Recession Driven Value Meals are Hurting Franchisees

Friday May 29, 2009

According to the Wall Street Journal, some franchisees say the costs of offering these bargain meals are too high -- and worse, that penny-pinching consumers drawn by promotions are skipping full-price extras that typically help offset the low margins of the discounted items.

Doni Pitchford, a Subway franchisee in Jamaica, N.Y., says she ran into this issue in February when headquarters unveiled a new pastrami sandwich at New York-area stores. To promote the new menu item, the company issued coupons for a free sandwich -- with no purchase necessary. Even though Subway supplied Pitchford's store with slices of pastrami, she was responsible for picking up the rest of the tab. The cost of the bread, cheese and other condiments amounted to about $1.50 to $1.75 per sandwich, she estimates, and that didn't include the added labor expense she took on just to meet the throngs of customers that gathered in her 1,300-square-foot store.

Making matters worse, the two boxes of pastrami Subway sent Pitchford ran out in just two hours. "When I ran out of pastrami, we couldn't accept coupons anymore. Then our customers got mad," she says. "I don't mind my food costs going up as long as I'm increasing sales. But these people were coming in just for the coupons… It was a nightmare," she says. After giving away 120 sandwiches (half of which were made with her own supply of pastrami) over the two-hour period, she estimates having lost roughly $500 on the deal. Subway spokesman Mack Bridenbaker, says that although they encourage franchisees to take part in promotions like this one, participation is voluntary and Pitchford could have opted out.

The tension over the recession-driven deals highlights one of the conundrums franchised businesses like fast food must grapple with.