Dive Brief:

• Subway plans to cut prices in January with the six-inch Oven Roasted Chicken sandwich and Veggie Delite sandwich at $2.99, under John Chidsey, who became CEO in November, according to the New York Post. The price discounts were revealed during a series of private, regional conference calls from Subway's ad agency.  
• Franchisees have already complained against the possibility of discounts with one franchisee saying, "stop the discounting and quit giving away the little profits we have," on an open forum for North American Association of Subway Franchisees, according to the New York Post. 
• Subway did not respond to a request for comment from Restaurant Dive about its pricing strategy by press time.

Dive Insight:

Discounts have already been a point of contention for franchisees, with 400 franchisees signing a petition against Subway's $5 foot-long promotion in 2018. While the promotion was popular among consumers during the recession, it was less so among franchisees during the economic recovery, who claimed that these discounts hurt their profit margins, according to Business Insider. 

This isn't the first time Chidsey has chosen a business strategy that could impact his relationship with franchisees. According to Restaurant Business, when he was CEO at Burger King Corporation, a $1 Double Cheeseburger and soda contract rebates were a sticking point, leading to lawsuits between the burger chain and its franchises. Plans to reduce pricing on some sandwiches reveal that he may be taking a similar approach to Subway's turnaround. 

It's unlikely steep discounts will bode well among franchisees this time around, especially since tensions with operators have only gotten worse within the last 12 months. Subway's troubled relationship with franchisees stem from its franchised model, where it doesn't own any of its restaurants and relies on franchise fees. Franchisees have to pay this fee even if they don't make a profit, according to the New York Post.

Subway franchisees have accused the sandwich chain of allowing development agents to force them out of business for minor infractions only to have that agent take over the franchise. These agents are often rival franchisees, according to the New York Times. The chain also closed over 1,000 restaurants in 2018 in the U.S., but is working to stem closures, mandating a new policy that requires franchisees that are not renewing their leases to fill out a questionnaire to help find a replacement operator.

The sandwich chain has also attempted to ease franchisee discontent by offering $10,000 grants to help with remodels, with 5,400 restaurants signing up for the grant. Subway now expects to remodel over 10,500 stores by 2020.

But beyond these grants, it doesn't appear that management has been addressing franchisee concerns. According to the New York Post, Chidsey did not address issues among its franchisees in a video he sent introducing himself during the last week of November.

While discounting can drive in-store traffic, it doesn't help improve profits, especially for franchisees. Jack in the Box's CEO Lenny Comma said it wouldn't do any more discounts in 2018 since it's not sustainable and hurts franchisee profit margins. This chain has also been dealing with its own problems, which heated up in 2018 when franchisees sued the chain for breach of contract and implied covenant of good faith. The chain has since focused on improving drive-thru times and had its best quarter of same-store sales during the quarter ending Sept. 29, with franchisee-owned same-store sales at 3%.