A match made in fast-food heaven?

"You grow or you die in the franchise world … How they let Subway grow to 2,000 [stores] is beyond me," Mr. Fisher said.

The Globe and Mail
April 13, 2005

A match made in fast-food heaven?
Country Style, the coffee shop chain, held talks about deal with Mr. Sub
Richard Bloom

Coffee shop operator Country Style Food Services Inc. has held discussions with Mr. Sub about forming a strategic alliance, reigniting industry speculation that the Canadian sandwich maker is back on the auction block.

One person familiar with the matter said Country Style is "really close" to an outright takeover of Mr. Sub, saying the chain could fetch between $25-million and $40-million. The person added that a deal has not been finalized and talks could still fall apart.

A marriage of the privately held companies would bring together two well-known Canadian banners operating within very competitive markets. It would give Country Style an improved menu to combat beefed-up lunch offerings by rival Tim Hortons and provide Mr. Sub with access to Country Style's popular breakfast items, such as coffee, muffins and bagels, experts say.

There have been reports that Mr. Sub has been for sale, off an on, for years, but sources say its four owners have not been able to agree on terms. Last year, there was speculation that Michael Bregman, the former owner of the Second Cup coffee chain, was about to pull the trigger on a purchase. Other names floated as possible suitors have included Swiss Chalet parent Cara Operations Inc. and KFC operator Priszm Canadian Income Fund.

Patrick Gibbons, Country Style's president and chief executive officer, would not comment specifically on the most recent takeover speculation, but did say: "I've been in discussions with Mr. Sub, as I have with other predominant brands in Canada, about strategic alliances to grow our business across Canada … We're always looking at different opportunities."

Mr. Sub co-founder and CEO Jack Levinson, was adamant that his company is not up for grabs: "We've never, ever been for sale. We've had suitors off and on for probably 34 years. We'll entertain offers if they're from reputable people … we've never solicited."

Doug Fisher, president of Toronto consulting firm FHG International, said Mr. Sub is attracting interest from suitors because it would make a "brilliant turnaround" story. He recalled how it dominated the industry before Subway began expanding rapidly in the 1990s. "They were the big guy. They owned the market and they let it go."

Indeed Mr. Sub — founded 40 years ago in Toronto's Yorkville neighbourhood when it was an haunt of hippies — has faded from 1980s industry darling following the expansion into Canada of the Subway chain, owned by Doctor's Associates Inc. of Milford. Conn.

Today, there are more than 2,000 Subway stores. Mr. Sub has about 500. "You grow or you die in the franchise world … How they let Subway grow to 2,000 [stores] is beyond me," Mr. Fisher said.

Market research firm NPD Group Canada calculates that Subway controls 35 per cent of the nearly $1.5-billion Canadian sandwich market, which does not include hamburgers. Mr. Sub has a 9-per-cent share, behind independent sandwich operators and Tim Hortons. Quiznos Canada Restaurant Corp., which has embarked on a major expansion in recent months, controls 5 per cent.

Back in 1968, the original Yorkville Mr. Sub location began serving only four sandwiches — ham, salami, spiced loaf and its venerable assorted. Today, there are dozens of items, and the menu board is management's key focus, Mr. Levinson said.

The chain claims to have been one of the first to serve tortilla wraps, it has added salads, boosted its fresh ingredients count and is testing a toasted sandwich.

Expansion isn't a concern, Mr. Levinson said. Nor is following every trend that emerges within the industry. For example, in 2003 and 2004, competitors launched a series of Atkins-approved low-carbohydrate products to phenomenal sales. Not Mr. Sub. "We didn't believe in Mr. Atkins … and we didn't go after those people," he said. "We just feel if we continue to serve a great sandwich, we'll be fine."

But that may not be enough. "They have to get innovative," Mr. Fisher of FHG said. "It's not making another sub, it's repositioning their company because the world looks at them as third tier … kids seem to be seeking out Subway and adults are seeking out Quiznos."

Wendy Evans, a retailing expert with Evans & Co. Consultants, said Mr. Sub's stores need a makeover. The chain is "somewhat older" and "not as fun and upbeat" as Subway.

Mr. Sub launched a national ad campaign last month that addresses what it considers consumer misconceptions about the chain, trumpeting its fresh ingredients, that it bakes its own bread and toasts its sandwiches.

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