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The American Dream, One Sandwich at a Time

Thursday, 26 May 2011 | 10:01 AM ET

Fred DeLuca might be the closest example to the quintessential “American Dream” in action.

When he was 17, DeLuca borrowed $1,000 from a family friend to start a sandwich shop, with the goal of paying for college. That was in 1965.

Today, his humble shop — Subway — is the largest sandwich franchise in the world, with 34,000 locations in 94 countries and sales of more than $13 billion in 2009 alone.

Not bad for a teenager from Brooklyn with a dream to make delicious sandwiches at an affordable price.

DeLuca remembered his family friend, Peter Buck, telling him that starting a small business would be easy: “You rent a little store. You build a counter, buy some food. Open for business and customers will come in. You'll have all the money you need,” he recalled Buck saying.

But, of course, it wasn’t that easy.

DeLuca struggled with meeting his goal of opening 32 stores in 10 years. He made it there in 11 years, but it was a difficult, one-store-at-a-time process. The turnaround came in the company’s eighth year when, realizing he was behind schedule on store openings, DeLuca decided to shift gears toward franchising.

“That really, really helped quite a bit because we taught people how to run Subway shops,” DeLuca said. “By then we had lots of experience. We developed great systems. We basically took these systems, packaged them up, and taught people in their own neighborhoods how to open stores and run them.”

According to Andrew Liveris, chairman and chief executive of Dow Chemical and author of the recently published “Make It in America,” teaching sustainable business skills, as Subway has done with its franchisees, is one of the keys to reviving the U.S. economy.

He said American companies opt to outsource manufacturing to other countries, our workforce eventually loses the skills and technological edge to produce entire groups of products, thereby falling farther behind.

Subway Made in America
CNBC's Nicole Lapin meets Subway's co-founder to discuss the companies' responsibility to buy in America and create more jobs at home.

By keeping this work in the U.S., companies support domestic job growth while also ensuring the workforce is competitive globally in the long term, he said.

Now, with small stores in 94 countries all over the world, DeLuca said it would be nearly impossible to run his business with the kind of precision it needs without franchising to small business owners.

It’s about more than expanding and bringing in more revenue — it’s about giving his franchisees all over the world a stake in the company’s brand.

“These are small businesses,” he said. “If we have the local people run the stores, they can do an excellent job, and they can benefit from the power of the brand.”

DeLuca said his franchisees benefit on advertising and buying power by combining forces underneath the larger, “umbrella” company, which gives them greater leverage and more resources to compete with larger companies.

“I think it's a great point of pride, not only for myself, but for the team that works in Subway, our franchisees, to know that our brand and our little invention is so well accepted in so many places,” DeLuca said.

Still, DeLuca’s stores keep it local. He estimated that more than 90% of the food ingredients, furniture and equipment in the company’s U.S. stores are made in America.

Except for maybe the olives: “I think olives are from Morocco,” DeLuca said.

DeLuca pointed out his U.S. stores employ American products not because they have to, but because, “it just so happens that they produce great products, and they have good price, and the service is fantastic, so we buy American products.”

Subway’s American stores return the favor; at the company’s peak output, Subway earned $8 billion per year from U.S. sales alone. That’s nearly 2,800 sandwiches and salads every minute.

DeLuca said that, typically, the company uses U.S. products when they enter a new market “because we have no scale in any other market.” But as the franchise develops over time, and shipping and assembling costs for American products come into play, the company does whatever is best for the franchise.

“So if the best thing is to continue to bring products in from the U.S., we do that. But if it's a wiser idea to make it locally in the U.K. or India, let's say — we do that,” he said.

Ultimately, DeLuca said, it’s about quality, efficiency, and the bottom line, no matter where they come from.

“The companies that do a better job stay in business, they grow. The ones that don't do as well, you know, they fade away.” He added that in his industry a "franchise company can't really grow unless the franchisees make a profit. The more profitable the business is, the bigger return on investment, the more growth a franchise company will experience.”

More than five decades since launching the successful franchise, DeLuca and his former mentor Buck are now co-partners of Franchise Brands, an organization that assists other entrepreneurs in replicating their success in the franchise industry.

“I just feel so proud when our people do a great job and we're able to grow the business,” DeLuca said. “That's probably the measurement of success: Are we growing? Are we earning more customers? Are more customers happy to become Subway devotees? And as we're growing the customer base, I know that we're succeeding.”

Watch "Made In America," a special series by Nicole Lapin, on "Worldwide Exchange," 4 a.m.-6 a.m. ET on CNBC.

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