Wal-Mart makeover favors Subway over McDonald's

Stand-alone outlets more profitable

As it opens new stores, Wal-Mart hands out lists of prospective locations to both McDonald's and Subway. But the sites on the lists don't overlap, and the two brands aren't allowed to bid against each other for a specific location.

Wal-Mart executives declined to be interviewed for this story. But a spokeswoman said in an e-mail that Wal-Mart picks its in-store restaurant vendors to "align with the customer needs in each market . . . matching customer tastes and preferences with the right restaurant partner."

Elizabeth Rolfe, director of new business development for Subway, contends that one reason the chain is sought out by Wal-Mart is that "they're looking for the healthy alternative." She also noted that, unlike McDonald's, Subway outlets have "no cooking, no frying."

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McDonald's rejects the suggestion that it is trailing Subway in the Wal-Mart race because of its food.

While McDonald's does occasionally choose to exit less-profitable Wal-Mart locations, it gets "the lion's share of what we ask for" when it comes to leases with Wal-Mart, says Bill Lowery, a McDonald's vice president in charge of business with the retailer.

"As far as food service inside Wal-Mart, we are still their best bet from an economic and any other standpoint," Lowery insists, adding that he is unaware of any situation in which the retailer had asked McDonald's to vacate a store in favor of a rival concessionaire.

While the average full-size, stand-alone McDonald's grosses about $2.1 million a year, the company says its Wal-Mart restaurants average just $900,000 annually.

Subway doesn't disclose its sales, but Technomic, a Chicago restaurant industry consultant, estimates that the typical Subway unit grosses around $400,000 a year. Industry sources say it makes little difference to a Subway's sales whether it's inside a Wal-Mart or not.

Where are the fries?

"A Subway can make it on fewer dollars," says Dennis Lombardi of WD Partners, a retail and restaurants development firm. By the same token, a McDonald's franchisee may calculate that the investment return from a full-size store is much greater than that from a Wal-Mart satellite unit.

Subway, which has more than 21,000 U.S. stores versus about 13,700 for McDonald's, enjoys an advantage in that its operation can fit into a smaller space than a standard McDonald's. And while they employ relatively small ovens to bake bread, Subways don't use fryers or grills, which require costly ventilation systems and hog more energy.

Both chains have master leases with Wal-Mart, allowing them to be in a store for 10 years. While neither restaurateur will discuss contract terms, "Our rent is based on our sales," says Subway's Rolfe.

Montana Subway franchisee Novak, who has two other stores in Great Falls, says that so far his Wal-Mart location is performing well -- "equal to my busiest store." He appreciates the fact that he doesn't have to maintain restrooms and that security isn't an issue, since Wal-Mart takes care of that.

And while he says he's received compliments from many customers, not everyone feels that way. Occasionally, would-be patrons will order french fries.

When told that Subway doesn't serve them, Novak says, some "turn around and walk out."

This article was reported and written by James Covert and Richard Gibson for The Wall Street Journal.

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