Subway eyes matching McDonalds in China in 10 years

SHANGHAI Mon Mar 8, 2010 2:16am EST

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SHANGHAI (Reuters) - U.S. sandwich chain Subway hopes to match McDonalds (MCD.N) in China by store count in 10 years, its President Fred DeLuca said on Monday.

DeLuca, who founded Subway when he 17 in 1965, said China had great growth opportunity and targeted 500 stores in the next 5 years, with 35 to 50 set to open in the coming year.

"If we accomplish that, then maybe in another five years we may be able to match McDonald's store count," DeLuca told Reuters. He added that Subway was looking particularly at second tier Chinese cities for expansion as major ones such as Beijing and Shanghai had already built a good foundation.

DeLuca said Subway's growth in China was in the early stages of development with awareness for products still quite low.

"Our biggest challenge is getting customers to try the product," DeLuca said, adding that they were considering lowering the price to attract more customers.

A standard subway sandwich costs around 20 yuan ($2.93) compared with 6 yuan for a cheeseburger at McDonalds. Subway, one of the largest fast-food chains in the world, has 150 stores in China compared with McDonald's, which has more than 2,000.

"We have a very different business model to McDonalds. We make smaller stores and tend to put a lot more of them around," said DeLuca.

Subway's emphasis on fresh eating and lots of vegetables will help the franchise chain grow as the Chinese consumer looks for healthier options, DeLuca said. He added that China was starting to become aware of rising obesity.

"People are starting to understand there is a bit of a problem. This may match up with our growth trajectory and put us in a position where we can grow quite fast."

Subway's China stores account for 0.5 percent of Subway's global network of 32,000 stores with markets such as the United States, Canada, Australia and the UK making up the bulk of revenue. In 2009, worldwide sales were $13.8 billion, of which China contributed only a "tiny" amount.

PEKING DUCK SUB

As Subway expands into China's different provinces, it plans to localize the menu to suit local palates.

"In the medium to long term it is absolutely part of our future to reach out and blend in with the local market," said David Keir, Subway's development agent in Shanghai.

Keir said Subway was doing trial research, testing sandwiches such as Beijing roast duck and local sauces like "hot spicy Szechuan sauce."

DeLuca said it would continue to use its franchise model in China, which has failed to take off for other large fast food chains.

"The investment per store is very low. The average store costs around 700,000 yuan to set up." He said that despite the recent safety concerns surrounding Chinese products, he was not that concerned about the quality of Subway's products.

"In this phase of development there are probably only a few products matching up to the 'gold standard' which is the ideal standard," but DeLuca said around 90 percent of the products were of high quality.

(Editing by Jacqueline Wong)

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