Subway passes McDonald’s as the world’s biggest fast-food chain as food franchisees downsize

News that Subway has passed McDonald’s as the world’s biggest fast-food chain is hardly a surprise to Australians, given the sandwich chain has 1,254 stores in Australia, compared to just over 780 McDonald’s stores.

But the rapid and unrelenting growth of Subway in Australia and overseas does raise an important question for the franchise sector: Are franchisees now favouring smaller and cheaper franchise options?

Franchising expert and SmartCompany blogger Jason Gherke, of consultancy Franchise Advice, says Subway and McDonald’s have pursued very different growth strategies.

Where Subway uses relatively low entry prices and smaller store formats (which mean lower rents) to attract franchises, McDonald’s has a strategy of owning the land that a franchisee can build a store on, with the exception, of course, of stores in shopping centres or other retail precincts.

“There is a much more significant capital investment required from both the franchisor and the franchisee under the McDonald’s model,” Gherke says.

The rate at which both chains grow is directly related to that. Whereas McDonald’s would need up to five years of lead time to scout store locations, get planning approvals and build a store, it could take only months to get a Subway store planned, established and up and running.

The trend towards smaller store formats is one Gherke says is also evident in the pizza sector, where Pizza Hut has moved away from a dine-in concept to a pure take-away concept. Rivals such as Eagle Boys have also modified their franchise offering to include “express” outlets which can be opened in small spaces within petrol stations and airports, for example.

However, McDonald’s is unlikely to be too worried about being in second place to Subway – Gherke says its slower growth means that McDonald’s franchises remains much sort after, and very expensive.

“I wouldn’t hazard a guess at what a franchise would sell for these days, if you could actually get your hands on one.”

And while other fast food operators are reducing the size of their stores, McDonalds has concentrated on changing its menu (particularly to include healthier options) and changing its store formats (with the inclusion of McCafe outlets in most stores).

“I can’t say that I’ve noticed a down-sizing of their outlets. McDonalds have modified their menu and their offer rather than their footprint.”

And of course, store numbers aren’t the only thing that counts in the battle for the stomachs of consumers.

According to IBISWorld, McDonalds has a 19.5% share of Australia’s fast-food market, compared with Subway’s share of just 2%.