Submarina CEO Talks Turnaround, Growth

After acquiring assets of the Submarina sandwich chain in 2009 through the Kerensa Investment Fund 1 LLC, investment banker Bruce Rosenthal said he was forced to make some changes.

The all-franchised chain had a serious negative cash flow, he said, and franchisees were threatening insurrection, saying that he needed to step in or face going under.

So Rosenthal took the helm as chief executive and over the past year and a half decentralized the business, downsizing the corporate office and shifting advertising and marketing to franchisees and area developers.

Now the 53-unit chain is growing again, with sights set on an aggressive move into Texas. Rosenthal plans to move the corporate headquarters to Houston in 2012, and menu upgrades are aimed at further differentiating the brand as a quality alternative to quick-service competitors.

Nation's Restaurant News spoke with Rosenthal about Submarina's turnaround.

How did you restructure the company in June 2010?

When I stepped in, I recognized there were major wholesale changes needed in the way the company operated and conducted itself at the franchisor level. The previous management had lost sight of the fact that, fundamentally, we are a retailer and our product is food. You must exceed customer expectations at every visit without exception. As a franchisor, you must make sure your franchisees are all profitable and doing well.

The first thing I did is dramatic decentralization, and I moved control of advertising and marketing essentially to the franchisees and their area developers. I recognized that it was ill advised for the corporate office to have marketing executives that incur tremendous overhead expense, and then you end up with poor advertising. Area developers and franchisees have done their own independent advertising to supplement corporate over the years, and they know what works. I said, 'Why do I need to micromanage you?'

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What has been the result?

If you were to look at first six months of 2011 versus the same time the prior year, we as a franchisor had an eleven-fold improvement in operating results.

I attribute that improvement to the change in management, streamlining operations, to going from franchisees that were ready to mount an insurrection to franchisees that have bought additional units and that are expanding.

Today I have happy franchisees — for the most part — and we've got new stores opening; some stores that have done very well, and some that closed under management that had issues where a new party or proven party has taken over the space and transformed some of those locations.

What differentiates Submarina in the competitive sandwich segment?

It comes from the top down. We believe in serving and offering our customers an absolute best-in-class premium product. And we also believe the critical element to our entire business model is serving and offering top-quality food.

One big differentiator between us and our competitors is that we don't hose our franchisees with incredible markups in everything they buy. We go to suppliers and negotiate the best prices we can get, mindful of looking for top quality, and the price we negotiate is the price franchisees pay. We don't have a situation where we go to suppliers and stick in a 10- or 20- or 30-percent markup. Once you start doing that, it then becomes obviously harder to offer quality product. What we earn from other parties is fractions.

Our attitude is that there are customers whose sole objective isn't gut fill. Those are not our customers. We offer a distinctly superior product. I don't intend to compete with Subway on price, and they can't compete with me on quality.

So Submarina doesn't offer a $5 sub?

Occasionally we might do a promotion item, but that's not our focus or mission. That's not our customer. We would only do it to get their customer to try our product, but we don't intend to keep that customer based on price. We intend to keep them based on our quality.

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What are the chain's growth plans for 2012?

We have an outstanding area developer in Texas, Robert Pina, a former Subway franchisee who also created Wings-N-More in Houston.

His principle for growth is opening Submarinas as an area developer there. He is planning to open 25 in two years, and the first three open in the first two months of 2012. He has great locations.

We've got tremendous growth planned in Texas, but we also have sights set on Florida, particularly the corridor from Valdosta, Ga., to Tampa and St. Pete. There's also a lot of opportunity in California, where we've been for 35 years. About 90 percent of our sales come from California, and we'll keep the San Marcos headquarters as a regional office.

Conservatively, we'll see 20 locations open in 2012.

What menu upgrades are planned for 2012?

We have some proprietary new salad dressings that we've been testing, and we'll be bringing out some new salads as well.

The big thing is our new stores, and select existing stores will move to on-premise fresh baked bread. While some of our competitors have fresh-baked on premises, none have the quality dough our bread is made with. It comes in frozen and pre-formed from a supplier who also supplies tablecloth restaurants.

Are you looking at breakfast at all, like some of your competitors?

Yes, we have dabbled in breakfast with some limited success in some markets, and in other markets none. It really depends on location and customer demand. Because we have traditionally been so focused on locations that have tremendous lunch traffic, we have a lot of locations that just don't have a demand for breakfast. We are a destination for lunch and our breakfast offerings were perceived as being ancillary, not a destination offering.

However, where there is a significant demand for breakfast, we are going to experiment more with it.

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