History, activities, and the franchising characteristics of Subway Bulgaria Ltd Entering the business The experience, which Subway has on various markets around the world, proved that the master-franchise methodology is not beneficial for the brand. Master franchise means that when one person or company receives the rights for a franchise, he can operate on the territory of the whole country – to organize all training and marketing activities. On the contrary – Subway is using the development-agent method. The agent doesn’t organize the trainings but sends the future franchisee in specialized training centers.
The course is obligatory for each franchisee and lasts 2 weeks. All expenses are to be covered by the franchisee. Subway Bulgaria Ltd. was established as in November 2008, its executive manager, Ivan Todorov, was appointed at the position of development agent of Subway for Bulgaria. To receive the franchise Todorov’s restaurant in a mall in the city of Varna had to compete with just one other restaurant. He won the franchise and Subway opened its first outlet in Varna. The goal of Subway was to have at least 10 000 restaurants in Europe and at least 27 of them to start operating on the territory of Bulgaria in the next 7 years – by 2015.
Before setting up Subway Bulgaria, Todorov has been working as manager of clubs, restaurants, immovable property. Franchising conditions, and development of Subway Bulgaria Ltd. The procedure to obtain franchising rights for Subway is simple. Subway Bulgaria gives franchise rights to other individuals. The application is online and right after that Subway sends a detailed package with information on the contracts and everything that should be known about the way the system works. After 10 days the contract can be signed, in order the franchisee to have enough time to review all conditions.
Subway requires a proof of stable finances in order to give the rights for a franchise. The company doesn’t cover any part of the investment for a new outlet. According to the conditions of the franchise the initial fee is 10 000$, but half of this amount goes back to the franchisee, if the restaurant starts working within a year after signing the contract. For each additional outlet, the initial fee amounts to 5000 $. Subway also pays 50% of the costs for the marketing campaign before the opening of each restaurant. In addition the franchisee has to pay each week 8% of its turnover to the parent company.
The additional investment necessary to run a restaurant is estimated to be between 80 000 and 120 000 EUR. The franchisees receive a discount on the equipment. The equipment for all restaurants is produced by the Duke Company. The company also has to approve the suppliers and the quality of their products. All ingredients for the sandwiches sold in Bulgaria are produced in Germany. In order to get the position of development agent Todorov had to prove to Subway that he can chose the right suppliers, to train the personnel and to successfully plan the marketing campaigns. The development agent is responsible for the training of the personnel.
Before and right after the opening of a new outlet Subway is evaluating very intensively whether the personnel can perform all tasks according to its standards. The price for an average restaurant (30-35 sq. m) is around 70 000 EUR. Each restaurant deposits 4. 5% of its turnover to a special advertisement fund – Franchise Advertise Fund. When in one city there is more than one outlet, the owners establish a board, which develops and adopts a common marketing strategy and the expenses are covered by the fund. As of November 2012 Subway had 30 restaurants in Bulgaria, the last of them opened in Sofia.
Subway Bulgaria also won Forbes Bulgaria’s prize for Best starting business in 2012. Apart from being development agent for Bulgaria, Subway Bulgaria Ltd. also has the rights to contract franchisees in Romania. 2. PEST Analysis of Bulgaria Political| Economic| * Political situation * The EU membership * Tax policy * Legislation| * GDP per capita growth * Inflation rate * Interest rates * Unemployment * Average salary * Turnover in the restaurants sector| Social| Technological| * Demographics * Changes in the lifestyle and consumer tastes| * R&D and Innovation activities * Online sales| ) Political Factors a. Political situation The situation in Bulgaria during the last few months can rather be described as unstable, having in mind the resignation of the former cabinet on February 20 2013, as a result of the massive protests all around the country. The social uprisings started in the end of January 2013 as a result of the high electricity prices but later turned to another direction with demands to nationalize monopolies, change the constitutions, introduce protectionist measures in favor of local producers, etc.
The political instability in the country introduced some fears that the investment climate will worsen. However, the appointment of an interim cabinet more or less stabilized the situation, although protests continue. As a result of the recent events, the EU urges the next government of Bulgaria to focus more on supporting small and medium-sized enterprises because the previous focus almost only in infrastructure investments put a heavy burden on the population, whose incomes remain the lowest in the EU. The political instability might make potential franchisees of Subway reluctant to operate in Bulgaria. b. The EU membership The accession of Bulgaria to the EU in 2007 made it much easier for foreign capital to be invested in Bulgaria. Another positive side of the EU membership is the visa-free travel in the other members of the Union as well as the single market trade benefits – such as no tariffs and import/export duties within the EU/ EEA. However, Bulgaria is still declined membership in the Schengen area and border-checking procedures are burdening exporters and importers.
In terms of legislation, as a member of the EU, Bulgarian producers have to comply with all quality standards imposed by the EU. In terms of food, there are strict regulations and labeling of genetically modified products. * EU membership and the unified standards and rules are certainly beneficial for Subway because the monitoring of the franchisees will be easier and entering the business for the will be cheaper as there are no duties on the imported products and equipment. c. Tax policy Bulgaria has one of the lowest tax rates in the EU – 10% corporate flat tax and 5% tax on dividends. Low taxes are the best incentive the government has introduced for potential Subway franchisees to enter the market. d. Legislation Bulgaria does not have a law on the franchising but it is considered that the Franchising Contract can secure the relation between franchiser and franchisee. In this respect administrative burden is decreased. * Might be a concern for the franchisees because they have no other way for protection but the contract and every responsibility to check its credentials lies on them.
On the other hand the lousy Bulgarian legal system might impose an unnecessary burden on new businesses. 2) Economic factors e. GDP per capita growth The GDP per capita amounted to 10,623 leva in 2012- up from 10,248 leva in 2011. The GDP per capita in Purchasing Power Standards in Bulgaria is 46% of the EU average (100%). Over the last 5 years, from 2007 until 2011, this indicator has improved from 40% to 46%. In 2007, Bulgaria’s real GDP growth was 6. 4% year on year, while the latest data for 2012, and shows that real GDP rose 0. 8% as compared to 2011. Low GDP growth is a negative indicator for future investors, low GDP PPS also means that consumers have limited spending on food (and Subway’s sandwiches are relatively expensive) but also speaks for low labor costs. f. Inflation rate Inflation in Bulgaria has been relatively stable over the past 5 years, with the only exception in 2008, when the inflation rate was 12%. In 2012, inflation rate stood at 2. 4%, which represents a 1% decline as compared to the same period of the previous year. * Low inflation rate speaks for stable economy and improves investment climate. . Interest rates According to the statistics of the Bulgarian National Bank, the average interest rate on short-term new business credits was 7. 45% in 2012, which is higher than the 2011 rate of 7. 29% but lower than the rates in 2009 and 2010 – 10. 15% and 8. 47%, respectively. The average interest rates on long-term new business credits is higher in general – in 2012, the average rate was 9. 67% – down from the 10. 72% in 2011. * Decreasing interest rates on credits improve the financing opportunities of potential franchisees. h. Unemployment
The unemployment rate in Bulgaria has also been relatively stable over the past years, amounting to a bit more than 12% – 12. 5% in February 2013. This is however higher than the EU-27 average of 10. 9%. * High unemployment means there is a sufficient supply of cheap labor which can be hired by franchisees. i. Average salary In 2012 the average salary in Bulgaria was BGN 766, which is higher than the amount in 2011 of BGN 686. * Slowly increasing but still low labor cost, beneficial for food companies due to the low skilled workers they need. j.
Turnover in the restaurants sector According to data of the National Statistics Institute the turnover of the restaurants sector in Bulgaria has risen by 1,5% during the last three months of 2012, as compared to the previous three months. * Even though it’s small, the restaurants’ performance improves, which might attract more competitors. 3) Social factors k. Demographics Life expectancy| 73. 6 years| Aging population – average age as of 01. 08. 2012| 41. 6 years| Coefficient of age dependency in 2060 (Eurostat)| 60. 32 – 5th in the EU| Working age population (NSI)| 62. %| Unequal distribution between employed and retired persons, which is expected to become more severe (NSSI)| ? 100: 82| * Population is decreasing – from 7. 92 mln in 2001 to 7. 36 in 2011. The aging population has negative impact on chains like Subway, because younger people are the major part of the customers. l. Changes in the lifestyle and consumer tastes Over the past 23 years the lifestyle of Bulgarians has changed a lot. The introduction of the American culture after the fall of the communism has introduced a lot of new products and changed the tastes of consumers.
Fast food has found its place in the daily life of Bulgarian consumers with the market entry of the fast food chain McDonalds. Apart from the global leaders in the fast food, very famous in Bulgaria are the doener shops, typical for Turkey and the Eastern cultures but gaining popularity across Europe due to the large number of Turkish and Arab immigrants. On the other hand, however, the interest of Bulgarians towards healthy eating and Bio-food is increasing. Surveys show that some 70% of the people try to eat good quality products, but also large part of the population (some 50%) has weight issues.
And still 20% of the people eat outside their homes due to their busy lifestyle. Trends show however, that mostly the younger people are interested in the healthy nutrition. This might be explained by the fact that they have much more information on their disposal and healthy nutrition principles and trends developed around the world reach them easier. * In general the improving trend towards healthy eating is beneficial for Subway but the problem is that mostly young people are interested in it, and their number is decreasing. 4) Technological factors m. R&D and Innovation activities
According to the EC’s evaluation of SMEs, Bulgarian SMEs score worse than the average for the EU in terms of skills and innovation. Only 21% of Bulgarian SMEs introduce product or process innovations and 17% are innovating in-house. According to an innovation report of the EU, Bulgaria has the lowest innovation activity in the EU. * When speaking for innovation one mostly speaks about high tech innovation which is not typical for the food sector. However, low innovation level might also show that it’s very unlikely another food company to introduce a concept which will outcompete Subway. . Online sales Although, the amount of online sales in Bulgaria has increased significantly in the recent years, this accounts mostly for clothes, shoes and electronics. Various online food websites have entered the market offering home and office delivery. However, most consumers still go to the physical outlets to buy their food. * There’s no threat for the classical outlets of Subway. ——————————————– [ 1 ]. BNB Statistics, Eurostat [ 2 ]. http://enterprise. bg/blog-news/pragmatika/ [ 3 ]. http://www. vita-bg. eu/bg/blog/993/