How China Eats a Sandwich

Opening Subway franchises in the People’s Republic–home of a billion potential customers–seemed like easy money. Until someone tried it.

By Carlye Adler/Beijing
March 1, 2005

(FORTUNE Small Business) – Jim Bryant’s office in Beijing is plastered with awards: Subway’s Top International Franchise Salesperson 1997, Highest Percentage Increase in Unit Sales 2002, and Most Franchises Sold in Asia, June 2003 to March 2004. But Bryant is proudest of a framed photo of himself with Muhammad Ali. In the picture, Ali is twirling his finger near his temple–signaling “This guy is a whack job.” He is not the only one with that opinion. “I think Jim is nuts,” says David Mann, Subway’s development agent in Taiwan. Bryant drives a vintage World War II-type motorcycle with a sidecar, spearheads a biker group called the Beijing Dragons, and once raced Indy 500-style cars, but Mann says the real mark of his insanity was trying to sell Subway franchises in Beijing.

Bryant, 50, is known in Beijing as the Franchise King, but bringing Subway to mainland China has almost knocked this entrepreneur out. Even as the number of American Subway franchises has exploded (it now has more restaurants in the U.S. than McDonald’s), the China expansion has happened at a snail’s pace. In the past ten years Bryant has managed to open just 19 stores in Beijing–half the 38 he was supposed to have today. (He says Subway charges him $2,000 a month for not having enough restaurants open.)

Bryant is hardly the only entrepreneur to be lured by China’s gangbuster growth (1.3 billion people! an economy growing at 9% a year! a fast-food industry estimated at $15 billion!). Nor, for that matter, is he alone in underestimating how hard it is to become established in the country. Small and big businesses alike have faltered under China’s quasi-capitalism. Brands including A&W, Chili’s Grill & Bar, Dunkin’ Donuts, and Rainforest Café have closed up shop and gone home.

In comparison, Bryant’s modest accomplishments look almost stellar. Subway–or Sai Bei Wei (Mandarin for “tastes better than others”)–is the third-largest U.S. fast-food chain in China, behind McDonald’s and KFC, with 100% of its stores profitable. Still, Bryant has had more than his share of setbacks. He says he has lost money to a scheming partner, has been beaten up, and had to teach the franchising concept to a country that had never heard of it. (When he started, there was no Chinese word for “franchise.”) “I fault myself for coming here too early,” he says. Bryant’s U.S.-based financial backer, Steve Forman, sees the country’s modern-day gold rush more harshly: “Doing business in China is very, very difficult for a small company,” he says. “They eat you alive.”

Shoes, not sandwiches, first brought Bryant to China. A natural entrepreneur who signed up with Amway at 13 and sold encyclopedias door-to-door at 17, he got into the shoe-manufacturing business after high school. In the late 1970s he started shuttling between the U.S. and Taiwan, and soon realized that mainland China had more potential. Bryant set up a factory in China’s northern coal capital, Datong, and began manufacturing athletic shoes for clients such as New Balance and Pony. He also made friends and learned the language without taking a class. Because he was a foreigner, locals would take pictures of him and ask for his autograph. “It was like I was one of the Beatles,” he says. “I fell in love. Who wouldn’t?”

For ten years his business grew, but in the early 1990s the shoe business started to go south–literally–as competitors from South Korea and Taiwan moved to China’s southern Guangdong province. Bryant’s business suffered, and–worse–in the early 1990s he was indicted by a federal grand jury in the U.S. in connection with importing counterfeit Keds. Bryant maintains he was innocent, but his company paid a fine, his legal fees soared, and the story made the Wall Street Journal. “It was a disaster,” he says. “Even though I was right, I couldn’t hold my head up in the shoe business.”

Ever the serial entrepreneur, Bryant had been dabbling in China’s export business, shipping home wooden whistles, religious figurines, and pollock, a white fish used in the U.S. to make chowders and fish sticks. He teamed up with Jana Brands, a seafood company based in Natick, Mass., that also sold imitation crab to Subway. Bryant had never eaten at a Subway, but he knew it was big business. Jana was selling $20 million in crab to Subway annually. When Subway founder Fred DeLuca and his wife came to Beijing in 1994, Bryant was eager to entertain them. He took DeLuca to a place that wasn’t on the official tour: McDonald’s. It was a Sunday night, and as usual, the place was packed. Bryant says DeLuca stood outside the restaurant and scratched his chin. “‘I didn’t think that China was ready for fast food,'” Bryant remembers him saying. “‘We can open 20,000 Subways here and not scratch the surface.'” (DeLuca did not respond to requests for an interview.) Two weeks after DeLuca’s visit, Bryant called Subway headquarters in Milford, Conn., and asked to be the company representative in China.

According to the agreement, he would recruit local entrepreneurs, train them to become franchisees, and act as a liaison between them and the company. For that he would get half their $10,000 initial fee and one-third of their 8% royalty fees. He would also be able to open his own Subway restaurants. Forman, Bryant’s backer and also the founder of Jana Brands, says he invested about $1 million and got a 75% stake.

Bryant used guanxi–the Chinese business practice of relying on local relationships–to find a manager for his first restaurant in Beijing. At the time, all foreign businesses in China had to be joint ventures with local partners, and Bryant’s new store manager introduced him to a partner with connections to the country’s 4,000 railway stations. Their project ran into problems almost immediately. Work on the first store was delayed, and construction costs quickly rose to about seven times the initial estimate. Bryant figured out why when he learned that one associate, he says, had been siphoning off cash and had swindled Forman and him out of $200,000. As for the deal involving the railway stations, “he was full of shit,” says Bryant.

His second spot, which opened a year later in the foreigner-friendly Chaoyang district, was almost as cursed. With six months left on the lease, the landlord locked the doors with a bicycle chain. Bryant waited half a day for the landlord to return, then cut the lock. That turned out to be a mistake: Within minutes the landlord showed up with eight “associates,” who, Bryant says, beat him up and kicked him off the property. (Bryant ended up with a fat lip and a broken toe.) Bryant says he learned later that the landlord had found another tenant who was willing to pay two years’ rent up-front. (As it turned out, the building was demolished within a year anyway.) The lesson, he says: Sign leases only with business entities, never with individuals. “Too often there’s corruption involved,” Bryant says. “And they don’t get in trouble–they just get rich.”

When he did get a restaurant up and running, it was immediately popular among Americans in Beijing (one expat kissed the floor when he walked in), but the locals weren’t sure what to make of it. They stood outside and watched for a few days, and when they finally tried to buy a sandwich, they were so confused that Bryant had to print signs explaining how to order a sandwich. They didn’t believe the tuna salad was made from a fish, because they couldn’t see the head or tail. And they didn’t like the idea of touching their food, so they would hold the sandwich vertically, unpeel the paper wrap, and eat it like a banana. Most of all, his Chinese customers didn’t want sandwiches.

It’s not unusual for Western food chains to have trouble selling in China. McDonald’s, aware that the Chinese consume more chicken than beef, offered a spicy chicken burger. KFC got rid of coleslaw in favor of seasonal dishes such as shredded carrots, fungus, or bamboo shoots. Starbucks launched a Green Tea Cream Frappuccino, TCBY added sesame-flavored frozen yogurt, and Mrs. Fields sold mango muffins.

Subway, on the other hand, did little to alter its menu–something that still irks some Chinese franchisees. “Subway should have at least one item tailored to Chinese tastes to show that they are respecting the local culture,” says Luo Bing Ling, who operates a store in Beijing’s Haidian district. Bryant says it tried: A few years ago Subway launched a pork-rib patty with Chinese sauce, “but nobody liked it.” He thinks with time and patience sandwiches will catch on. “In ten or 20 years people will be scarfing down sandwiches in China,” Bryant says. Maybe he’s right: Tuna salad –which the chain couldn’t give away at first–is now the No. 1 seller.

The franchise concept has also taken some time to catch on. One of Subway’s early franchisees went through training and then changed the restaurant name and color when he opened. (Bryant made him change them back; that franchisee soon went out of business.) Bryant has made progress, though. There’s now a Chinese word for “franchise” (jia meng, roughly translating to “person joins group of other people”), and outfits such as the Athlete’s Foot and Century 21 have been growing through franchising. In 2003, McDonald’s granted its first franchise. And new regulations–China’s first commercial-franchise laws (requiring franchisees to carry out their commitment to the franchisor and protecting franchisees if the parent company goes bankrupt)–were expected to pass as of presstime.

Bryant has recruited some franchisees who appear to be in for the long haul. “Subway is a business for tomorrow, not for today,” says one of the system’s newer franchisees, Peter Chen, an ex-IBM executive who fell for Subway while studying at the University of Southern California. Luo Bing Ling, the Haidian franchisee, who closed her import-export company to open a Subway and gain more flexible hours, says her store lost about $6,000 in its first eight months, but now that it has started to make a profit, she recently bought a second outlet.

It comes as something of a surprise, then, that as business is improving–Bryant has seven stores under construction–he has become more frustrated than ever. It’s not the roller coaster of building the business that has caught up with him, but his role as Subway cop–inspecting stores and sticking thermometers into meatballs–that has gotten him down. “I don’t like pruning the tree,” he says. “I like to plant the seed and watch it grow.”

After 25 years in China and ten working with Subway, Bryant says he now may sell his stores and the Beijing-area developer rights. It could take years to find the right deal, he says. In the meantime, he’s planning a motorcycle trip from Ireland to Beijing. One logistical issue he’ll deal with is where to find Subways along the route. He has eaten one of the chain’s sandwiches (usually turkey on honey oat) at least once a day, sometimes twice, for the past ten years.

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