QUIZNOS: Biggest Collapse in Restaurant History?

Just three years ago, [Quiznos] topped $2 billion in sales. Now, industry observers say the Quiznos sandwich chain, led by Denver investors Rick and Richard Schaden — is $875 million in debt, with sales down 14 percent and 600 stores closed last year. “It’s one of the biggest restaurant collapses in American history,” says restaurant analyst – John Gordon.

(UnhappyFranchisee.com)  The Denver Post reports that the Quiznos chain faces tough finance issues, and may earn the distinction of becoming one of the biggest financial collapses in restaurant chain history.

UnhappyFranchisee.com has been reporting on the rancor between Quiznos corporate and its Quiznos franchise owners for years now.  The Denver Post article cites a report that lists Quiznos adversarial relationship with its franchisees as a major factor in its current dire financial situation:

The problems stem from a highly leveraged investment in 2006, competition from other sandwich purveyors and a protracted battle with the company’s franchisees over operating costs and profitability.

The result is an estimated 14 percent drop in sales last year and the loss of 600 restaurants — the steepest decline of any major fast-food chain, according to restaurant consulting firm Technomic Inc.

Sales in 2010 were about $1.55 billion, down from the 2008 peak of $2.02 billion, Technomic estimated. During the same period, stores declined from about 5,000 to 3,500 and likely are fewer than 3,000 this year.

Quiznos took a big hit when rival Subway introduced toasted subs in 2005, effectively stripping Quiznos of its key differentiator.

Subway delivered another blow with its highly successful $5 foot-long campaign in 2008.  Quiznos’ attempted counter-punch, the $4 “torpedo,” failed to bring back its lost customers.

Instead of working in a unified fashion to beat the competition, Quiznos has also been at war with its franchisees over price gouging and poor marketing strategies, especially in terms of discount promotions:

As Quiznos has fought to maintain market share, it has suffered lingering animosity from some franchisees who say profit margins are lean or nonexistent — due in part to a requirement that franchisees buy food at allegedly above-market prices from a Quiznos-mandated supplier network.

In 2009 Quiznos settled a franchisee class-action lawsuit by agreeing to pay up to $95 million.

The corporate debt problems are troubling to remaining franchise operators, said Justin Klein, a New Jersey attorney who represented franchisees in the lawsuit.

If Quiznos were to default on its debt and file for bankruptcy reorganization, “it would have a negative impact on the investment these franchisees have made in the company. It pretty much puts that investment into the toilet,” Klein said.

Quiznos seems destined to become a franchise restaurant chain cautionary tale, with the moral being that franchisor indifference to franchisee profitability and a callous disregard for the welfare of those who financed your growth will result in a catastrophic failure for all involved.

Quiznos had a great product, strong, enthusiastic franchisees and a golden opportunity to be a leader in the fast casual segment.  What a shame it had to come to this.

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