Growth spurt lifts Subway to top of fast food ranking.

McDonald's has finally lost its home field advantage.

The fast-growing Subway franchise, with 350 stores in Los Angeles County, has edged the fast food giant whose origins trace to 1940s San Bernardino as the chain with the deepest penetration in the market.

The first place showing on the Business Journal's list of largest restaurant groups in L.A. County comes as a result of a growth spurt that is expected to continue into next year. Milford, Conn.-based Subway, which was founded in 1965 but did not open its first local store until 1979, will have opened 46 new stores in 2002 alone, according to Ruth Sender, president of L.A.-based OhCal Foods Inc., a development agency for Subway franchisees. Subway, each of which is a franchise, opened about 25 stores each in 2000 and 2001.

The rankings mirror national results, as McDonald's 13,099 units nationwide is exceeded only by Subway's 14,360. McDonald's has 349 units in the county.

But Subway's top local ranking also reflects the rapid growth of smaller, non-burger and often regionally based chains at the expense of traditional fast food operations.

Following close behind longtime strong-holds such as Jack In The Box (No. 2 in the county), Burger King (No. 6) and KFC (No. 10) are El Pollo Loco (No. 11), whose first U.S. store was in downtown Los Angeles, South Pasadena-based Panda Express (No. 13) and Quizno's (No. 14).

Subway has surpassed McDonald's despite the fact that the Oak Brook, Ill.-based company is still in growth mode locally, according to Jim Carras, development director of McDonald's Corp.'s Southern California offices in Woodland Hills.

The company, which announced last month that it was shutting down 175 stores, most of them overseas, opened 20 stores in the county last year and will open 15 each in 2002, 2003 and 2004.

"We're under-penetrated here," said Carras, who added that the chain's countywide average of one store per 33,000 people trails the national average of one per 24,000. "We still have a lot of growth we need to do in Los Angeles County," he said.

Property values

The rise of groups like Subway and Panda Restaurant Group are in part due to smaller footprints that make a franchisee's cost of entry less daunting in a region renowned for its expensive and diminishing real estate.

Subway's minimal kitchen requirements (the only product cooked on premises is the bread) means that the average store is 1,100 square feet, compared with 4,000 square feet for McDonald's.

"You're not comparing apples to apples," said Janet Lowder, president of L.A.-based consultant Restaurant Management Services. "A Subway can go into a strip mall, a McDonald's can't."

As a result, a McDonald's operator invests about $1.5 million for a store, where nationwide sales per unit average $1.5 million per year, according to fast food trade publication QSR Magazine. It can cost as little as $200,000 to open a Subway that may do $500,000 in annual sales, according to Lowder and Stephen Pettise, managing principal of restaurant consultant Golden Spike Resources Group.

"When you evaluate sales to investment, it's a better deal to open a Subway," said Pettise, who has worked as a marketing executive for both IHOP Corp. and Carl's Jr. parent, CKE Restaurants Inc., and has franchising rights for Baja Fresh northeast of the Bay Area.

Conversely, expensive local real estate has kept many national chains from establishing a substantial local presence. Top 10 national chains like Wendy's (more than 5,300 stores nationwide) and Dairy Queen (about 3,200) have just 24 and 25 stores, respectively, in Los Angeles County.

"If you look at other parts of the country, the population is growing quickly, there are more development-friendly areas as far as zoning, and the economics of doing the project make sense," said Chuck Chapman, vice president of development at Minneapolis-based American Dairy Queen Inc. He noted that four Dairy Queens have opened in L.A. County since he joined the company two years ago. "The demand would be there, but I'm not sure prospective franchisees see opportunity there as much as they see it in other places."

Another deterrent for fast food restaurants is finding a location that allows drive-through service, which is out of favor with nearby residents, according to Dick Carter, a broker with L.A.-based May Realty Advisors.

"Wendy's has had a miserable time finding sites," said Carter, who has worked for the real estate departments for McDonald's, Carl's Jr. and Burger King. "The easiest way to do it for us to buy up somebody already in place."

Meanwhile, as burger chain presence plateaus locally, there's been a land grab on the part of sandwich shops competing for a market that's growing due to the perception of a healthier alternative to burgers and fried foods.

"Subway's advertisements (featuring lower fat sandwiches) have been working very well," said Ron Paul, president of Chicago-based consultant Technomic Inc. "They're experiencing double-digit sales increases in terms of same stores sales, versus McDonald's."

There are 45 Subway store slated to open next year, and Denver-based Quizno's, which has 89 stores in L.A. County and 16 in the Santa Barbara area, is scheduled to open 44 in L.A. County/Santa Barbara by the end of next year, according to Stacie Lange, spokesperson for Quizno's Master LLC.

"They're trying to get a stronghold before the others get those locations," said Lowder of Subway, adding that Richmond Heights, Mo.-based Panera Bread Co., a bakery cafe chain with more than 350 units nationwide -- and none in the region - has a franchise agreement to open more than 20 stores in L.A. County.

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