DeLuca, Fred

views updated

DeLuca, Fred

(1947?-)
Subway International

Overview

Fred DeLuca began the Subway Sandwich chain as a 17 year-old in need of money for college. His company grew from two unsuccessful outlets in suburban Connecticut in 1965, to over 13,000 stores around the world in 1998. Subway sandwiches are available in 64 countries, and it is the second-largest fast-food franchise operation in the world—only McDonalds has more outlets. For several years in the 1990s, it was consistently named the top franchise opportunity in Entrepreneur magazine's annual ratings issue. DeLuca is known as a hands-on CEO who regularly checks up on Subway stores posing as an average customer.

Personal Life

DeLuca was born in the late 1940s in Brooklyn, New York. His father worked in a factory. As a child the family lived in a housing project. De Luca earned money by collecting empty bottles and cashing them in for $.02 each. When he was 10, the family moved to Schenectady, New York, and there he further honed his entrepreneurial skills with a paper route that grew to more than 400 addresses. In his teens, he moved once again with his family to Bridgeport, Connecticut. He later earned a degree from the University of Bridgeport, but was already well on his way to heading a successful fast-food company at the time of his graduation.

When Connecticut instituted a personal income tax in 1991, DeLuca moved his wife and son to Florida. His son earned a degree in economics and works for the Subway chain. Though DeLuca is a billionaire, he keeps to modest lifestyle, driving a seven-year-old car and often flies coach, rather than the more expensive business class. Until 1990, he signed every check issued by the company.

Career Details

As a teen, DeLuca wanted to study medicine, and needed money for tuition. He took a job in a hardware store the summer before college, but realized the meager wages would not last long. He asked a friend of his parents, Dr. Peter Buck, for a loan of $1000, which he would use to open a store. Buck, a nuclear physicist, saw potential in DeLuca's plan: to begin a fast-food venture that provided a healthier, less fattening bill of fare. At the time, burgers and pizza were the standard fast-food menu. DeLuca seized the idea of submarine sandwiches—a novelty food named because the long oblong bun shape.

Buck loaned DeLuca the money and he became coowner of the company. The first store opened in 1965 in Bridgeport, Connecticut; DeLuca was still 17 years old. At the end of that summer, he had only $6 left over. This outcome did not discourage Buck and he suggested that they open a second store, for higher visibility. As DeLuca told Fortune it was done to create the image of success. The second store lost money as well. DeLuca and Buck opened a third store. They changed the name from Pete's Submarines to the catchier name Subway. The venture began making a profit, earning $7,000 its first full year. Buck remains as co-owner in the company with DeLuca.

DeLuca did earn his degree from the University of Bridgeport, but found the entrepreneurial life hard to resist. He planned on expanding Subway to at least 30 stores by the end of its first decade in business, but in 1974 was half short of that goal. When he brought a friend on board to help run one of his stores, it gave DeLuca the idea that well-trained owner-operators would be the best suited to build the Subway chain. This led him to start franchising his business.

DeLuca hired development agents to sell the franchises. For an investment of about $85,000, husband-and-wife teams can own their own store; Subway provides the training. In contrast, the start-up cost to open a Mc-Donalds is about a $1 million. Subway signs a lease for a small commercial space with a landlord, and rents are low since the stores have limited seating. The bread is baked on the premises. Staff costs are also nominal—during busy periods, just two people are needed: one to make the sandwiches, which is not complicated, and one to staff the register. There is no grill and no fryer.

In 1978, Subway's 100th store opened. DeLuca and Buck's original strategy to increase visibility had become a cornerstone of their long-term plan. "Even when we were small, Fred always thought we should compete with McDonalds," a top executive, Dick Pilchen, told Nations Restaurant News. "He probably won't be happy until we surpass McDonalds in size."

Subway passed the 1000 store mark in 1987. In 1993 alone, over 1100 units were opened—McDonalds opened just under 800 that same year. DeLuca believes that overall volume sales increase in a region along with the number of Subway shops in that area. DeLuca's belief caused some concern among franchise owners. Franchisers who, in some cases, had given what amounted to their life savings to the Subway parent company for the right to operate a store, were unhappy when a new Subway outlet opened a few miles away and cut into their revenues. In 1998, Subway had over 10,000 stores in the United States, but faced criticism: there were 160 lawsuits pending against the company in various stages, from franchisers who claimed fraud to landlords suing for unpaid rent. This figure was higher than the combined number of lawsuits pending against seven of Subways biggest competitors. The Federal Trade Commission investigated the company for unfair franchise practices, but the suit was dropped for lack of evidence. Later, another business venture of DeLuca's, Cajun Joes, faced similar inquiry.

DeLuca, and his company respond to criticism by pointing out the nature of the franchise business. In many cases, franchisers are first-time business owners. One of DeLuca's maxims is: Everybody goes to high school, but not everybody reads the book, according to one of his associates quoted in Nations Restaurant News. Franchisers are provided with a two-week training session, and then provided with guidelines about cleanliness and service—but they don't always follow them. DeLuca recounted an anecdote about one store he visited with dirty windows, and how he told the owner they needed washing. When he returned a day later, the windows were still dirty. I was really upset, because I knew that would negatively impact their sales, but I couldn't do anything about it, he told Suzanne Kapner and Peter O. Keegan in Nations Restaurant News.

Visiting stores is an integral part of DeLuca's job. He is known to drive cross-country for a tour of anonymous visits, in which he simply orders a sandwich. Owners or employees rarely recognize him. With over 10,000 outlets in the United States alone, he tries to pack in as many visits as his day permits, and sometimes eats a half-dozen submarines a day—if the sandwich is made properly, I can eat one for every meal and never get sick of them, DeLuca told Carrie Shook of Business First-Columbus.

Chronology: Fred DeLuca

c. 1947: Born.

1965: Opened first submarine shop.

1974: Began franchising Subway name.

1978: Opened 100th store.

1987: Opened 1,000th store.

1989: Subway named number one "franchise opportunity" by Entrepreneur magazine

1991: Relocated to Florida.

1997: Subway sells over $3 billion in food and beverages.

Social and Economic Impact

Subway has grown into the most successful fast-food franchise after the colossal McDonald's corporation. It has over 13,000 outlets around the world. Despite the legal problems, many praise DeLuca and his handson attitude. "Fred understands franchisees better than most presidents because he started out very poor," one franchise owner told Nations Restaurant News." He knows the value of a dollar and the hard work it takes to make sandwiches, wash floors, and clean bathrooms. He came from there."