Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
A Quiznos franchisee discusses why he is dumping his 3-year old franchise in favor of opening his own restaurant at the same location:
“Over the years, the cost of operating has gone up to the point where it’s not profitable, and it actually has never been profitable,” he said. “The business model is just too expensive and advertising fees have gone up recently.”
The risk that the franchisor will increases the mandated advertising fee or cost of inventory is risk born solely by the franchisee.
Tully said advertising rates and product costs hindered the Quiznos operation. He said he was only allowed to buy products pre-approved by Quiznos, which led to higher prices.
“I understand Quiznos has a system and brand, and they want to promote the brand in every way, but the model is such that a lot of us are having trouble,” he said.
What’s the attraction to running his own restaurant?
“The nice part about running it myself is I’ll have control of it, and if something doesn’t work, I can throw it out right away. It also gives a closer relationship to the customer,” Tully said. ”
“The nice part about running it myself is I’ll have control of it, and if something doesn’t work, I can throw it out right away. It also gives a closer relationship to the customer,” Tully said. “We hope to create the atmosphere of a neighborhood place.”
Needless to say, I would’t buy it!
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In the first year after I took my lawn care franchise independent, I experienced a 15 to 20% drop in cost of goods [versus an international franchise portfolio, +1,600 franchisees]. I saved a ton of dough on ineffective marketing hoopla.
My sales rose by 10% with a 6-year annual residential renewal rate of minimum 82%. Go figure the value of hanging with Brand bullies.
After getting getting together with 3 other independents within 1/2 hour drive, I was able to reduce CGS by another 10%. Industry association membership pays, it doesn’t cost.
Eighty per cent of product CGS was for fertilizer and pesticides [hardly a branding issue].
While this was NOT what I had intended when I signed up, it made it profitable enough until the lawyers were paid. Still went bankrupt but that was entirely due to losing $140,000 within the first 18 months as a franchisee.
Faced with the 3 Ugly Alternatives (sell to the next guy, abandonment or independence) I chose the lesser of the evils; after I adjusted for personal ethical standards.
This system remains today. Exactly where it was in 1997 as far as numbers of units but with new, presumably less predatorily professional management.
The fear of bankruptcy is an effective mechanism for keeping hamsters on the wheel. The call it federal legal protection for a very good reason.
The best money I ever spent after 4 independent and 2 franchises was for my Bankruptcy Trustee.
They say that a CPA’s job is to ride down after the battle and kill the survivors. Let’s leave the armchair quarterbacking to games such as football.
Otherwise, let’s do the best with the hand we’ve been dealt and maybe remove a rock or two on the path for those that come after us to avoid stumbling over.
Oh, I almost forgot. By dropping out, I avoid any mid-season data meltdown that a Chicago peer experienced. Seems there was malicious code in the franchisor’s required software.
Don’t want to renew the software, on our terms? No problem; the software automatically deletes all the customer files. No warning.
D’Oh. In his case, 4,800 customer files fried.
Elizabeth
Mar 14, 2008 at 6:44 pm
A costly lesson:
Submitted by Guest on Fri, 2008/03/14 – 17:52.
Elizabeth
Mar 14, 2008 at 5:38 pm
A costly lesson
on Mar 14th, 2008 at 2:08 pm
Prospective Quiznos buyers please read this carefully. I have always prided myself in that fact that I try to make good decisions. Yet, the decision of my husband and myself to purchase a Quizno’s restaurant is one decision that has been anything but positive. Please take your time reading my story because it may help you to avoid making a terrible mistake. I am hoping that by sharing my experience the information may save your family, finances, sanity and future.
We transfered our Quiznos over 23 months ago. Our weekly labor ranges between 22% to 25% – the goal is 20%. Average food costs range between 30% to 33% the goal is 30%. Not only have we not made money, but we have lost over $45,000 in the last twelve months in addition to $34,000 during the first 11 months. Additionally, another Quiznos near my location is also showing similar dollar losses based upon information that the owner has shared. I realize that there are poor stores in the system. It is unrealistic to assume that every owner runs a great operation. However, our store has one of the highest customer approval ratings in the area. In addition, our location regularly appears on the top half of page two of the weekly blast fax. The blast fax is an intra-company sales reporting tool utilized by owners in order to compare their store statistics to a large grouping within a certain geographic region. It is of great concern that our business is making more than 2/3 of our geographic region and yet we are not even breaking even. One wonders how the stores that are producing less volume than ours manage to survive? The fact is that most do not for long. The owners eventually become disappointed with this company and are either forced to sell or walk away because they can not find a buyer. Despite working as an unpaid “volunteer” at our location for the past 22 months I have never sacrificed quality or service. We have never skimped on labor in order to squeeze more money out of the bottom line. Our store is meticulously clean and the employees are well trained. Yet, despite all of our efforts, we have lost a lot of money. Yes, we conduct local marketing weekly in addition to other strategies that the company suggests to increase revenue – but to no avail. There are a fortunate few that are doing well, however, this is a rare exception. I too have a friend that is profitable. Her location is in a busy commercial district with plenty of daytime professional traffic in addition to evening residents as well. She is one of the fortunate stores that appear regularly on the top of the first page of the blast fax. Yet, despite the fact that her store is one of the more frequented locations, she has remarked that because her business is one of the highest grossing stores in the region, she is frankly surprised that she is not making a greater profit. She, like I, works her business diligently both in front and behind the scenes. She is also one of the fortunate few.
In our case, the fact that the company put not one – but three – new Quiznos extremely close to our existing store has been but one of several factors for our lack of profit. Even our customers remark that they are surprised that the company places stores in such close proximity. Our restaurant, once grossed between $9,000 to $11,000 average per week before we bought it. The addition of the other stores dramatically cut into our customer base. Currently, a $9,000 week is the rare exception. After paying over $320,000 for this store, we expected to at least net $70,000 per year. We would settle for breaking even at this point. We still have customers that make the extra trip to patronize our store because we offer the best service and most pleasant environment of the other Quiznos in the immediate vicinity. Yet, that is not enough to help our bottom line.
We realized that we were not going to make money two months into our venture. We put our store on the market right away. Today, almost two years later, we have been forced due to financial constraints to give it away. Another owner has offered us $90,000 and we are finally getting out. He knows that he will make a profit because at $90,000 it is a positive net sum gain for him. A store can not even be constructed for $90,000. He has said that based upon our P&L and the price that he is paying, he will probably make about $30,000 – perhaps $35,000 per year at our location. The key to profitability according to our buyer, is owning several locations that can be purchased for very little and planning to make about $30 – $50K per location based upon the traffic flow of each individual store. The key is to pay as low as possible for a store in order to squeeze out a small profit from each location.
One might ask why do so many franchisees fail to make a profit and so few do?
The answers are:
1) The profitable stores are located in areas with significant traffic flow to offset the high costs associated with operating one of these stores.
2) Non profitable stores (poor operations excluded) have been canabalized by our very own franchisor. It is apparent that none of the company’s decision makers understand the franchisor’s own required reading of “Behind the Golden Arches, The Ray Croc Story”. If they understood the symbiotic relationship that exists between corporate and its franchisees, then they would realize that the franchisee is the life blood of the company and it is not in anyone’s best interest to undermine the very people that make the system operate.
3) A store’s location is not sufficient to produce the high traffic necessary to cover its numerous expenses.
4) In regard to expenses, the franchisor has a monopoly upon most services, food and equipment necessary for us to operate. There are simply too many hands in the till for profit to filter down to the bottom line – the franchisee. There is something very wrong when a person can go to their local Restaurant Depot and find the same exact product made by the same manufacturer, same weight and ingredients but pay half the price of the same item sold by our required distributor. Many of my fellow owners have found this to be true regarding food and equipment time and time again. Other franchises that have a “franchisee consortium” responsible for monitoring and regulating costs of the goods and services utilized by franchisees have not only a higher satisfaction rate but are profitable as well. – (Source QSR magazine.) Of course there are always problems even in the best of systems, yet the bottom line is profitability. No one buys a business because they “like” the product. Investors purchase businesses in order to make money. In addition, there is no transparency within the company despite the fact that our franchisee’s pay extremely high royalties. Where there are royalties there should be total transparency. These restaurants are a long shot in the very best case. Yes, there are those who will sing the praises of the franchisor, but the extreme and vast majority will say that it is simply not worth the time or investment.
5) The existing business model is fatally flawed and operates for the sole purpose of making money for corporate as well as their investors.
6) Many of us have paid too much for our stores.
7) The costs keep creeping back up from the reductions announced by last year’s new administration while the suggested retail prices have either fallen or remained the same.
Our broker has decided not to sell any future Quiznos until the company changes its entire business model. Ours will be the last that he will handle until the tide truly turns.
It has been predicted by the new administration that the future for Quiznos is “bright” and that eventually there will be more “positive” stories rather than negative ones such as ours. It is a known fact that there are at least 450 Quiznos for sale on a well known web based real estate site versus only 24 Subways. Why do you think that is the case? Stories just like ours have played out and are occurring every day. Of course, Subway has its share of difficulties as well, but one thing is undeniable, a Subway does not stay on the market very long before it sells, whereas it is almost impossible to sell a Quiznos – let alone give them away as lease assumption only. Someone must be making something worthwhile at our competitor’s stores otherwise they would not be in such high demand. It is widely viewed that the “happy” owners of the future will be the ones that are either the second or third generation franchisees. When those of us who have over paid and are not able to financially continue on at our Quizno’s “volunteer” jobs have either had enough and sold for pennies on the dollar or “gone dark” the next generation – the future “happy” ones – will take over what we have built with our blood, sweat, tears and cold hard cash.
So yes, the company is accurate on one point: There will eventually be many more positive stories about which the company will boast. Those stories will come from the new owners who have purchased the deal of a lifetime and will ultimately profit from our failed investments. At the price that most of us are either walking away from or giving them away for in order to extricate ourselves from this financial nightmare called Quiznos, the next owners will actually be able to make a living from one of these stores. It is called “churning” and I firmly believe that this is an integral strategy to the corporation’s plan to make their restaurants a worthwhile investment in the future. It is simply a matter of time before we all cry “uncle” and corporate knows it.
And yes, then the next generation will truly be “happy”. Please think carefully before you invest in ANY business. Perform due diligence, talk to other owners, read comments posted on the internet, read trade magazines – anything that will help you to make an informed and objective decision. I only wish that we had known about this web site as well as the many others that I have since found in our familie’s nightmare odessy. Perhaps things would be different and life would actually be “normal”. This was a very costly lesson. Our lives, my children’s sense of security and future has been devastated by this experience. We are struggling just to survive at this point. I hope that you can learn from our mistake.
I want to agree with Elizabeth. This has been the worst experience of my business life. What should, based on quality of product, be a great business has been ruined by greedy pigs who are only concerned with what they can take out of the business. Now they have reduced price again, brought back BOGO coupons and the workplace program (One of the worst pieces of garbage marketing I have ever seen) and they tell us the answer to the cost issue is less product on the sub. Guess what Quiznos, even with less product the price we charge and the .75 per coupon doesn’t make up for the over priced product they make us buy. Do us all a favor and buy us out and see if corporate can make these things go.
The tales of woe and warnings continue in this brand and for good reason. Franchisees are not stupid or lazy, but when the business model is stacked against the franchisee as shown by Elizabeth, there is little to reslove immediaitely except to start cutting corners, buying on opportunity to save food costs, debranding. renegotiating with landlords and other suppliers.
Amazing that for all these years and months, I have not read one defensive comment from the Q Area managers on how to rectify the system fro the Zees.
Regrettably you will see more stores go dark as owners give up.
The fast food market may be shrinking as more decide to brown bag it and as there are fewer employees in those buildings as more employees are laid off. Futhermore, the $1 menu looks good again or most budgets despite its nutritional nightmare.
Frequency of visits will also decrease-how many are willing to buy $8.00 subs 3 times a week? It is about erosion and the competition. They are having an effect. There is a Subway on every corner, and they can get away with the $5 value menu because of 27%-29% food costs vs Q costs of 30%-34% (both including paper costs).
I believe the Toasted Subs Franchisee Association will have some ideas if you want to stay with the system.
mrfranchiseman.com
Quizno’s
As for the marketability of Q stores, there is trouble ahead. Never build a new Q for $200k plus.
There are many available for <100k and the word is spreading that there is no resale value and they can be acquired cheap.
Buyer networks, especially in the immigrant communities, have all spread the information
I am aware of one broker who had about 18 stores for sale in 2008. 8 closed their stores, 6 others gave up trying to sell only to give up/debrand the stores later and the remaining two are still for sale in the “hoping” mode. What a disaster for sellers, but what a great opportunity for buyers to “try making the numbers work” for themselves. At $75,000 it may work for some.
mrfranchiseman.com