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A brief history of Quiznos’ collapse

The once high-growth chain is an example of what happens when restaurant systems don’t focus on operator health, says RB’s The Bottom Line.
Jonathan Maze

The Bottom Line

On Monday, Quiznos was sold to an investment firm out of San Diego. This has given me time to tell the story of one of the biggest restaurant chain collapses in industry history.

Between 2007 and 2017, Quiznos shrunk from 4,700 U.S. locations to fewer than 400. We can find no other example of a chain that had grown to that size that has shrunk that much in such a short period of time.

How does a restaurant chain lose 90% of its units in a decade? With a perfect storm of bad decisions and bad luck. Quiznos had a bad business model, a tough competitor, a devastating recession and a leveraged buyout.


Fragile foundation

It’s easy to forget just how successful Quiznos was back in its heyday. The chain was a rapidly growing threat to Subway in the early 2000s, with innovative national ads and an early focus on internet-focused marketing (anyone remember Spongemonkeys?). Its toasted subs were a contrast to the cold sandwiches that its larger rival served.

To put the chain’s 4,700-unit size in 2007 into perspective, Arby’s and Firehouse Subs today operate a combined 4,300 locations. (Which just goes to show you that unit count doesn’t matter when it comes to chain size.)

But those 4,700 locations were built on a weak foundation of low unit volumes and low profits.

In 2007, I toured Quiznos headquarters with Greg Brenneman, the CEO at the time, while I was working with another publication, Franchise Times. The tour was designed to tout the chain’s improvement.

During that tour, we were in an elevator in which two employees were talking about a meeting the night before. “Boy were those franchisees mad,” one said.

Why were they mad? Because they weren’t making money. Quiznos at the time relied on food and paper sold to its franchisees to make much of its profits. The company owned a subsidiary called American Food Distributors that bought food from vendors and distributed the food to operators.

That subsidiary took in $500 million in revenue in 2006.

Those 4,700 locations averaged just $400,000 in revenue a year. The high food costs made it tough for them to make a profit.

In 2007, operators were suing the chain and forming rogue franchisee associations. One famously took his own life.


The buyout

In 2006, a private-equity firm, CCMP Capital Advisors, bought a minority stake in Quiznos from Consumer Capital Partners, an investment firm led by Rick Schaden. The leveraged buyout left the company with hundreds of millions in debt. When Quiznos filed for bankruptcy in 2014, the company had $875 million in loan obligations.

Leveraged buyouts assume that a company can continue to grow, because money from the company is used to pay the previous owners, in this case Consumer Capital Partners. Such buyouts are relatively common.

They’re also massively risky. And Quiznos would prove to be the worst-case scenario.

Subway

The Milford, Conn.-based sandwich giant might be struggling, but it has long been a dominant force in the sandwich business, perhaps never more so than in 2006. The company did two things that would hammer Quiznos.

First, it added small toasters in all of its locations in 2005, eroding what Quiznos felt was a competitive advantage. The smaller chain failed to properly react to the move.

And then, Subway began selling footlong subs for $5.

Quiznos made the mistake of trying to compete by discounting.

Maybe the most famous came in 2009, when the company sent out a coupon for a free sandwich, and franchisees, angry at the discounts and low profits, revolted and refused to accept the coupons. Customers got angry, and Quiznos' problems got worse.

The recession

The free sub promo and Subway’s $5 footlong offer came just as the recession hit. The recession was bad on the restaurant industry, as consumers cut back on dining out. In 2009, there was an absolute decline in restaurant sales according to federal data—a remarkably rare event.

The recession hit a lot of companies. Bankruptcies were common. Quiznos was filled with small franchisees who made little in the way of profit. And they began closing stores in droves.

Seven hundred locations closed in 2009. Another 800 closed in 2010. Quiznos equipment could be had on Craigslist for pennies on the dollar.

Quiznos could have helped those operators out, but it had that debt it needed to pay off. The funding from the sales of that food was too important. So the chain kept closing units.

Today

Quiznos has kept closing U.S. units year after year. Here’s the percentage of unit count closures the past five years, according to Technomic: 25.6%, 30.5%, 33.3%, 26.4% and 23.8%.

U.S. system sales, which had reached nearly $1.9 billion in 2007, were down to $171 million in 2017, according to Technomic.

The company does have more than 300 international locations. But those are declining, too: The number of international locations declined 9% last year, according to Technomic.

The good news is that the financial strategies, notably the food charges, that helped lead to so many closures are done. And the company’s unit volumes are increasing: Average unit volumes rose 3.9% last year, according to Technomic.

Lessons

On their own, the different factors that contributed to Quiznos’ downfall are common. Leveraged buyouts are common. Systems often charge operators for things like food or rent. Many franchisees have small franchisees with small unit volumes. Recessions happen every few years and the business is always competitive.

What made Quiznos unique is that these all happened to the same company at the same time. It’s unlikely we’ll see another situation like it.

Still, there are lessons to be learned here for the restaurant business. And the biggest one is this: Make sure your franchisees can make money.

And then find ways to help them keep making money. Because if your operators are happy, then your business will perform better. And you won’t find yourself the subject of a brand collapse retrospective in 10 years.

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