Toasted Quiznos Sub Chain Torpedoed by Bankruptcy: Food Space Tightens Belt

 Quiznos

The Quiznos Sub chain, once the third largest sandwich shop outfit,was torpedoed by bankruptcy today, less than a week after the Sbarro’s Pizza chain went into voluntary bankruptcy, as the fast food space tightens its belt again. Like Sbarro’s, Quiznos is approaching the court with a “pre-packaged” reorganization plan and is expected to emerge from the “accelerated basis” process in three months.

Companies in the food space look for a unique niche for their concept restaurants. Quiznos’ primary claim to fame in the crowded fast food space has been their toasted submarine or hero sandwich products that were similar to the traditional pizzeria hero sandwiches that founder Jimmy Lambatos grew up with in New York City. Until Quiznos did it, other sub chains did not toast their sandwiches to bring out the flavors in the food. Now, all do, eliminating Quizno’s sole distinction in the food space.

Founded in 1981, the Denver-based chain achieved wide popularity with their “New York style” toasted submarine sandwiches, growing to nearly 5,000 franchised restaurants with locations in all 50 states and 34 foreign countries. Beginning in 2007, adverse economic conditions and increased competition from other fast food chains forced more than 2,000 franchises out of business, leaving the chain with around 3,000 outlets as the company went through a succession of different owners and management models.

In 2012, the company went through a private, out of court restructuring in which Avenue Capital Group, LLC, took over majority ownership and control of the company, which then had approximately 2,1000 franchise operations still in business. In the deal, the company shed $300 million of its $900 million debt load, and injected $150 million of additional operating capital into the company.

In its Chapter 11 filing, Quiznos listed debts totalling $500 million. Under the pre-packaged plan, the company is seeking relief from $400 million of that and court approval for a $15 million operating fund loan from its senior lenders to float the company through the bankruptcy process. The individual franchises are not affected by the bankruptcy and will remain open for business during the restructuring process.

What is wrong with the once highly ranked chain? Why are they not making a go of it when competitors like Subway are eating their lunch?

The Denver-based chain lost the exclusive on the toasted sandwich front when Subway started toasting its sub sandwiches. Quiznos then retreated to the “better quality” claim, a motto that has since been usurped by the Papa John’s pizza chain and by the Chipotle’s Mexican Grill sandwich shops. Subway countered with its “eat fresh” health claims, comparing the fat content of their offerings to the fat content in fast food burger chain products. That health claim went unchallenged by the smaller chain which, now, has no motto to fall back on.

Many Quiznos stores are located in malls and, with mall traffic has been declining steadily since 2009 due to both the recession and increased use of internet shopping…but the most important issue is one of scope and scale.

Subway, founded in 1965, has almost 41,000 outlets around the world, making it the largest restaurant chain in the world. (The company is privately held and does not release revenue data.) McDonald’s has 34,000 units with annual revenues of $27.5 billion. Burger King has 13,000 outlets with annual revenues of $1.97 billion. Quiznos has 2,100 units with annual revenues of $130 million. Up and coming Chipotle has 1539 restaurants (all of which are company stores; the company has no franchise program) with revenues of $2.7 billion.

The closest comparison among these chain operations is between the sub chain and Chipotle, both of which are headquartered in Denver. Comparing revenue data indicates that Chipotle, with 25 percent fewer locations, generate five times the revenues than the larger of the two chains generates with its stores. With an average per store revenue of $61,900 for a Quiznos location as opposed to $1.75 million for a Chipotle store, it is not surprising that franchisees have been walking away from their stores. In some cases $61,900 would not even pay the rent on the store. For comparative purposes, McDonald’s generates an average of $795,000 per store, while Burger King rakes in just $151,500 per store.

What these numbers suggest is that there might be something to McDonald’s special sauce, if it brings in more than five times the revenue than a Burger King store for what is basically the same product. Advertising budgets obviously account for some of this discrepancy, but that does not explain Chipotle’s performance, with a per store performance that is 2.2 times better than average McDonald’s store, because Chipotle does almost no advertising at all.

In Chipotle’s case, it boils down to word of mouth. The stores are always full at lunch and dinner time, but the food is healthy, largely organically grown, fresh, hot and plentiful, service is fast and the stores are clean as a whistle….all of which helps to build a good word-of-mouth experience. Once someone goes to a Chipotle, they are more likely to go back. If anything, the most common complaint about Chipotle is that they give customers too much food.

In contrast, recent site visits to several Quiznos locations revealed stores that were understaffed, ill-lit and poorly kept. The food is still a cut above Subway’s offerings, but the menu is dated, and the accessories, drinks and side dishes are weak.

What started out as a report on Quiznos seems to have become an advertisement for Chipotle, and that tell the story in a nutshell, because it is in the comparative analysis that the sub chain’s problems become more evident. Chipotle is an exciting company and that makes it a fun place to eat. The employees appear to like working there, which is interesting in and of itself. If people like working in a restaurant, that communicates to the customers and makes eating there a more pleasant experience.

At Quiznos, on the other hand, more often than not, the employees seem as toasted as the sandwiches as the sub shop edges through bankruptcy, torpedoed by market changes and sharper competitors as the food space tightens its belt by another notch.

By Alan M. Milner

Sources:
Bloomberg /Business Week
CNN Money
CNBC

3 Responses to "Toasted Quiznos Sub Chain Torpedoed by Bankruptcy: Food Space Tightens Belt"

  1. Alan Milner   March 27, 2014 at 7:12 am

    Compare Sbarro’s situation to Quiznos. The food space is becoming an increasingly difficult place to make a profit simply because food costs are going up across the board. One of the reasons for this is the rising cost of grains such as corn, which is in almost everything we eat….and corn itself is under attack. Recent increases in the cost of gasoline at the bump are not due to oil prices, which are going down, but are instead due to ethanol costs, which are going up. Automotive fuels are 10% ethanol. More than 90% of the ethanol used in the US comes from corn.

    For more about food space issues:
    http://guardianlv.com/2014/03/sbarro-pizza-declares-bankruptcy-again/

    For more about corn:
    http://guardianlv.com/2014/03/rootworms-are-making-a-comeback-against-genetically-modified-corn/

    Reply
  2. Alan Milner   March 15, 2014 at 9:12 am

    Reporters are commenting elsewhere that Quiznos’ goose was cooked, so to speak, by a $95 million settlement with franchisees who charged that the high cost of Quiznos’ ingredients, which the franchisees were required to buy from the company, were making it impossible to turn a profit on the stores. That story, which reports the settlement taking place in 2009 ignores the fact that the cost of the settlement was already baked into the company’s debt and was offset by the infusion of $150 million in fresh capital in 2012. What is true is that morale is very low among the remaining franchisees, but that’s probably because the average Quiznos store is bringing in just $61,000 per unit, and that’s not nearly enough to support a franchisee’s operations.

    Blind taste test comparisons have usually given the edge to Quiznos sandwiches over Subway products, a fact that is directly related to the higher cost of the raw materials that Quiznos insisted upon. So, where is the difference that makes the difference.

    Advertising. Quiznos barely does any advertising at all. Subway doesn’t stop advertising. Their ads are all over broadcast television. They have co-located stores in Wal-mart locations. Their discounted loss leaders bring in more customers in a day than some Quiznos stores see in a week….but it all comes down to the advertising.

    Subway has successfully rebranded their sandwiches as a healthy alternative to fast food hamburgers, and they have also established their brand as a great-tasting diet food. …and those two campaigns, along with a NASCAR team and other PR gambits, plus the sheer number of locations generate the sales to keep Subways advertising campaigns humming along. Quiznos doesn’t have the money to compete with Subway’s advertising, and they don’t have the word of mouth to compete with Chipotle’s pr campaigns.

    We always liked Quiznos over Subway but, as one Quiznos location after another shut down around us, we found that the remaining locations were not pleasant places for a quick meal and eventually stopped going to them. Quiznos is better than Subway according to our taste buds, but it’s not worth an additional 30 minute round trip to get there and back.

    The nearest Quiznos to us was right across the street from a Subway location. It wasn’t even open during the dinner hours. Today, it’s a Metro PCS location. The next nearest location was a Quiznos, then it was several other things. Two month’s ago, the location re-opened….as a Subway store.

    Reply
  3. Seraphita   March 15, 2014 at 4:06 am

    Quiznos subs are the most delicious subs I’ve ever eaten. Subway does not even come close. It’s a shame!

    Reply

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