Subway is facing 2 problems that are wrecking its business

Subway on Facebook

Subway's business is in decline.

The sandwich chain's revenue fell 4.3% to $1.11 billion last year, following a 2.6% drop the previous year, according to a franchise disclosure document cited by Bloomberg.

It also recently lost its status as the second most popular fast-food chain in the US, based on systemwide sales. Starbucks overtook Subway to snag the second-place spot, behind McDonald's.

To make matters worse, the company last year lost its most lucrative spokesman, Jared Fogle, in the worst possible way: he was convicted and sentenced to more than 15 years in prison for having sex with minors and distributing child pornography.

Subway's chief marketing officer once credited Fogle for as much as half of the chain's growth since he became famous for losing more than 200 pounds while eating the restaurant's sandwiches.

Subway is trying to revive sales by making some menu changes — such as switching to antibiotic-free meats and removing artificial colors, flavors, and preservatives from its food in North America.

But the changes might be too little, too late, according to Neil Saunders, CEO of retail consulting firm Conlumino.

He says the company is facing two main problems that will plague its business going forward.

1. Subway grew too quickly.

"Especially in the US, it has expanded rapidly and therefore the opportunities to grow though new store openings are fairly limited," Saunders said. "This means that one of the key engines that once drove sales is only operating with a fraction of the power it once did."

Subway opened 911 new locations in the US last year, while closing 877, according to its franchise disclosure document.

Subway on FacebookSubway says its outlook for 2016 is positive, however.

"The outlook for 2016 is more optimistic based on the terrific feedback we received from our guests about our culinary improvements and exciting new menu offerings," the company said in a statement to Business Insider.

2. Consumers are tired of Subway's menu. Their tastes have changed, and Subway has been too slow to adapt.

"While Subway remains a top choice for many consumers who love its range and competitive pricing, other consumers have become bored with the offering," Saunders said. "This is especially true of younger millennials who prefer a more diverse range of options, including salads and healthier choices."

Subway rose to become one of the biggest restaurant chains in the world with more than 43,000 outlets by advertising a healthier, fresh alternative to traditional fast food like McDonald's or Burger King.

The chain was a pioneer in made-to-order sandwiches, prepared right in front of customers by employees taking orders in an assembly-line fashion.

But then other rivals, such as Chipotle and Panera, started offering even fresher options — like antibiotic-free meats and additive-free guacamole prepared on site.

Subway on FacebookSubway didn't evolve quickly enough to meet diners' changing ideas about what is considered fresh and healthy. As a result, public perception regarding the quality of its food has eroded.

The company's public image was hit particularly hard two years ago whenFoodBabe.com blogger Vani Hari launched an online campaign against the chain for using the additive azodicarbonamide in its bread.

The campaign was successful, and Subway was forced to change the recipe for its bread as a result.

Now Subway is committing to remove all artificial flavors, colors, and preservatives from its food over the next two years, as well as promising to switch to antibiotic-free meats.

Meanwhile the company has also been losing market share to cheaper rivals like McDonald's, Saunders said.

"Pressure is growing from chains like McDonalds," Saunders said. "While these don’t necessarily appeal to those wanting a healthier option, the introduction of offers like the all-day breakfast menu has definitely stimulated interest and has taken some share away from Subway."

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