IPO-bound Subway India makes a big ownership shift

Subway India operator EverBrands India bought 101 franchisee-run stores in FY26 as it accelerated its shift towards a company-owned network, according to its draft red herring prospectus (DRHP) filed with the Securities and Exchange Board of India (Sebi) for a Rs 600-crore IPO.

The shift gives EverBrands a larger share of each store’s economics, but also puts rent, staff, store capex and operating costs on its books. The company plans to fund another 460 company-owned stores with Rs 326.9 crore of the IPO proceeds over FY28 and FY29.

EverBrands inherited a largely franchise-led network when it took over Subway’s India business in December 2021, acquiring the Indian entity from Subway International BV and Subway International Holdings LLC for Rs 17 lakh and signing master franchise agreements for India, Sri Lanka and Bangladesh. As of April 2023, it operated 143 stores itself.

It has since bought 188 franchised stores for Rs 150.3 crore, including 101 in FY26. Another 105 franchised stores shut over the three-year period. Company-owned stores rose nearly fivefold to 678 as of the end of March, while franchisee-run stores fell to 330 from 501 two years earlier. Two-thirds of its 1,008 stores in India are now company-run.

The attraction lies in the economics. As master franchisee, EverBrands pays Subway International BV a royalty on sales at every store — 6% for franchised stores and 6.5% for company-owned stores. On a franchised store, EverBrands collects a royalty from the franchisee but, after paying the global franchisor, retains only about 2% of the store’s sales. On company-owned stores, it captures the store-level operating profit. An industry report by The Knowledge Company, commissioned for the IPO, puts this at 13-15% of sales.

That shift is already changing EverBrands’ revenue mix. Sales from company-owned stores rose 57% to Rs 611.5 crore in FY26 and accounted for nearly two-thirds of revenue. Revenue from franchised stores fell to 7.4% from 17.7% in FY24.

But the higher store-level economics come with a larger capital and cost burden. EverBrands spent Rs 105.2 crore setting up company-owned stores in FY26, while lease liabilities rose to Rs 525.6 crore from Rs 275.9 crore two years earlier. Its net loss more than doubled to Rs 58.2 crore in FY26 from FY25.

The format also limits how much each store can generate. EverBrands spent an average Rs 69.7 lakh on a new store in FY26, compared with Rs 1.5-2.5 crore for McDonald’s, according to the industry report. But Subway stores are smaller, at 500-600 sq ft, and generate average daily sales of Rs 30,000-35,000, against about Rs 1.5 lakh for McDonald’s.

Delivery is another cost that EverBrands increasingly bears as it takes stores in-house. Aggregators accounted for 48.9% of its QSR revenue in FY26, up from 41.9% in FY24, while commission and delivery costs were 21.3% of that revenue. Under the franchise model, these costs are borne by the franchisee.

EverBrands also has limited room to slow the expansion. Its master franchise agreements require it to grow the network to more than 2,500 stores across India, Sri Lanka and Bangladesh by 2031, from 1,016 currently. A shortfall of more than 20% against the annual target gives Subway International the right to terminate the agreements. If a franchisee defaults or shuts a store, EverBrands may have to convert it into a company-owned outlet at a high cost or accept the closure, potentially affecting its ability to meet the targets. It has met its India timelines so far but missed targets in Sri Lanka and Bangladesh, although Subway International has not issued a notice.

The IPO will therefore finance further expansion of the company-owned model. Of the Rs 600 crore issue, Rs 326.9 crore is earmarked for 460 new company-owned stores in FY28 and FY29, while another Rs 125 crore will be used to repay debt.

The case for taking on that capital burden rests partly on improving productivity at existing company-owned stores. Same-store sales growth at these stores was 6.2% in FY26, compared with a 2.4% decline in FY25. The industry report ranked this ahead of Burger King at 4% and Westlife’s McDonald’s at -1.1%.