Hopefully the promotion of Michael Roeper to COO of Quiznos will help the franchisee’s profitability. Roeper owned several Quiznos units in Chicago from 2000-2006. SOURCE

Quiznos Quiznos renegotiated it’s debt load and took in an infusion of equity capital from JP Morgan and other existing shareholders.   You can read both good and bad into this.  The good being the investors saw enough upside to invest more, the bad being Quiznos desperately needed this to happen so their financial soundness probably isn’t strong. Chipotle Chipotle still showing a growing customer base with 1st quarter same-store sales up 4.3%.  They plan to open a new store every three days in 2010. Fuddruckers Fuddruckers filed for bankruptcy a few weeks ago.   It received approval to sell 62 Fuddruckers and a dozen Koo Koo Roo (similar to Boston Market) for $65 million.  It also plans to close 20 restaurants with “lease issues or low-foot traffic” stores.  Sales were down 10% in 2009. I woudn’t consider Fuddruckers part of the “better burger” craze of Five Guys and Counter, the brand is simply too old and retail square footage is way too large.  Red Robin’s are large in size too, but it invested plenty of capital in marketing and bradning to keep its brand appealing to the next generation of customers…much more so than Fuddruckers. Pizza Fusion Plans to offset its entire “carbon footprint” by paying a percentage of sales to a company to construct renewable energy facilities.

Current CEO Rick Shaden in a Fox Business interview talks about his competition with Subway and the new torpedo sandwich.  A few notes: Blames slowdown on “economy and increased costs” Says customers want cheaper sandwiches Touts the $4 Torpedo sandwich, claims it is the “first portable sub”, “modern sandwich” Head to head to Subway, more innovative and edgy Frames Quiznos as a “challenger brand” to Subway If I’m a franchisee, and my problem is low profit margins, I do NOT want to LOWER my prices…it just makes the problems worse.  However, from a franchisor’s perspective, earnings are based on TOTAL system sales.  So if forcing lower-priced sandwiches increases total system-wide sales but still lowers the franchisee’s profitability, some CEO’s may think that is necessary tradeoff.   Their short-term financial rewards often pave this path.  The interest between the franchise and franchisor are unfortunately are misaligned.If you haven’t seen the torpedo sandwich Shaden speaks of, here is a commercial for it:The Million Sub promotion left many customers upset when many stores refused to honor the “free sub” coupons, including a member of my family. The franchisees apparently are not reimbursed by corporate for the coupon – OUCH!Quiznos is in a tough spot. Their toasted sub concept is no longer unique, and the food and operational costs are still inflated due to franchisor imposed required purchasing.

Quiznos is helping franchisees renegotiate leases at no cost to the franchisee. Good move. Since the teams have been in operation, Quiznos has negotiated more than 40 leases thus far, with an average reduction of 15-20 percent in lease payments Here is one franchisee’s experience in the press release Thomas Mihailovich, a franchise owner in Rochester Hills, MI, participated in the lease renegotiation program in late February. Quiznos and a third-party team worked with Mihailovich and his lessor to arrange a reduction in rent of more than 20 percent, a cost savings of $50,000 over the term of the lease. “I began the process and within one week I was saving nearly $500 per month on my rent,” said Mihailovich. How do you renegotiate a lease? If you are currently leasing a space for your franchise and want to renegotiate the lease, you do have a few leverage points. First, the landlord doesn’t want to lose a tenant because it will usually mean unrecoverable expenses and vacant space for a period of time. Second, along the same lines, a long-term stable lease makes landlords smile, so offering to extend or renew a lease for a longer number of years is very attractive, even at a reduce price per square foot. Here is a sample approach. Find another space nearby that fits your needs equally well and is less expensive. Then approach your landlord and ask him to match the rent or you intend to move. See what the response is. From that point, ask permission to sublet. Depending on how long you have on your lease, ask also offer to sign a longer lease in exchange for reduced lease payments. Getting the assistance of a real estate broker or better yet an attorney is usually well worth the money …

Quiznos seems to be in perpetual defeat.  Here is another money-losing franchisee from Quiznos:   “We can’t make money,” said Quiznos franchisee Marty Tate, who said his Erie, Pa., store leads the region in sales. Mr. Tate, who is not part of the lawsuit, said 40% of his sales go directly into advertising, royalties and food for the next week. He added that three of seven locations in his county have closed in the past year. Mr. Tate said that when his contract expires next spring, he will open his own independent store. Advertising funds are always somewhat of a mystery. Typically, the franchisee will pay about 5-8% into an advertising pool that is supposed to be leveraged across all applicable markets. Unfortunately, there is often not as much bang for the buck as the franchisor would like you to believe, particularly in the creative production and media buys. Quiznos example: Then there’s the issue of advertising. Quiznos’ agency is Cliff Freeman & Partners. According to TNS Media Intelligence, the chain spent $83 million in measured media in 2007 and $55 million in the first half of 2008. Despite the increase, many franchisees said that they rarely see their own ads, and most say the work isn’t memorable. (By comparison, Subway spent $361 million in during 2007, according to TNS. “The last good Quiznos commercial was Baby Bob, and that was 2004,” said Mr. Tate, who said he’s complained to executives about the creative. “I would challenge anyone to remember the last Quiznos ad they saw.”

Source: Daily Courier (Pittsburgh)A law suit was filed on July 3, 2008 by a few dozen franchisees in Western Pennsylvania.   The allegations are: The lawsuit alleges that Quiznos engages in a “pattern of racketeering” and generates “grossly inflated profits” at the expense of franchises that usually fail. It also accuses the company of saturating geographic areas with more franchises that can be supported. Quiznos is accused of allowing customers to redeem coupons for free or discounted sandwiches, a practice that allegedly benefits the company but not the franchise holders, who are not compensated for the loss of revenue, according to the lawsuit. Quiznos, according to the filing, requires its franchise owners to buy products they do not need and work only with suppliers connected to Quiznos who charge high prices.   The financial strain on the franchisees causes the business to fail, the suit maintains. When the franchise fails, Quiznos threatens the owners with lawsuits to enforce the agreement, which requires them to pay royalties for 15 years even if the business has been forced to close, according to the lawsuit.     Quiznos Response: Richard Emmett, general counsel for Quiznos, said the allegations in the lawsuit are similar to those in an action filed two years ago in Illinois that was dismissed recently by a federal judge.”This is a copycat of that lawsuit,” Emmett said. “We’re confident the claims have no merit and this lawsuit, like the other one, will be dismissed.”   He added that the allegations contained in the action arose several years ago.” They have nothing to do with the way we’re operating now. It’s historical rather than present day,” Emmett added.  

I would not let one semi-positive article influence my opinion of Quiznos, but here it is: A year after some franchise owners sued Quiznos over business practices, the restaurant chain’s chief executive said Monday he expects franchisee profits to increase 60 percent overall in the wake of improvements to the system. 60% increase sounds fantastic, but it is relative from the starting profit level. Going from a $20,000 profit to a $32,000 helps but doesn’t save the day. Danny Kessels, a Quiznos store owner in Boulder who said he was not invited to the meeting, said he knows of other Quiznos store owners who are struggling. “Nothing’s really changed, in my opinion,” said Kessels, the head of an Quiznos independent franchise group called the Toasted Subs Franchisee Association. “The whole system is still on shaky ground.” It looks like the new CEO-turnaround specialist is trying to make changes, but as I have personally learned in business – don’t try to catch a falling knife.

Download the Quiznos Profit Spreadsheet Based on the 115 comments, the most popular post on FranchisePundit.com has been What a Quizos Franchisee Makes, posted on April 10, 2005. The purported author of the financial projects also founded the web site QuiznosSucks.com (don’t bother going there, it now defunt and replaced with a domain aggregator’s advertising search engine). More of his experience is posted in this forum thread (pdf) on ToastedSubs.info. Here is the main snippet: QuiznosSucks 08-10-2005, 11:35 AM Yeah, Corporate is aware of Quiznossucks.com. Richard Sauls, the fellow who is responsible for the site, is himself a former Quiznos franchisee. Corporate actually sued to force him to kill the site and lost. My own feeling is that Quiznossucks makes them a bit nervous. It was developed on a shoestring and to little fanfare, but now averages in the neighborhood of 30k hits per day. I know that ever franchisor has its share of unhappy franchisees, but the situation with Quizno’s has reached a fever-pitch. From my research, the only comparable situation I have found is UPS Store franchisees. Ultimately, the Quizno’s business model doesn’t work. particulars vary from region to region, and depend heavily upon the franchisee’s rent and debt load, but break-even for a Quizno’s store is astronomical for this type of operation. The only thing keeping this house of cards aloft are second and third owners, who buy existing stores based on cash flow, at a fraction of the cost of a new store. I actually had a Q owner in my area approach me to see if i was interested in buying his store. The store was 3 years old, and he was running at break-even for the first year-and-a-half, with sales around 6700 per week. The Q opened a store near him (you have …

Quiznos CEO puts turnaround skills to work The former Burger King boss is applying his turnaround expertise to the troubled sandwich chain, whose dissatisfied franchise owners have complained about low profits, company operating requirements and the franchisee recruiting process. Since jumping into the fray in January, Brenneman has worked to reduce food costs by as much as 4 percent, improve communication with franchisees and test new products, like a Quiznos taco, to boost profits. … Last year, private equity firm J.P. Morgan Partners became an ownership partner, and Brenneman later became a partner through his company, Turnworks. Through the roller-coaster ownership ride, the chain expanded quickly, to at least 5,000 stores. Today it’s ranked third behind Subway and Arby’s by Technomic, an industry analyst firm.  Although Quiznos does not release much information, Technomic restaurant industry analyst Darren Tristano said Quiznos has average sales of about $425,000 a year per store while Subway has average sales of about $375,000. Quiznos’ success has come with growing pains. Lawsuits by franchise owners in Illinois, Michigan and Wisconsin allege the company draws in prospective owners, who pay $25,000 for a franchise, but doesn’t give them complete facts about restaurant locations and business operations. … Lawyer Justin Klein contends many franchisees sign contracts only to wait a year or more for the company to build a restaurant. The suits also accuse the company of requiring franchise owners to buy all supplies from Quiznos at higher prices than if they bought locally. The company denies the allegations and filed motions to dismiss the suits. Brenneman, meanwhile, has reached out to franchisees and targeted their food and other costs. If he can cut food costs by 3 percent and coupon discount offers by 4 percent, Brenneman believes he can add $25,000 to $30,000 in franchisees’ profits. …

Death of a toasted sandwich salesman Quiznos had sought to strip eight franchisees of their franchises after a franchisee gripe site posted the suicide note of a Quiznos franchisee on its website. The note blamed the Quiznos Corporation for ruining his business and his life. The franchisee, Bhupinder “Bob” Baber, was found dead last November in the bathroom of a Quiznos restaurant in Whittier, California, after pumping three rounds from a .380 caliber handgun into his own chest. …. Another group of angry franchisees, the Toasted Subs Franchisee Association (TSFA), took up his cause, and posted his suicide note on its website to raise money for the Baber family. Quiznos quickly responded by yanking the franchises of the eight directors of the TSFA, and the TSFA responded by filing for an injunction in federal court in Denver seeking to hold onto their franchises until the defamation allegations filed by Quiznos could be litigated.

 The NY Times highlights several despondent Quiznos franchisees.   The article does a good job of summarizing the major complaints and law suits currently pending against Quiznos. Hat tip:  Perry in the forum.

This article is a few months old, but makes for a good reminder: The suit alleges Quiznos forces franchisees to buy food and supplies from the parent company, or its affiliates, at inflated prices, but sets artificially low prices for its products. That strategy makes stores unprofitable for franchisees, according to the suit. The franchisees further allege Quiznos unlawfully sells franchises by leaving out or misrepresenting facts about its business operations. The plaintiffs seek lost investment funds in the suit. Two similar suits against Quiznos, filed by Colorado and Arizona franchisees, were dismissed by Denver District Court judges in 2005. Those cases alleged Quiznos allowed franchisees to encroach on each others’ territories, overcharged for food and supplies, and misused advertising funds. A suit filed against Quiznos by 17 New Jersey franchisees last year remains open. Quiznos seeks the dismissal of this suit. Quiznos denies the charges.

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!

More biting accusations from 28 Quiznos franchisees in this class action in Wisconsin. Here are some excerpts: Quiznos Sub forces its franchisees to buy food and supplies from the company or its approved vendors at unfair prices and sets retail prices too low for the stores to make a profit, according to a lawsuit filed by 28 operators of Quiznos franchises in Wisconsin…. The lawsuit, which seeks millions of dollars in damages for lost investments, accuses Quiznos of fraud, violations of federal and state antitrust laws, racketeering, breach of contract and violations of Wisconsin’s fair dealership law, attorney Justin Klein said Tuesday… “They tell you who you can buy from and who you can’t buy from,” he said. “The prices are unreasonably high. Quiznos gets rebates from approved vendors.”

Another group of franchisees accuse Quiznos of fraud: A group of Quiznos franchisees have filed a class-action lawsuit against the Denver sandwich chain in U.S. District Court for the Eastern District of Wisconsin. The lawsuit alleges that Denver-based Quiznos has “systematically defrauded its franchisees in a scheme designed to build the brand at the expense of its operators in the field.” The suit contends that the company forces franchisees to buy food and supplies from Quiznos or its affiliates at inflated prices while setting retail prices so low that franchisees can’t profit. The lawsuit also alleges that Quiznos omits or misrepresents key facts about its business operations when selling franchises. Link to another background article. Link to previous Quiznos articles on Franchise Pundit