"DotEEBubble is one of the most controversial startup blogs in the world and you've probably never heard of it." -TechCrunch

Thursday, April 4, 2013

Fly like Vapiano's or Fail like Friday's? Subway's Future in Estonia.

Subway Arrives in Estonia : Our Take

Yes, we know Subway is a large multinational company and isn't usually considered as a startup. Yes, we know they didn't receive EAS money. Yes, we know they don't really fit the profile of most companies and organizations we cover on our blog.

However, we think there is a lot to be learned from analyzing the potential of this venture. In Estonia, Subway is a franchisee, so the local owners are essentially starting from scratch. Countless restaurants in Estonia fail, so we thought an analysis of the numbers that drive the restaurant business would be of interest. One of us has expertise in this area, which enabled us to do a fairly thorough analysis.

A Brief History of Subway in Estonia

Subway opened their doors last week with an exclusive party on Thursday, complete with a band, DJs, ribbon-cutting ceremony, and even a speech by the US ambassador to Estonia. Anyone who has lived in the US, where Subways are more common than McDonalds, would find the fanfare quite surprising. The opening of a new Subway in the US is typically greeted with a resounding "meh" and nothing more. Estonians probably have the same reaction when a new R-Kiosk opens.

The opening of Subway seems to be the largest business event in Estonia this year, based on the widespread media coverage. There were 5 articles in Delfi about it just the last month, and another 3 in Äripäev in the same period.

Subway opened its doors to the public on Easter Sunday, and even that drew press coverage, with Delfi reporting on the status of how many people were waiting in line (not many, but we've heard the lines have been longer on some occasions since then). No one in Estonia at this point is unaware of Subway, given their heavy coverage in the media.

What was sadly lacking in all the media coverage was an analysis of their business model.  Will it work?

Now that their numbers are starting to come out we can start figuring out what it will take for Subway to succeed in Estonia. Subway has more locations worldwide than McDonalds, thanks to much lower start up costs and a franchise model that tolerates a higher level of stores per area.

How will this business model succeed in Estonia? The owners have plans to open up 20 restaurants in Estonia by 2019. By comparison, Hesburger has 30 restaurants in Estonia, while McDonalds has 10. It's nice to see they are dreaming big, but first they will have to prove the franchise can be profitable in Estonia.

Let's focus on the first store opened and try to get an idea of what they must make monthly to break even and how many sandwiches sold per day that equals.

We'll build a basic budget for the restaurant, and use that to calculate an estimated break even point.


Fixed Costs

We'll start with the fixed costs of the restaurant. Fixed costs are costs that are incurred regardless of sales. An example is rent, where you have to pay it whether you sell 1 sandwich or 1,000 sandwiches

First let's look at the physical space. There is the initial build out to have it looking like a Subway. Subway expects franchisees to pay between 90,000 and 180,000 euros for this build out. The Estonian one looks really nice so we'll budget it at the midrange point of 120,000 euros.

As we are looking at a monthly break even, let's break the 120,000 cost out over 10 years and make it interest-free. This build out is a long term investment in the business, but the cost must be regained and accounted for. So we'll pay back 12,000 a year for 10 years, or 1,000 a month.

On top of that we have to pay the initial fee for joining the Subway franchise. This is $15,000 in the US and for the sake of keeping the numbers easy, let's call it 12,000 euros or another 100 a month for 10 years.

Next up we have to pay rent on the space. They have 40 seats in their location at Estonia pst 7, which is next to Solaris. It's not inside one the of main malls, but it has a bunch of seating. A bit of research on City24 and we can estimate they are definitely paying more than 1,000 a month and probably closer to 2,000. Let's call it 1,200 without VAT. We'll account for all VAT later as a variable cost.

Next up are utilities including electricity, water, area maintenance, heating, and any other costs the landlord will pass on to the tenant. It's a restaurant focused on a bakery so this should skew higher than the average retail establishment. The bill will vary drastically from summer to winter but it would be highly doubtful the bill would go below 500 and quite realistic to expect it to hit 1,500 euros/month in the cold of winter. Let's budget it at 800 euros/month and hope for the best.

We've got the place built out, rented, and the lights turned on. Now let's get some staff. To calculate how many we need, we'll use the hours of business Subway Estonia lists on their Facebook page. They haven't quite got their weekend hours down yet but for this budget we'll guess they have the same Saturday hours as Friday and the same Sunday hours as a week day.
Add it all up and we get that they are open 490 hours a month.

How many employees should be working at any one time? According to our sources, Subway Estonia has 22 employees. This makes us skew the number high. Let's go for 4 and see how close we get to their amount of employees. From what we've seen at Subway this week, they do typically have at least 4 workers on shift at a time.

If all the workers are full time and put in 160 hours a month and the store is open 490 hours a month while needing 4 employees working at all times, then we need 12.25 full timers. We are still nowhere near 22. But much like the 20 stores idea, let's count the 22 number as a bit optimistic and simply say we need 13 full time employees.

How much should we pay them? Let's hope the restaurant is able to offer above minimum wage while staying a good bit below average Estonian overall wage. So we'll go for 350 net wage per full time employee. That's 4,550 euros going into the hardworking sandwich artists' pockets, but there are still social taxes to deal with.

As we are paying 350 net we still have to account for the employees' and employer's taxes on those wages. Taken together this rate is 66% of the net wage. With 4,550 net wages per month we are looking at an additional 3,000 in social taxes.

We'll definitely need a bookkeeping service to help make sure those taxes and employees are paid. For that many employees let's expect to pay around 500 a month for this service.

Time to think about things like internet, security, trash pick up, replacing lightbulbs, window cleaning, and other such minor costs. The more a small business can lock these down the better, but starting up, this going to be expensive. Subway might well be paying G4S for a premium package or they might have 0 security expense. Altogether let's budget 300 for this.

Add everything up and we get a fixed cost of 11,450 euros/month. A little safety cushion would nice so we'll go up to 12,000.


Variable Costs

Time to look at the variable costs. Variable costs are costs which do vary based on sales.

The first is VAT, which runs 20% We did not add this in to any of the fixed costs to keep things simple.

The second is Subway's charge for product (food). This number is relatively easy to find online and so we can put it at 30%. We think it may actually end up higher in Estonia, since much of the product is imported from abroad and transport costs on perishable goods can drive up this number.

Next up is Subway's marketing fee, adjusted to the local market: 10%

Add it all up and we have 60% variable cost.

After these costs are paid the owners get 40% of each euro to pay all the fixed costs plus make a profit.

With fixed cost and variable cost in hand we can make a basic equation which will show how much money our estimated Subway must make for the owners to not lose money in an average month.

-12,000 + .40x = 0
x= 30,000

Our estimate shows that Subway has to make 30,000 euros a month in revenue to earn absolutely nothing. On these estimates, it is interesting to note that the most room for variance can occur in the fixed costs as the variable costs are mostly set by the franchisor and government (taxes). In other words, the only way to get this number lower is to hire fewer people, or pay less rent.

30,000 / 30 days a month results in a daily required take of 1,000 euros.

Now for some fun: let's look at their prices and see how many sales that equals.

Thanks to all the media coverage including photos of their menu, we see the cheapest sandwich is 3 euros and the most expensive is 6 euros for a footlong sub. In addition to sandwiches they sell drinks, chips and cookies. With these items and price points we can guess an average sale will be 5-6 euros. Let's use the low end of this (not everyone orders a footlong), so 5 euros per sale.

1,000 / 5 = 200 sandwich sales per day.


A Moneymaker?

So can Subway sell 200 sandwiches a day? Remember that is in order for its owners to break even, not to make a profit.

We can quickly do the math to figure out how many sandwiches per day they have to sell if each of
the two owners wants to take home 1,000 euros a month. First we'll add in the profit tax rates at
21% to get to 2,420 then add that to the fixed cost in the equation. A little bit of math later
and we see in order to get this decent level of profit they need to make 1,200 euros a day or
roughly 240 sandwiches. In a 15-hour work day that is a sandwich every 3.75 minutes.

Can they do it? It's not difficult to imagine selling that type of volume during the lunch and dinner rush times, but will they also do that kind of volume at times of the day like 9am or 4pm, for example? We don't think so. Even the lunch rush will be limited by how quickly they can make sandwiches. The fastest Subway sandwich maker in the world can make a sandwich in 45 seconds, so we're guessing preparation times will be closer to 2 minutes at best.

What they will probably do is work on cutting back their fixed costs, especially staffing. Right now, they open at 8am every morning during the workweek, and we don't think many people get a craving for a roast beef footlong sub at that time of day.

We do enjoy a Subway sub from time to time, and their arrival in Estonia was welcome. But with the limited size of the Estonian market, we don't think they will have the success they hope for.


  1. That's an interesting analysis. Would you care to write something similar about CoffeeIn one day? I never understood how this chain manages to survive here. I was especially puzzled when they just started and looked like a completely ignored business with extra-overpriced coffee (at the time it was unreasonably expensive).

  2. There's an article today about how the price of a Subway sub is usually based on a % of the price of a Big Mac in the same market. However, in Estonia, the price is much higher than that:


  3. Great article and methodical break down of the business potential!

  4. Hi, great, thanx. Now, it's time to write about GameFounders - I think you know the project. Looks great on paper/web, not so great on... errrrr, where?

  5. +1 GameFounders.
    Gaming is a very specific industry for non-gaming people to play with. As far as I understand all projects are going to non-Estonian companies?
    Seems more like greasing board members into Western Europe, rather than helping the Estonian game scene.

    1. They're on our list, and we'll be writing about them in the next few weeks. It's been a bit difficult to get their government funding information, but we have it now.

      If anyone wants to send us information on GameFounders, please email us. So far, we've heard from one gaming startup about them, but we'd like to hear from others.

  6. There was a study done that proved when humans celebrate early with giving each other awards or talking about success before it is achieved, it boost ceretoinin levels and then they are unlikely to achieve success. Rewards before actual results jinx your likehood of success. In the case of game founders, it implies that they have succeeded already in founding a game. So they travel the world blowing the travel budget promoting that they have founded something, when none of them have done anything other than tap into some government aided funds right? You'll see all the same guys jump ship to found another eu funded project, and put on their resume they were founders, that found out they cant do anything but jerk each other off and give each other awards. One big circle jerk. Its gota get depressing after a while when you wake up and realize who will hire you for being a pro at spanking away eu money. Maybe work for the government or start a new incubator called pro spankers foundation. Then the title does match the leadership talent. Just google trace the names to see how many other spank parties they have been involved in. It pretty much describes the entire startup scene in estonia. I wish rewards were given to the right people for real accomplishments to build real role models for the future -- but maybe u need to fake it until u make it.

  7. Unfortunately this general Startups story also reflects the typical Estonian attitude, where people love to drive a flashing Porsche and show it off to others, while taking a loan to pay for it, living in a falling house and saving on money for food.....you cannot change that.

    We can only hope that a part of EU funding will be managed by technical minds or TTU directly (more competent and less arrogant that our EAS yuppies) in future. Engineers love things that work and are not too flashy, indeed.

  8. You're kind of jumping the shark here, friends.

    First, you spend three paragraphs whining about the fact that the opening of the first Subway in the country was big news. How is this surprising? I've seen other (west-European) countries have exactly the same reaction to the introduction of other well-known franchises like Starbucks. This is totally to be expected and very normal.

    Even if it were surprising, you bring it up as if it were a bad point. I would rather view it as the marketing genius of the owners, but that wouldn't fit with the negative mood of this blog, of course.

    Then you ask why the media didn't analyse their business plan. Jesus, it's Subway, as you clearly show in this article their business plan isn't that hard to predict, and is most definitely not complicated.

    > The fastest Subway sandwich maker in the world can make a sandwich in 45 seconds, so we're guessing preparation times will be closer to 2 minutes at best.

    But they have 4 employees working, which means 2 sandwiches a minute. If they work rush-hour (full speed) for 1 hour (half an hour at noon, half an hour at 18?), they already have half of the required revenue for that day. The remaining 14 hours they would only need to sell 10 sandwiches an hour. I'd say that's more than likely, considering how "well known" they have become with all the media attention, the quite central location, and the relative uniqueness of the product.

    > But with the limited size of the Estonian market, we don't think they will have the success they hope for.

    The limited size of the Estonian market? I'm hoping you're talking about their admittedly optimistic "opening 20 restaurants", and not about this one in particular. The fact that there's a McDonalds and a Hesburger within 20m of eachother, and then another Hesburger 100m away from there at Viru Keskus, and ANOTHER Hesburger in Solaris, shows that this particular area has quite a big market for fast food. The fact that McDonalds and Hesburger are practically the same, but Subway kind of different, gives them an edge in niche-loving Estonia.

    It feels like you're reaching, and it devalues all the other content on this blog.

  9. Always fun to respond to a good comment. I see 3 issues raised with this one.
    First, the amount of press giving to the opening of the restaurant. I don't really consider it "whining," more of introducing the story and explaining why we'll write about it. Yes their endless press was quite impressive, but here we like to look at the numbers behind the story. They did well building expectations, but the real question is can they run a profitable business?
    Second, the meat of the comment, can they sell 120 sandwiches in an hour? Having visited the place a few times, there's just no way. While they do have 4 staff on duty, the max I've ever seen actually making the sandwiches is 2. And they don't come close to two minutes. Still if rush lasted 2-3 hours, then I agree they could cover half their costs in this period. During non-rush selling 10 sandwiches an hour is still one every 6 minutes. If you've walked by the place in the morning or later at night you'd have to agree that is a quite a challenge.
    Finally, yes we're referring to the idea of 20 Subways in Estonia when talking about their hoped for success. Sorry for not making that clear. Even if the first shop succeeds in surviving the winter, it seems doubtful it will be able to justify much of an expansion.
    On the bright side they've not sucked up 100,000s of euros of tax payer money unlike the other companies profiled on this blog. Also they hire and train low skilled locals. All good stuff. We think a business operating like Vesivara grill has a much higher chance of success and growth due to the difference in quality of product and cost of production. Still that's another story.

    1. Thanks for your reply! I apologize for my initial agressiveness ;)

      You bring up some good points here. Still it makes me wonder how the other fast-food restaurants with comparable prices stay in business? Is it because they have more staff and products that lend themselves better to bandwork / fast production, better marketing to get more customers in, ... ?

      I'm guessing they'll next want to expand into Tartu. If that happens, I guess we can assume the shop here is at least breaking even.

  10. Overall it's just a different product. The burger places don't make much of a margin on the burgers but a lot of people buy drinks and fries as well. This gives them a decent profit level on a small sale. The sub place can't sell you fries and if you buy a bottled drink their profit level is much lower than a a fountain one.
    While both depend on volume, spend some time in Viru Mcdonalds and then go to Subway. It's just a radically different level. Viru has at least 3 registers open and making sales constantly through the day, and more open during rush. Subway has one register and as mentioned earlier if they are doing a sale every 10 minutes that seems decent for them.
    I think the primary reason for this is Estonian clients think paying 1 to 3 euros for a burger is a deal while paying 3 or more euros for a sandwich is expensive. Obviously Subway's operating costs are lower with less employees, electricity, and rent. But they still need to make their daily nut.
    A sign of success will be if they open a new shop in Spring and the first location does not go bankrupt in winter. I use the seasons for the simple reason that their sales will most likely be less when it is cold and nasty out while their utility bills will be much higher. February is a brutal month for retail as it has less days, cold weather, and people spend less.

  11. Thanks for a great article!
    Also comments were on a decent level.

    Any news and updates regarding Estonian Sub? Did they start to sell more? Changes in pricing or concept?

  12. Seems that Subway made it to Peetri Selver this week, and will be opening in Airport next week. Conclusion seems to be that the prediction for so far of their development is not accurate.

    They came out with "Sub+Jook" deal, elswhere known as "Lunchdeal" early in the summer 2013. Otherwise the prices are unchanged as the owners said. I guess Luncheal killed their margin as 3,5 for a 15cm Sub and a cup drink is relatively low price, however they still seem to be doing ok considering the expansion so far.

    Seem to be flying for now.