Subway Microeconomic Analysis Subway Corporation Microeconomic Analysis essay

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Subway Microeconomic Analysis

Subway Corporation: Microeconomic Analysis

Subway is an American restaurant franchise that primarily sells submarine sandwiches and salads. Since its inception in 1965, Subway has blossomed into one of the world's most successful franchises, with 35,015 restaurants in 98 countries as of August 2011 (Subway, 2011, p.1). Subway restaurants have been consistently ranked in Entrepreneur Magazine's "Top 500 Franchises," and in March 2011, Subway surpassed McDonald's in its ranking of most popular fast-food restaurant in the United States in a poll of over 43 thousand social media users (Jargon, 2011, p.1).

With its promise to provide both quality fresh ingredients and impeccable customer service, Subway has earned a place in the upper echelon of American franchises, seeing consistent revenue streams, increased employment, and a consistent and loyal consumer base. In viewing the microeconomic makeup of Subway, along with its strategies for success in the market, one can gauge how Subway has become one of the most successful franchises in the world with an economic business model that has proven undeniably successful.

Economic Progress and Costs

Economist Michael McCarty (2011) notes that the United States fast food market has seen a healthy rise in growth within the last three years, with the market forecast to have a value of $57.6 billion by the end of 2011, an increase of 12.1% since 2005 (McCarty, 2011, p.488). Subway, in turn, has seen remarkable success in the past ten years.

This success is due largely in fact to the steady low cost of production of Subway products. While the price of food has risen substantially in recent years, Subway has consistently committed itself to maintaining operations that are as financially and socially responsible as possible. During the recession, Subway franchises across America teamed up with family-owned farming operations to both promote the value of customer patronage of family farms and cost allocations. By incorporating locally sourced products wherever possible, Subway is able to meet its safety specifications and remain cost effective, which is a tactic that has allowed Subway to continuously increase in terms of business expansion even during the recession.

In utilizing such tactics, Subway has maintained the ability to keep its prices low while providing quality prices. Through massive promotional campaigns and advertisements for deals such as the "Five-Dollar-Foot-Long," along with mention of the dietary success patrons like the now-famous Jared Fogle, Subway has been able to bring in a consistently strong revenue stream in order to turn a profit, regardless of minimal price hikes in the distribution of other products.

Supply, Demand, and Elasticity

Subway's supply and demand flow is one that is fairly steady. Without customer demand, a restaurant like Subway ceases to exist. However, Subway has carved a niche for itself in the fast food market that has set it apart from many of its competitors. In doing so, Subway has established a pseudo-monopoly on the distribution of healthy fast food. Though other competitors are now seeking to include more health-conscious menu items into their repertoire, Subway is still far out of reach in terms of true competition.

The issue of supply then comes into play especially in terms of the enormous marketing promotions and advertising that Subway utilizes in order to move its product. For example, Subway's "Five-Dollar-Foot-Long" promotion was so popular and so fast, that it caused inventory shortages throughout the company. In order to compensate, additional products and employees were brought in. The question of whether Subway's $5 fixation was a round number that resonates with customers or a function of consumer-price points and price elasticity that affect virtually all markets? Economis Steve Tobak asserts that the answer is most likely the latter. He notes, "there are times when price is the best lever . . . And recognizing those times is often more a function of desperation than marketing wisdom" (Tobak, 2009, p.1).

In terms of demand elasticity, the new demand created by the promotion "directly added to revenues and profits" (Duru, 2009, p.1). Further, Subway discovered that these sandwiches had a very high demand elasticity because the percentage increase in demand was very high in relation to the percentage change in price (Duru, 2009, p.1).

Market Structure

Economists group industries into four distinct market structures: pure competition, pure monopoly, monopolistic competition, and oligopoly (Brue and McConnell, 2004, p. 8). In understanding these structures, one can understand how price and output are determined within a company. In recent years, one may say that Subway had a monopoly on the market in terms of its production and distribution of healthy sandwiches and salads. However, currently, one could easily define Subway's market structure as monopolistic competition. Subway competes in its industry in terms of similar price points for its products along with having similar products.

In monopolistic competition, an industry contains many competing firms, each of which has a similar but at least slightly different product. This definition aligns itself with that of restaurants and in this case, fast food chains. Fast food chains, for example, all serve food but of different types and in different locations. Production costs are above what could be achieved if the firms sold identical products, but consumers and the market in general benefit from the variety.

With nearly every fast food chain selling sandwiches and salads, and more and more adding menu items that correspond with an increase in demand for food that meets a healthy agenda, Subway's competitors have stepped up allowing these entities to compete on an even playing field with Subway, but these entities still do not produce an identical menu to that which Subway has, providing evidence for Subway's monopolistic competition market structure.

SWOT Analysis

McCarty notes that "Subway sandwich shops are well positioned to leverage their strengths and address reasonable threats, weaknesses, and opportunities" (McCarty, 2011, p.489). In assessing how Subway is poised to deal with its strengths, weaknesses, opportunities, and threats, one is able to gauge where Subway's ultimate success in the market is coming from.

In looking at visible strengths and weaknesses, one can see that Subway's strengths in the current economic market far outweigh its weaknesses. Subway boasts an ever-increasing number of stores, all of which provide food based on the demand for fresh, healthy, quality food fast. Subway has also partnered with the American Heart Association, which has added tremendously to its notoriety and success in providing fast food that surpasses that of its competitors in terms of health. Additionally, Subway has achieved worldwide brand recognition, and this allows for franchises to rapidly increase with fairly low franchise start-up costs.

Subway's weaknesses are far less obvious, but exist nonetheless. With franchises often hiring many part-time workers, employee turnover is exceedingly high. Additionally, Subway franchise owners have no control over "franchise saturation" in given market areas (McCarty, 2011, p. 490). This is to say that unbeknownst to franchise owners in a specific community, other upcoming developers may be given license to open additional Subway locations within a geographical area that is already being services by the franchise. This over-load of franchise locations may bring in additional revenue in terms of the company as a whole, but diminishes profits from franchise to franchise.

In looking at the opportunities available to Subway, several aspects of business come to the forefront. Subway has recently shown significant improvements in its "green agendas" by focusing on environmentally-friendly efforts. Since 2006, Subway has opened many eco-stores, designed with an emphasis on energy efficiency and water conservation. Since 2006, all new and remodeled restaurants have used low-flow faucets, saving more than 78 million gallons of water annually (Brown and Fitzgerald, 2009, p. 22). Additionally, Subway has significantly reduced its carbon emissions in recent years and taken initiatives to eliminate processing and packaging by purchasing local farm products when possible. As environmentally-friendly and green agendas continue to take precedence…[continue]

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