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SUBWAY TO OPEN 1,000 STORES IN CHINA WITHIN 10 YEARS

By Dees Stribling

Mention Chinese food, and the first thing coming to mind will not be a Subway 12-inch meatball marinara sub or an Italian BMT on wheat bread or anything else the sandwich-and-salad giant serves. And with only 54 shops currently operating in China (and two in Hong Kong) to serve a billion-plus people, Subway is equally unlikely to be the first thing the Chinese think about when they go for lunch.

Subway, whose formal corporate name is Doctor’s Associates, is out to change that, or at least to make its sandwiches as popular an import to the People’s Republic as KFC or McDonald’s — the acknowledged No. 1 and No. 2 respectively among restaurant imports to the country. Though China is a tremendous growth economy right now, bringing a restaurant concept into it is no sure thing. Just ask A&W, Dunkin’ Donuts or Rainforest Café, all of which have tried, only to retreat.

“The challenges for any Western brand in China can be formidable,” said William J. McEwen, global practice leader of brand management at the Gallup Organization, who recently co-authored “Inside the Mind of the Chinese Consumer,” an article in the March issue of the Harvard Business Review. “It’s a balancing act for restaurants, or any retailer, really. They have to maintain their appeal as a Western brand but also satisfy Chinese tastes.”

Subway has been in China since 1995, brought there by , American businessman Jim Bryant. The early years establishing Subway in China were beset by problems finding good locations (or any locations), petty corruption among government officials and quizzical Chinese consumers (“Just what is this bread-and-meat-and-veggie concoction, anyway?”).

But by the time he sold his franchises and development rights recently, Bryant had established a foothold in China. The franchising concept and the sub sandwich, both brand-new in China a decade ago, are not so novel anymore, no small thanks to Subway. There are even new words in Chinese to describe the concept of franchise — jia meng, roughly translated as “person who joins a group of other people” — and even the Subway name itself, which is rendered Sai bei wei (“tastes better than others”) in Mandarin.

Now Subway wants to ratchet its growth in China to a fever pitch. “If we followed the U.S. standard, we’d have over 60,000 shops in China, but I don’t expect to see that in my lifetime,” said Karen Eidsvik, regional director for Asia at Subway International, who is based in Singapore. “But I would expect at least 1,000 in the next 10 years. Australia, with a population [similar in size to that] of Beijing, has almost 950 stores.”

Subway’s international track record is no guarantee of success in China, but it’s impressive all the same. Currently, the chain boasts about 1,000 stores in Europe, 1,100 in Australia and New Zealand, another 1,100 in Latin America, some 300 in the Middle East and as many again in Asia, including the budding China business. In fact, Subway has surpassed McDonald’s as the largest franchiser in the world, with about 26,350 units worldwide.

Is Subway up to the task of growing its brand in an equally prodigious way in China? If so, it will do so by charting its own culinary course, says Eidsvik. Unlike KFC, which substitutes bamboo shoots or mushrooms for coleslaw, or McDonald’s, which offers a chicken burger in acknowledgment of the Chinese appetite for chicken, Subway’s menu in China is little different from its menu elsewhere (though the chain does offer halal selections in Muslim countries).

“Chinese do have a taste for our products,” said Eidsvik. “The Chinese palate is changing and is interested in new flavors. Our menu is very diverse, and, as a result, there’s something for everyone.”

More to the point, Eidsvik says, Subway’s expansion in China depends on the ability to appeal to Chinese youth, who are affluent and curious about new experiences in ways previous generations could scarcely have imagined.

Such youth-based expansion is not without precedent in Asia. At one time Japan, though different from China culturally, presented Western fast-food purveyors a similar opportunity. When McDonald’s entered Japan in the early 1970s, critics scoffed at the notion that the Japanese would ever take to it, so alien was the chain. Japanese youth proved the critics wrong, crowding into the restaurants and making McDonald’s a multibillion-yen business in short order.

“Young people in China are definitely open to new things,” said McEwen. “And they now have more money to try new things.” The opportunity is all the more real because only one in five young people in China has much brand loyalty to any of several new consumer choices, including food, according to Gallup polls. “The field is still open,” said McEwen. “China represents tremendous opportunity for anyone who can differentiate themselves from the crowd.”

And that may be the rub. As Chinese society becomes more affluent, Chinese youth have more choices than ever. “Their incomes have gone up, but so have their alternatives,” McEwen said. Those alternatives include a rapidly expanding number of locally inspired fast-food places. “Any brand is going to have to work hard to capture its market.”

Eidsvik acknowledges the obstacles ahead but also points to Subway’s advantages. “We are a new product, and so we attract early adopters,” she said. “And as our store distribution grows, so does our market.” She also points out that in China women visit Subways just as much as men do. “Perhaps that’s due to our low-fat, healthier options,” she said, though it is too soon to know whether that advertising-driven image of Subway has percolated into Chinese consciousness. China has yet to have an equivalent to Jared Fogle. (Nicknamed Jared the Subway Guy, Fogle was featured in the chain’s TV ads after losing an astonishing amount of weight by means of a diet that included Subway food.)

By contrast, Subway’s emphasis on fresh ingredients may carry more weight with the sandwich-eating masses. Subway goes out of its way to stress that each sandwich is made on freshly baked bread, using fresh ingredients and in front of the customer. “Freshness goes over very well with the Chinese consumer,” Eidsvik said. “Our ability to toast the sandwiches quickly and provide an expanded hot menu has been a great success too.”

But what’s the best way to get the word out? Eidsvik concedes that marketing is indeed a challenge, because China’s enormous population makes it hard to focus on a target market. “At this stage, localized marketing is the most effective,” she said, “targeting customers in the immediate area around the store.”

Said McEwen: “It’s a tough road for any Western brand. But the rewards of success are very great for the companies who can capture the loyalty of the Chinese consumer by combining the best of the West and the East.”