Business

Freshii proposes partnership with Subway in open letter

In a friendly open letter to the parent company of Subway restaurants, Canadian fast casual restaurant Freshii has proposed a tie-up between the two businesses that would see some Subway locations converted to Freshii restaurants.

Both restaurant chains promote healthy eating, but U.S.-based Subway is vastly larger

Freshii has yet to comply with new Ontario law requiring restaurants with more than 20 locations to post calorie counts on all menus. (Graeme Roy/Canadian Press)

In a friendly open letter to the parent company of Subway restaurants, Canadian fast casual restaurant Freshii has proposed a tie-up between the two businesses.

"Let's explore a partnership in which we together convert select Subway stores to Freshii restaurants in a quick, low-cost way," said the letter from Freshii founder and CEO Matthew Corrin published as a full-page newspaper ad in the Globe and Mail on Tuesday.

Any such partnership would bring together two businesses of disparate size.

Freshii, which went public on the Toronto Stock Exchange at the end of January, currently operates 286 restaurants in 15 countries. Most Freshii restaurants are in Canada and the U.S., but the company also has franchises in Europe, the Caribbean, Central and South America, and the Middle East.

If we didn't admire them, we wouldn't be reaching out to them.- Matthew Corrin , Freshii CEO

Freshii aims to have between 810 and 840 franchise locations by the end of its fiscal year 2019, according to regulatory documents filed before its initial public offering.

Subway, privately owned by Milford, Conn.-based Doctor's Associates Inc., has 44,600 franchised locations in 112 countries. It reported $1.1 billion US of revenues in its fiscal year 2015, down almost 4.3 per cent from the previous year.

Subway's expansion also slowed dramatically from 2014 to 2015. Subway opened a net total of just 34 franchises in fiscal year 2015, down from 313 in 2014.

Toronto-based Freshii will deliver its first quarterly report and year-end financial results Wednesday morning.

'This is already happening'

In an interview, Freshii CEO Matthew Corrin said his company has received "dozens and dozens" of inquiries from Subway franchise owners interested in opening Freshii locations

Some sell their Subway stores to open Freshii stores, others open Freshii stores in addition to their Subways, and others are interested in converting entirely, Corrin told CBC News.

"The spirit of this open letter is saying, 'Look, this is already happening, and it's going to probably accelerate, we believe,'" said Corrin.

The open letter to Subway from Freshii CEO Matthew Corrin was published in the Globe and Mail newspaper on Tuesday. (Freshii)

Corrin described his company's offer as a chance to "collaborate … at a time that Subway has struggled more than probably ever in the history of their company," although he noted that Subway is still a hugely successful brand and a model for Freshii.

"If we didn't admire them, we wouldn't be reaching out to them," he said.

Subway and Freshii restaurants have similar-size footprints, and neither requires on-site cooking, said Corrin. Converting a Subway to a Freshii would involve refreshing the restaurant's appearance, retraining staff and replacing inventory and point-of-sale systems, he said.

The average cost to convert a Subway location to a Freshii location would be $75,000 US, according to the letter, which doesn't specify who would pay that cost.

Corrin's pitch comes at a time when Subway has been disputing a recent CBC Marketplace program that said samples of its chicken products showed less than half the DNA was from chicken.

'He understands the power of publicity'

Freshii's chief executive has written open letters to its larger competitors before.

In May 2015, Corrin published an open letter to McDonald's CEO Steve Easterbrook in USA Today. The letter called for McDonald's to allow a co-branded Freshii outlet in "just one" U.S. McDonald's restaurant.

"My promise: If after one year Freshii in McDonald's has not improved your sales and profits, I will refund you the difference," wrote Corrin.

Subway has about 44,600 franchised locations in 112 countries. (Mike Blake/Reuters)

McDonald's didn't take Freshii up on its offer. Neither will Subway, believes Robert Carter, who studies the restaurant industry as an executive director with NPD Group.

But even if Subway ignores Freshii's overture, Corrin's letter may have served a purpose.

"He understands the power of publicity, and in the restaurant industry it's really important to have awareness of your brand," said Carter, who added that Corrin's assessment of Subway's troubles is spot-on.

"Subway's been challenged over the last number of years," he said. "Their positioning on health and wellness has been eroded as the market's evolved, and Subway just hasn't evolved at the same pace."

Fast casual restaurants like Freshii or Chipotle, which emphasize food quality, flavour, and freshness, are winning customers away from quick service brands like Subway, said Carter. Those restaurants are growing their sales and customer numbers even though growth in the North American restaurant industry as a whole is "flat," he said.

"If you're growing your customer counts, you're literally taking them from another operator."

With files from The Canadian Press

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