Sandwich maker's franchise model recipe for entrepreneurial success

By James Oldroyd

By some accounts Korea is lacking in entrepreneurial ambition. However, looking a little bit deeper demonstrates that the entrepreneurial spirit in Korea is alive and well. Although lacking institutions akin to Silicon Valley to foster venture startups, Koreans still establish businesses in rich abundance. Though much of the entrepreneurship in Korea is in what is termed the small and medium enterprise (SME) segment of the economy. This segment includes businesses with up to 100 employees.

A key challenge for the growth of SME is a lack of support for entrepreneurs in this segment of the economy. Often these small firms face three problems: firstly, they are unable to raise funds and have unclear capital requirements; secondly, they cannot obtain strategic advice on their business plan; and thirdly, they cannot conduct sophisticated marketing efforts. As a result they are left to their own devices. The terms “bricolage” or “bootstrapping” are often used to describe the efforts SME entrepreneurs engage in as they attempt to make do with what they have or can find.

When SME entrepreneurs have a great ideas, it takes time for their business models to mature, markets to develop and processes to become efficient. As a result, most entrepreneurs fail to survive this “trial” period. Yet, even large well-funded, entrepreneurs take time to refine their business. For instance, Amazon.com lost money for nearly 10 years as founder Jeff Bezos refined the business model, invested in infrastructure and built a brand. The organization survived because they had access to a healthy supply of venture funding and exuberant investors. Most entrepreneurs will never enjoy this luxury.



In Korea as well as other parts of the world many entrepreneurs are flourishing by tapping the efficiency of franchising. Franchising organizations are set up to provide clear capital requirements, a well-developed business model and marketing to would-be entrepreneurs.

Take the case of Subway Korea. Subway was founded in 1965 in the U.S. Through aggressive franchising, it quickly spread across the U.S. Currently the company has 36,014 stores globally and the newest opened on Jan. 18, 2012 in Korea. In 1992 the company began preliminary Korean operations, but its growth was slow until the company renewed its focus on the Korean market in 2007. Since then the firm’s growth has sped up with 48 stores across the peninsula. The company opened just two stores in 2009. In 2010 they increased that to eight stores, opened 17 new stores in 2011, and are set to open 30 new stores in 2012.

One hundred percent of Subway stores around the world are franchisee-owned. The company has grown by finding and enabling entrepreneurs. Colin Clark, Subway’s country manager for Korea, said, “Many entrepreneurs find us through the internet and some find us through our advertisements in the newspaper.”



For those interested, the company presented a high-level business model in a weekly sales seminar held in their headquarters office in Banpo-dong followed by a tour of a few stores. “This session is to show what our business is about, answer questions and allow them to see firsthand what their potential with Subway is,” explained Mr. Clark.

Not only are the entrepreneurs assessing Subway but the company is assessing the entrepreneurs’ abilities and plans including where they are planning to operate and if they have what it takes. Clark noted, “Some people think that opening a Subway franchise is about making sandwiches, but it is really about being an entrepreneur: getting customers into the store, operating efficiently and providing a pleasant dining experience. It is hard work. We provide the tools but they must use them.”

The firm has been successful focusing on long-term, responsible growth. “We are very careful to set realistic expectations,” said Clark. “Seventy percent of our franchisees give us the ultimate indication of satisfaction by opening a second store.” Subway does not release exact profitability numbers because they are 100 percent franchisees, but in general, they meet or exceed the industry average.

Subway provides a clear framework for entrepreneurs.

1) Addressing the problem of capital: They help entrepreneurs solve the problem of capital by providing them clear projections of labor costs, real estate costs and other invested capital requirements. Clark noted the value Subway can add, stating, “We help our entrepreneurs get more bang for their buck by optimizing their upfront investment.” This begins immediately as Subway provides a new entrepreneur, economies of scale in everything from renting real estate to buying table and chairs and meat and cheese.

2) Executing the business model: Subway has a well-defined business model that has been proven successful in 98 countries. This model has built in features that make a big difference. For instance, the firm helps with cash flow by not requiring the franchise to pay the distributor for inventory until the customer pays.

This allows a store to grow exponentially by allowing them to sell inventory before they pay for it. Because Subway only receives money from royalties it is in both the company and entrepreneurs’ best interest to do well. Clark noted, “If the franchise doesn’t do well, we don’t do well.” Moreover, because all stores are owned by franchisees, there are no corporate stores to compete with the entrepreneurs. But the company does more than just provide a well-honed business model, it provides ongoing support. At least once a month, a field consultant visits each store “to preserve the brand and help the franchisee really put the brand to work for their own success.”

3) Providing effective marketing: The marketing formula at Subway is simple: 4.5 percent of sales go into a marketing fund that is directed by an elected board of franchisees. The firm provides strategic direction in each country to build the brand. The brand is focused on “fresh” and “customer choice” because the customers choose everything included in a sandwich.

The entrepreneurs have discretion in customizing their marketing approach. Stores near universities emphasize the value of the meal, those near businesses emphasize a quick-healthy-lunch, and those with a high concentration of families emphasize a healthy meal with a clean family-friendly environment.

In sum, those organizations that can provide a proven template for entrepreneurs will find success in Korea due to a thriving entrepreneurial attitude.

James Oldroyd is the professor of management at SKK GSB, Sungkyunkwan University.