Sandwich Nation

Canadians’ love of the sub is feeding a new fast-food industry

Sandwich Nation

Photographs by Andrew Tolson

Eric Heinrich decided several years ago to abandon the bright lights of Toronto, where he was employed by a national hotel chain, and go into business for himself—ideally in a smaller community where he felt more comfortable and the cost of living was cheaper. He bought his first Subway franchise in 1994 in Hanover, Ont., a community of about 7,000. He has since added a dozen or so more of the popular submarine sandwich restaurants around the province, focusing on similarly small towns where there is little competition from rival fast-food chains. That now includes locations in Wiarton (with 2,300 residents, not including a famous winter-predicting groundhog named Willie), Kincardine, Wingham, Arthur, Port Elgin, Walkerton, Clinton, Exeter, Palmerston and three stores in his hometown of Owen Sound, a relative metropolis with a population of 22,000.

These days, he is in the midst of building his 15th Subway restaurant about halfway between the small towns of Orangeville and Shelburne, northwest of Toronto, in a location that doesn’t really have any permanent residents at all. “It’s basically a busy intersection that’s a good stopping area for travellers,” Heinrich says. “The only other options are greasy burger joints, so we thought it would be a good opportunity.”

His business credo—“in order for a store to be successful, you need either a high school or a highway”—has proven remarkably successful, even in a down economy. But he has also benefited immensely from Subway’s unique low-cost operating model, which stems from its straightforward menu of “foot-long” or “six-inch” sandwiches that don’t require much in the way of expensive kitchen equipment or staff to produce.

As a result, Subway franchisees like Heinrich are able to scratch out a living in towns and hamlets that would otherwise be considered too small to sustain a McDonald’s or Burger King, but are starved for the experience of a big chain restaurant. In some ways, it’s the perfect franchise recipe for a large and sparsely populated country like Canada, and is among the reasons Subway, which generated US$13.8 billion in global sales last year, is poised to overtake industry icon McDonald’s when it comes to global locations in the next few months (Subway already has more restaurants than McDonald’s in North America, although it still trails Tim Hortons in Canada).

Subway’s sprawling growth is also being driven by the soaring popularity of sandwiches in general. Despite having been a mainstay in lunch pails and brown bags for generations, sandwiches and wraps have suddenly become the hottest growth item in the fast-food industry—in part because sandwiches are perceived as healthy, but also because they are fast, convenient and, generally, made to order. As a result, everyone from burger and pizza joints to coffee shops are eager to get a piece of the action, creating a market brimming with BLTs, club sandwiches and permutations of the chicken wrap: Caesar, Southwest, Chipotle BBQ, Honey Mustard—the list goes on. Even suppliers like Maple Leaf Foods are keen on getting into the business by selling branded, prepacked sandwiches. In other words, get ready for a world where sandwiches are everywhere, from gas stations to corner stores. Fast-food nation? Not quite. Welcome to sandwich nation.

Along with their low-carb wrap counterparts, sandwiches were among the few fast-food menu items to experience growth—up two per cent—in the Canadian market last year, according to data compiled by market research firm NPD Group. In fact, NPD says they are also the single most popular lunch item at fast-food restaurants in Canada, accounting for one out of every three lunch meals.

The numbers support what many hungry Canadians have noticed on the menu boards of their favourite fast-food counters in recent years. After observing the meteoric growth of sub chains like Subway and Quiznos, several quick-service operators (industry-speak for fast-food outlets) have decided to try to take a bite out of the market themselves. Tim Hortons, the country’s largest franchise chain, moved away from selling only coffee and doughnuts in the mid-1990s and now offers a full lunch menu, including a variety of sub-style sandwiches. Meanwhile, McDonald’s (still the biggest chain by overall sales) overhauled its menu several years ago in a bid to shed its bad-for-your-health image and now offers a wide array of “toasted deli sandwiches” and wraps. That includes its new Mac Snack Wrap, which is basically a Big Mac stuffed inside a tortilla (and therefore not much healthier than the original, according to critics), and represents the first time in the company’s history that it has toyed with its iconic double-decker burger. Meanwhile, several pizza chains have also experimented with adding sandwiches or wraps to their menus. “It started with a number of quick-service operators three years ago and just this last year even more jumped on the bandwagon,” says Linda Strachan, an NPD food service analyst.

But in order to truly gauge Canadians’ appreciation for sandwiches, one needs to look no farther than Subway’s eye-popping expansion in this country. The first Canadian Subway restaurant opened its doors in 1986 in St. John’s, Nfld., after an eager entrepreneur approached the Connecticut-based Doctors Associates Inc., which owns the chain, and has nothing to do with medicine (one of Subway’s two founders had a doctoral degree). More than two decades later, the number of locations has ballooned to 2,495 restaurants, nearly twice the number run by McDonald’s in Canada. That translates into about one store for every 12,027 Canadians, compared with one for every 13,212 people in the United States, Subway’s home market, giving Canada the distinction of having the most Subway stores per person of any of the 90 countries that the company operates in, according to Don Fertman, Subway’s director of development.

Sandwich Nation

Photographs by Andrew Tolson

More importantly for franchisees, Fertman says that Canadian Subway restaurants generate average sales that are 11 per cent higher than in the U.S., with Canadian sales totalling US$1.2 billion last year compared to US$10 billion south of the border. He attributes the company’s success in the Great White North to Canadian tastes and a pre-existing familiarity with submarine-style sandwiches. “In Canada, it’s been a nation of submarine sandwich eaters,” Fertman says. “But we had an advantage. When we started in Canada, there was already a chain that had made significant progress.” The chain was Toronto-based Mr. Sub, which opened its first store in 1968. Mr. Sub now has about 400 stores across the country, but nevertheless failed to enjoy the same sort of explosive growth as Subway—in part because it was relatively slow to shed its reputation for meatball- and pizza-themed gut-busters even as the fast-food industry began moving away from the idea of “supersized” menu items.

Subway, by contrast, roared into the Canadian market with ad campaigns that focused on “healthy” and “fresh.” The approach began with a menu of sandwiches with six grams of fat or less and a long-running series of ads featuring a tall and awkward-looking man named Jared Fogle, formerly a student at Indiana University who managed to drop 245 lb. on a diet of six-inch turkey and veggie subs (no mayo or cheese) and—this part is also key—a lot of walking. For the record, Fogle’s Subway diet was not dreamed up by marketing consultants, the company says. Rather, a franchise owner read about Fogle’s story in Men’s Health magazine and got the idea of using him in an ad. A star was born and sales boomed. More than a decade later, Fogle remains the company’s official spokesman.

But while it’s tempting to try to explain the rise of the sandwich as the result of a trend toward healthier eating, it hasn’t necessarily corresponded with a simultaneous decline of the burger, which remains as popular as ever. Besides, as critics have noted, just because it’s called a sandwich doesn’t mean it’s healthy. Many Subway fans might find it surprising to learn that a six-inch tuna sub has about the same number of calories as a Big Mac.

Instead, experts say sandwiches appeal to those who want convenience and flexibility (sandwiches and wraps are easier to eat on the go, or take back to the office), while allowing fast-food chains to widen their potential customer base. “There’s a lot of menu broadening happening,” says Strachan. “Everybody is always looking for innovation.”

The success of chains like Subway in making the humble sandwich a fast-food juggernaut is no small feat. Just as Starbucks changed the way North Americans drink coffee (many now pay top dollar for a latte or Americano instead of brewing a pot at home), fast-food outlets have successfully managed to convince a large swath of the country to effectively shelve their loaves of Wonder bread and packaged cold cuts at lunchtime.

It’s a trend that hasn’t gone unnoticed by the people who are in the business of supplying sandwich-making ingredients—namely breads and meats—to Canadian households and, increasingly, restaurant kitchens. Last year, the Canada Bread division of packaged food giant Maple Leaf Foods paid $42 million for Quebec’s Aliments Martel Inc., a privately held Quebec-based manufacturer and distributor of pre-made packaged sandwiches. Then, on Jan. 1 of this year, the company set up a new division called Maple Leaf Fresh Prepared Foods that will be tasked with launching the company into Canada’s nascent pre-made, packaged sandwich market.

Maple Leaf’s research suggests that Canadians eat roughly four billion sandwiches a year, 90 per cent of which are made at home. Most of the rest are being purchased from fast-food operators, with the exception of about one per cent that are pre-made, packaged and sold in cafés, supermarkets and convenience stores. That, according to Simon Wookey, the head of Maple’s Leaf’s new sandwich division, represents fertile ground for expansion. “It was a chance to put a toe in the water,” he says of the Aliments Martel purchase, which gave Maple Leaf sandwich factories in Ottawa and Toronto. “At the end of the day, the market for the sandwich category is huge.”

Just one problem. Pre-made sandwiches aren’t exactly a coveted item in North America, where they are generally associated with dusty gas station and convenience store coolers. That’s where Wookey comes in. He used to work for a food company called Greencore in the U.K., a country crazy for pre-made sandwiches and the home of the successful Pret a Manger chain. At one time, he oversaw a Greencore sandwich division consisting of three U.K. factories, producing some four million pre-made sandwiches every week, most of them packaged in triangular boxes and destined for the chilled shelving units of grocery and convenience stores. It’s all part of an $8.3-billion industry in Britain, according to (naturally) the British Sandwich Association. Which raises the question: can Maple Leaf replicate the phenomenon on this side of the pond?

Sandwich Nation

Photograph by Andrew Tolson

“Canada is not the U.K.,” says Wookey, noting that fast-food restaurants are engrained in North American culture and that consumer habits are tough to break. “It’s not as simple as picking up the U.K. packaged format and bringing it here.” A key challenge, he says, is convincing North American consumers that pre-made doesn’t necessarily mean poor quality. At the same time, Maple Leaf will need to be careful not to step on the toes of the fast-food restaurant chains it currently supplies with cold cuts and bread. Wookey, however, says there’s more than enough room for everyone in the market, and that it is looking to partner with its fast-food chain customers to create sandwiches that carry their brand names. “Our focus at the moment is to work with a number of different customers to pilot test programs, which we are intending to do later this year.”

All those sandwiches naturally raise the question: how much is too much? Subway, for one, is well on its way to becoming the world’s biggest restaurant chain in terms of locations, with 32,495 stores and counting. But a closer look shows that much of that new growth is coming from outside North America, including countries like Russia and India, or from non-traditional locations such as inside gas stations, hospitals and schools. There’s a Subway counter in a Buffalo, N.Y., church, a New Zealand aluminum smelting plant and an air conditioning factory in Georgia. There’s even a Subway location on the construction site of New York City’s Freedom Tower that moves upward each time a new floor is added.

The risk is whether the constant focus on expansion will saturate the market—particularly in North America—and dilute Subway’s powerful brand. Coffee giant Starbucks, for example, was forced to rethink its frantic growth strategy two years ago as sales began to slump and the novelty of having a Starbucks on every corner in some cities wore thin. McDonald’s, too, ran into a wall in 2001 after decades of expansion. At the same time, dozens of chains are eyeing the sub sandwich market. It may be telling that Subway, which has long relied on its healthy image, has recently resorted to a more traditional value-based fast-food pitch with its $5 foot-long campaign in the U.S., which is also being tested in parts of Canada. “At some point they will saturate the market here in the U.S., but globally they’ve still got a lot of markets to go into,” says Darren Tristano, the managing director of food industry consultancy Technomic in Chicago. “I don’t think they will run into trouble the way Starbucks has, but I do think you’re going to see the growth rates slowing in some markets.” He adds that he doesn’t see McDonald’s new-found love of sandwiches to be a huge threat in the foreseeable future, but says Tim Hortons is already a significant competitor in Canada.

Subway’s Fertman, however, says he’s confident that the chain will not meet the same fate as other big operators. He says the low-cost model—some estimates peg the start-up costs for a franchise to be as little as $180,000 to $250,000—protects it from economic downturns. Plus the fact that all Subway stores are owned by franchisees (unusual in an industry where many chains have a mix of company-owned outlets and franchised stores) is credited for creating an entrepreneurial environment where ideas such as using Fogle in advertisements and even the $5 foot-long promotion flow from the bottom up, rather than the other way around.

Back in Ontario, franchisee Heinrich doesn’t see any end to the market opportunities either. His latest restaurant—the one just off the highway—will be his largest yet, similar in size to a regular fast-food restaurant. He also plans to outfit it with Subway’s new decor, which includes more chairs and tables as well as leather lounge seating. “It’s going to be a whole new thing for me,” he says. “This is going to be comparable to a McDonald’s.” Without the burgers, of course.

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