Quiznos Franchisees Walloped by Recession

Woes Also Include High Costs, Lawsuits and Rivalry With Subway

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LOS ANGELES (AdAge.com) -- While the recession and banking crisis have taken a toll on the entire restaurant industry, a number of Quiznos franchisees claim to have been disproportionately affected. Beset by higher-than-average commodity costs, lackluster marketing, a bruising promotional war with Subway and a premium-pricing structure incompatible with a tight economy, the chain has shuttered 150 stores this year.

It's also embroiled in three separate class-action lawsuits in which franchisees allege, among other things, that the chain overcharges franchisees for food and other supplies. The suits are pending in Colorado, Illinois and Wisconsin.

"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.

Move toward value
Quiznos admits there are problems but said they are common to the restaurant industry as a whole. "Anybody who hasn't noticed a change has their head in the sand," said Quiznos Exec VP Rich Emmitt. "Consumers are reticent to open their pocketbooks, and the consumers have become much more keen on making sure that what they are purchasing is a value purchase."

The move toward value is clearly hurting the 4,450-store chain in its sandwich war with much-larger rival Subway, which has more than 22,000 locations. Subway's $5-foot-long-sandwich promotion has resulted in double-digit sales gains in many parts of the country, forcing Quiznos to fire back with its own $5 promotion in May.

But while some Quinzos franchisees say the promotion boosted sales, others maintain the increased traffic hasn't been enough to balance thinner margins. According to Quiznos, traffic is up, but the average check has gone down.

Bonnie Brunet, a Quiznos franchisee in Maine, said before the promotion started, she was losing a few hundred dollars a month. As a result of the higher food costs and lower average checks, she said, she's losing about $2,500 a month. Her average ticket has fallen $2. (Ms. Brunet is part of the lawsuit).

However, Brian Wise, a six-unit franchisee in Kansas, said it was "imperative" the chain respond to Subway. "We can get to the point where we want to have this very select niche of customer that absolutely will pay whatever we charge for a Quiznos sandwich, but that's not true for the larger customer base." He said a couple of his locations are having problems, but most are up over last year.

Lacking variety?
The chain launched another value promo this year, offering its flatbread "sammies" for $2, and Mr. Emmitt said Quiznos has a number of products slated for the fourth quarter and early 2009 that are supposed to add variety and value.

"Where [Quiznos] is getting its ass kicked is Subway has more products," said one executive familiar with the situation. "When the consumer wants ... variety, there just isn't much in the way of options."

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."

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Contributing: Rupal Parekh
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