Kotabe/Helsen, Global Marketing Management, 5e

Case 12

Case 12
Subway Restaurant Entry in Japan1
Introduction
Walk the streets of downtown Tokyo or Osaka or any other Japanese city at lunchtime and you
can see office workers heading out to udon (Japanese flour noodle) restaurants and donburi (rice
bowl dish) restaurants for something to eat. You can see McDonalds, filled with high school
children, chatting and sending e-mails on their mobile phones over milkshakes and small-sized
bags of French fries. Office employees head to Italian cafes for pasta lunch sets, and those too
busy to head out of the office grab a bento (Japanese lunch boxes) or onigiri (rice balls) from
convenience stores. Ramen (noodle) shops, takoyaki (Japanese dumpling) shops; the choices of
food are endless. Japan is truly a gourmet paradise, and not simply at the high end of sushi or
kaiseki (multi-course traditional Japanese style) restaurants. The American sandwich chain
Subway decided to enter this market in 2002. However, despite its huge international success and
the Japanese love of food, Japan has proved to be a very difficult market for Subway to crack into.

Background
Subway started in the United States in 1965 as a single sandwich store in Bridgeport, Connecticut
called Petes Super Submarine Sandwiches, launched by Fred DeLuca, who remains Subways
president and CEO today. The company started franchise operations in 1974. Subway sells
sandwiches and salads which are made to order, in front of the customer. Subway markets itself
as a healthier fast-food option, compared to stores such as McDonalds or KFC. In the year 2000,

This case was prepared by Daryl Johnson, Kentaro Oku, and Shigeru Tamiya of Kwansei

Gakuin University under the supervision of Professor Masaaki Kotabe for class discussion rather
than to illustrate either effective or ineffective management of a situation described (2008).

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Subway started a series of commercials featuring Jared the Subway Guy, Jared Fogle
<http://www.subway.co.jp/jared/index.html>. Fogle, who had been extremely overweight as a
teenager, but famously lost 245 lbs. (or approximately 112kg) on a diet of Subway sandwiches,
became well-known as the face of Subway, and helped in the promotion of Subways healthy
image.
Subway has over 18,000 units in the United States and is committed to expansion of its
business in overseas markets. By 2005, the company had overtaken the number of units
McDonalds operated in Australia, Canada and Northern Ireland. The company surpassed
McDonalds unit count in the U.S. market in 2002. International expansion is seen by the
company as being crucially important in the coming years, with particularly successful markets in
Canada, Germany and the United Kingdom. Latin America was recently targeted by the company
for expansion. The company focuses on what it calls high potential markets, where population
density, political and economic stability, target customers levels of disposable income and
openness to fast-food style restaurants are all favorable for them.
Asia has been a difficult market for Subway, however. DeLuca has acknowledged that
growth in Asia has been slow, and that stores there have not been as profitable as in other markets.
He has suggested that food cultures in many parts of Asia that revolve around rice may be part of
the reasons for this lackluster performance.

Competitors
Subway competes in the fast food market, which is heavily saturated. In Japan, competitors
include:

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McDonalds The market leader, McDonalds has had a presence in Japan since 1971, when the
company McDonalds Holdings Company (Japan) was established. The franchise has more than
3,000 stores in Japan. In January 2007, they launched the four-patty Mega Mac burger. This
was widely reported in the Japanese press, as 3.32 million of them were sold in its first four days
of availability in January. Intended as a limited edition offering, demand was so high that the
sales period was extended, and it was re-launched in July 2007. McDonalds has a low-price
strategy (e.g. 100 yen burgers), which has been very popular with customers, and a set-menu
strategy designed to increase sales per customer (a basic set menu is just 500 yen, for a burger,
French fries and a drink).
McDonalds advertises heavily, for example on TV and by use of discount vouchers
regularly handed out by staff in urban centers. The company launches seasonal products (such as
the Tsukimi burger in autumn; a teriyaki burger with an egg on top, to celebrate the Japanese
moon viewing season). It targets a wide section of the market, and are popular with children,
offering them the Happy Meal set. It has a high number of repeat customers. McDonalds
sales were 441.5 billion yen in 2006. McDonalds Japan reported a group net profit of 3.16 billion
yen in the first half of 2007 (Daily Yomiuri, August 3rd edition).

Mos Burger Established in 1972, this Japanese burger chain has 1,435 stores across the country.
Mos Burgers menu has similarities to McDonalds, but its prices are a little higher (burger sets
are around 600 yen). However, Mos Burger cooks burgers to order, and the company stresses
fresh ingredients, including use of seasonal vegetables. Its advertising heavily features salad,
vegetables and wholesome ingredients. It offers original Japanese adaptations to the burger
format such as the rice burger a burger with two rice cakes used instead of a split bun, and
featuring Japanese-style fillings. Mos Burger targets women in their 20s and 30s, and makes use

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of the character Miffy, who is very popular in Japan, and other designs by artist Dick Bruna, in its
marketing. Mos Burger is the second-most successful burger chain in Japan, behind McDonalds.

Yoshinoya An incredibly long-lived fast food restaurant, (according to its website, With a
history dating back to 1899, YOSHINOYA D&C CO., LTD., boasts more than 100 years of
tradition), Yoshinoya could be described as traditional Japanese fast food. The company
mainly sells gyudon, a Japanese dish of simmered beef and onions served on a bowl of rice. The
company targets male students and workers, offering very cheap dishes (from 300 yen) and fast
service. Yoshinoya has 1,031 branches in Japan as of 2007. Fast, inexpensive and convenient, as
well as healthier than a burger, Yoshinoya has also had international success, opening branches in
the U.S., China, Hong Kong, Taiwan, Singapore, the Philippines, Malaysia, and Australia.

Starbucks Starbucks has made inroads into the Japanese market over the last ten years. Prices of
its sandwiches start from around 380 yen, and its coffee costs from 250 to 330 yen. Starbucks
targets young people, especially women (especially Japanese OLs office ladies). They have
been successful due to their convenience for breakfast, lunch and also coffee break times, as
well as the relaxing atmosphere of their stores. Starbucks operates 702 stores in Japan as of 2007.

Kentucky Fried Chicken (KFC) KFC has proved to be a very popular franchise in Japan. KFC
targets the family market, for example with their take home buckets of chicken, similar to their
style in the U.S. Prices tend to be higher than Subway. It offers set menu items for around 750
yen. KFC operated 1159 stores in Japan as of 2007. It promotes heavily by use of TV advertising.
KFC aims to serve a standardized quality food everywhere and they promote an image of
freshness, health, home-made or home-cooked style products, as well as hospitality.

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Mister Donut Mister Donut, owned by Duskin Corporation, has operated in Japan since 1971.
The company operated 1294 stores as of 2007. Mister Donut offers doughnuts at very low prices,
as well as dishes such as ramen noodles and Chinese steamed pork buns. Its main customers are
young people, including students and office workers. The company advertises on TV and by the
use of discount vouchers handed out on the street. Mister Donuts TV commercials have been
very popular in Japan, featuring famous Japanese TV personalities, and even members of Spanish
football team Real Madrid. The company regularly holds campaigns offering all doughnuts for
sale at 100 yen, which prove massively popular, especially with high school and college students.

In addition to these large fast food companies, there are a plethora of local restaurants in Japan
that serve fast and cheap meals. For example, ramen noodle shops can be seen everywhere in
Japan. Prices for a bowl of noodles are around 500 to 700 yen, but some chains are cheaper for
example the company Bikkuri Ramen offers bowls for 180 yen. Other restaurants can be seen
around the country serving dishes such as soba and udon noodles, Japanese fast food such as
okonomiyaki or takoyaki, pork cutlet restaurants, Japanese curry restaurants, omelette restaurants,
countless bakeries, as well as international cuisine such as Korean, Indian or Italian.

Food Culture in Japan

With so many truly healthy food options available in Japan, it would seem difficult for a fast food
company to try to promote itself as a healthy choice. Complicating matters, there is a clear taste
for what could be considered unhealthy food in the country also, as seen in the success of other
fast food companies. McDonalds Mega Mac has been popular, and other companies such as
Wendys and Mos Burger offer large-sized hamburgers. American doughnut chain Krispy Kreme
had a successful launch in Japan at the end of 2006: there is a demand for junk food in the
country. If people in Japan choose to eat fast food, they are aware that it probably will not be

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healthy, and do not necessarily expect it do be so. But it is a question of making a conscious
choice to indulge, not trying to choose between the least unhealthy of the fast-food lunch time
options that are so common in the U.S. or much of Europe. For those who are making a conscious
decision to eat such food, they are keen on choosing big burgers, with lots of cheese, ketchup and
so on.
Super-sized burgers and their hard-core junk food fans aside, many other common
restaurant food items could not be considered healthy by Western standards. For example, deepfried dishes such as tempura or kushi-katsu (skewered meat or vegetables, dipped in breadcrumbs
then deep fried) are common, as are deep-fried pork cutlets. Another consideration in Japan,
however, is portion size typically, people will have this kind of food in smaller amounts, and
often accompanied with side dishes such as rice, miso soup and pickled vegetables. Even icecream chain Cold Stone Creamery downsized its servings when it entered the Japanese market.
Finally, concepts of healthy food are not necessarily the same in Japan as in many
Western nations. While of course there are many people watching their calorie intake, many
Japanese think of healthy food more in terms of its quality for example, how fresh, pure, or
organic ingredients are than in terms of its calorie or fat content or cholesterol level. This is how a
chain such as Mos Burger, selling fried burgers and deep fried chicken and potatoes, can
successfully market a wholesome image they use good quality ingredients, which are likewise
reflected in the chains higher prices.

Subway in Japan
Subway in Japan offers 15 regular sandwich items, as well as wrap sandwiches and salads. There
are many similarities to Subway in the U.S., although the bread is softer and recently, the
sandwiches have noticeably not been filled with the same amount of ingredients as they used to
be (they used to be comparable to the size of servings in the U.S.). The result is a sandwich that is

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not as full or large as one in the U.S., although the bread dimensions are the same. This alteration
to serving size was as a result of criticism from Japanese customers that the large sandwiches
were difficult for them to eat. Subway in Japan also offers oven-baked potato wedges on its menu,
which have recently been advertised as having 50% fewer calories than they used to.
Jared Fogles story features on Subway Japans website, which tells people how he lost
112kg on his Subway diet. The average weight for a Japanese man aged 20 to 24 is 65.4kg. For
women in the same age group, the average weight is 55.4kg. While obesity exists in Japan, it is
not on the same scale as in the U.S. or many other western countries, and Subways advertising
revolving around the concept of beating obesity does not carry the same resonance as it does in
the U.S.
The first Subway store was opened at Akasaka Mitsuke, Tokyo in 1992 after Subway
Japan Inc. concluded a master franchise agreement with the American parent Subway. Subway
Japan is 100% owned by Suntory Ltd., Japans leading whisky maker, and one of Japans four
major breweries. Suntory operates five food service companies, and operated restaurants
numbering 750 in 2006. Their food service operations are supported by one of Suntorys group
companies, Hospitality Business Innovator Inc.
There are 115 Subway stores in Japan. 55 of them are located in Tokyo, 15 are in
Kanagawa, 11 are in Chiba, 10 are in Osaka and the remainder are in other prefectures, but not in
the Hokkaido, Kyushu or Shikoku regions. Most Subways are franchised. According to the
franchise application guide book, Subway is focusing on opening new stores around the capital
area and Kansai areas of Japan (which includes Kyoto, Osaka, and Kobe), where there are
demographic centers; for example, downtown areas, office areas, amusement centers, and in front
of rail stations.
One of the main features of Subways franchise stores is that they can start up from a
small floor space, and they do not require fire-facilitated kitchens. Therefore the start-up costs are

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fairly small; for example, for a 15 tsubo (a Japanese floor measurement 3.3 square meters) store,
start up costs are around 18.8 million yen, and for a 25 tsubo store, costs are around 25.8 million
yen.
Subway promotes its sandwiches as fresh, healthy and made-to-order. They use the
slogan Eat Fresh. Customers can choose between six or twelve inch-long rolls for their
sandwiches, with four types of bread, several kinds of toppings, and lots of salad and dressings.
Every menu item has a calorie count next to the price; some products even display a fat count.
Calories listed on its six-inch menu items range from about 200 to 400 kilocalories. For example,
the calorie count of the 6-inch Veggie Delite sandwich is just 218 kilocalories, and the Ham &
Cheese sandwich is 313 kilocalories. The highest calorie count is for a tuna sandwich, with 474
kilocalories. All these sandwiches calorie counts include having onions, lettuce, tomatoes, green
peppers, pickles, and olives as toppings.
Six-inch sandwiches cost between around 300 to 400 yen. If customers wish to have a
drink, the additional cost is 180 yen; with a drink and baked potato wedges, the additional charge
is 280 yen. So, basically, the total cost for a meal at Subway will be between 600 to 700 yen.
Subway operates a members card system, where customers can get stamps on a card when they
purchase sandwiches, or salads. Once customers collect eight stamps, they can get a 6-inch
sandwich and a small-size drink only for 200 yen.

Problems for Franchisees

Out of 195 stores that Subway franchisees opened in Japan between 1992 and 2001, 112 of them
have failed. The average survival rate for a store is less than three years. Former franchisee
Tetsuzo Ono, in an interview with Englands The Times newspaper in 2002, claimed that he felt
problems were apparent when many of his first months customers failed to return, and his second
months sales were half those of his first. He told the newspaper People who didnt know

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Subway sandwiches never saw any commercials, never heard any word of mouth and, because
the chain did not grow, never passed a store on the street.
Subway assured its franchise owners that as the chain expanded, the company would cut
the prices of its ingredients, but this did not happen. Subway also suggested the company would
run TV advertisements, which did not materialize. According to Ono, Subway claimed that if
owners experienced difficulty, they would provide management guidance. However, when he
contacted Subway for help, he was given advice such as to remember to greet your customers,
and keep the store clean. Ono said, That was it... they never suggested I do anything else.
Despite minor adjustments, Subway has moved into the Japanese market without
adjusting its product or marketing for local tastes. This is all the more interesting considering that
Suntory, the owner, is a Japanese company, with experience in the Japanese restaurant and fast
food industry.

Japanese food service industry

The Nikkei newspaper conducted a survey of eleven famous fast food stores in Japan. In response
to a question about what fast-food restaurants people had visited in 2006, 85.1% of respondents
said they had been to McDonalds, 59.4% to Mister Donut, 59.2% to Kentucky Fried Chicken
37.1% to Lotteria, 23.6% to First Kitchen, and 21.2% to Subway.
In response to a question about how well stores rated on taste, Mos Burger took first
place with 82.2%, Freshness Burger came in with 72.9%, Kentucky Fried Chicken got 68.9%,
Subway got 58.7%, Wendys got 45.8%, and Mister Donut got 45.7%. Regarding price, 83.7%
thought McDonalds had good prices, followed by Mister Donut with 42.8%.
In a key question, when asked about stores they would visit again, 55.2% of respondents
said they would return to McDonalds, 49.4% said they would re-visit Mos Burger, 47.5% said

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they would re-visit Kentucky Fried Chicken, 42% would go back to Mister Donut, but only
19.8% said they would return to Subway (See Case Exhibit 12-1).
Case Exhibit 12-1 [take exhibit number out of art]
Exhibit 1
Customer Return Rate
55.2
Mos Burger

49.4
47.5

Mister Donut

42
19.8
16.8

Lotteria

Customer Opinion

15.1
13.8
13

Wendy's
Becher's

5.8
0

10

20

30

40

50

60

The market of the food service industry is intense in Japan, and has been growing every
year. However, the growth rate in the number of fastfood restaurants has exceeded the growth
rate in total sales, so the market is now highly competitive (See Case Exhibit 12-2). To survive
in this competitive market, restaurants need to appeal to their customers in specific ways.

Case Exhibit 12-2

Japanese Food Service Industry Growth Rate

10

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Food S ervice Industry (1993 based)

180%
p e rc e n t

160%

totalsales

140%
120%

total
custom ers
totalstores

100%
80%
2005

2003

2001

1999

1997

1995

1993

60%

sales per
custom ers

year
Source: Japanese Food Service Association

Changing lifestyles are affecting the food industry. A higher profile for women in society,
the increasing number of single-person households, and the number of people active 24 hours a
day will increase demands on the food service industry, including take-out and delivery services.
In 2010, the percentage of people over 65 years old will reach 23.1%, and in 2020 it will be
29.2%. Independent seniors will also increase demand. However, at the same time, consumers are
becoming more concerned about health and food safety.

Discussion Questions
1. Why does Subway not have a high customer return rate despite having a good reputation for
taste?

2. Do you think Subway can distinguish itself from competitors in terms of its positioning?

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3. Subway has struggled to establish its business in Japan. What do you think are the important
points that Subway should have considered when trying to do business in Japan?

4. How does Subways positioning compare with that of its competitors?

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