Thursday, May 30, 2019

econlife - The Rise and Fall of the Subway Five Dollar Footlong by Elaine Schwartz

The Subway footlong might never have been a foot long.

Six years ago, an Australian teenager posted on Facebook a picture of his 11-inch Subway Footlong. Feeling cheated (I guess), two New Jersey guys sued, others followed, and we wound up with a class action suit. Subway indicated the problem was frozen bread that had to be consistently stretched. They also said the slogan was an ad, not a promise.

In an initial settlement, Subway promised that they would implement new measures that guaranteed accuracy. They also agreed to pay a $520,000 legal tab and $500 to each of the ten people leading the suit. Explaining the small settlement the attorney said, “It was difficult to prove monetary damages, because everybody ate the evidence.”

But it didn’t end here. The litigation continued when yet another attorney who had nothing to do with the case said it was ridiculous. He explained that because only the lawyers made money, the decision should be thrown out. It was.

But so too was the footlong.

The Rise and Fall of the Footlong

In 2004, a Florida Subway franchisee figured out that a five dollar footlong would boost business. It was catchy, simple, cheap, and perfectly timed for a recession. At first local, by 2008, as the recession spread, the five dollar footlong did also.

Now though one store owner says the footlong costs him more than $4 to produce. In 2004 the margins were big. But, with $5.00 in 2004 the same as $7.00 today, inflation has sliced out the profit.

Our Bottom Line: Fast Food Competition

Subway’s biggest problem could be the competition. In 2019, everyone gives a discount, deli meat is no longer called healthy, and the name has become normal. Add all of that together and you get a monopolistically competitive firm that is less able to use the Five Dollar Footlong to differentiate itself.

Below, moving to the right on the market structure scale, firms become larger and more powerful. Meanwhile market entry and exit become increasingly difficult.

In a monopolistically competitive market, many firms compete for lots of customers, although firms sell similar sandwiches, they are able to achieve a bit of a “monopoly” by being different.

For Subway it was the footlong.

My sources and more: Thanks to the Planet Money Indicator podcast for alerting me to the demise of the footlong. Vox though had the whole story and Reuters, the end of the court case.

Please note that our featured image is from Subway and several sentences from today’s post were in a past econlife.

Ideal for the classroom, reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.