway's come and go or their physical location changes. If you have the cash you have a subway and it could be a block and a half away from another Subway. So much for protecting the small guy trying to start up by letting competition move so close. You don't become a millionaire off owning one subway, you have to have multiple locations (about 10) to achieve the million dollar mark.

    So in closing McDonald's has a good protected brand like Louis Vuitton, and then next one built is built to last. Subway is like a coach purse go into suburbia or go into the ghetto and everyone has one, better yet go into a busy ER waiting room and count the coach purses and Iphone/Ipad. But that is another discussion for another time. It's not apples to apples here, it's a 1992 Porsche that's still on the road versus a 1992 Yugo that you don't see except in an occasional junk yard.

  • Report this Comment On April 02, 2013, at 4:28 AM, wgtjunior wrote:

    id rather eat poo than eat at mcdonalds,at least there will some flavor

  • Report this Comment On April 02, 2013, at 9:27 AM, vostro wrote:

    I don't like "mystery" meat!

  • Report this Comment On April 02, 2013, at 12:07 PM, hipbemovin wrote:

    It seems only hellbound1 understood that this was a financial analyst's article, not a nutritioninst's or food critic's.

    And he's right. Sean is absolutely comparing apples and oranges. Until Subway's revenues come close to McDonalds and the company goes public, so we understand the true financial numbers for the company, there is no way to state that "Subway Torpedoed McDonalds".

    As has been pointed out, Subway will cannabalize their own franchisees to open another location. It seems the privately held company only cares about franchise fees and royalties pouring into it's coffers.

    Sean - what is Subway's revenue and profit per unit? If I can't buy their stock, instead of MCD, why is this in the Fool?

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