In a quest to rebuild sales and recover from years of malaise, Quiznos is wielding an unlikely weapon: higher prices. Take that, Subway.
Gone are the $3 Sammies and $4 Torpedoes — symbols of Quiznos’ now-discarded “value” era. Replacing them is a new upscale line featuring prime rib and all-natural chicken, at prices up to $7.99 for a large sandwich or $6.69 for a medium.
“It’s all about going back to Quiznos’ heritage — high-quality, good-tasting food,” said Greg MacDonald, chief executive of the Denver-based sub-sandwich purveyor.
Higher prices are more than just a necessity to support costlier ingredients. With prices now consistently pegged at 10 percent higher than Subway and some other competitors, it sends a message to consumers, MacDonald said, about the chain’s new thrust toward tastier food.
Opinions differ on whether the approach will turn around performance and patch up lingering animosity from struggling franchisees.
“They’re looking to work it through and stop the bleeding in a very strong and competitive industry,” said Darren Tristano, a restaurant analyst and executive vice president at Chicago-based Technomic. “I sense that many franchisees feel that this is a step in the right direction but with inherent risks.”
Armed with a $150 million equity infusion from a new corporate owner, Quiznos is rolling out the new campaign in an effort to reverse what an analyst described last year as one of the biggest restaurant collapses in national history.
Among the telling statistics:
• The number of Quiznos restaurants plummeted from 5,125 in 2006 to about 2,800 last year — a decline of 45 percent.
• Sales fell by more than half, from $2.1 billion in 2007 to $1.02 billion last year, according to industry estimates.
• Quiznos’ market share among peers in the sandwich sector has dropped steadily in recent years. From 2010 to 2011, its share fell from 4.9 percent to 3.8 percent. At the same time, industry giant Subway grew from 45.8 percent to 47.3 percent, according to Technomic.
The sagging metrics did little to help Quiznos deal last year with an oppressive debt load of $875 million. Some analysts were predicting an imminent bankruptcy filing from Quiznos, which faced competition not only from Subway but from fast-growing newer chains such as Jimmy John’s, Jersey Mike’s and Firehouse Subs.
Instead, Quiznos worked out a restructuring deal in which major creditor Avenue Capital Group, an $11.6 billion New York hedge fund, converted a portion of its debt into a 72 percent controlling equity stake.
Following the Avenue Capital takeover in January, Quiznos in May introduced the “Qrave Quiznos” branding campaign that included the “Better Than Ever” menu upgrades.
“We’re not focusing anymore on value. We’re focused on high-quality ingredients,” MacDonald said in a recent interview conducted from a table at Quiznos’ two-story, glass-enclosed flagship restaurant at 17th and Curtis streets in downtown Denver.
“We have always made sure we are competitive in pricing,” the 42-year-old MacDonald said. “Now, we’re making sure we’re a little more expensive than Subway, yet with higher-quality ingredients. People are changing. They’re more educated about the food they eat, and they’re willing to pay more money for it.”
Costs are hard to swallow
Deli meats and cheeses have been upgraded. Cookies are now made with butter in place of shortening. More fresh vegetables — green peppers, cucumbers, red onions and seasonal lettuces — are available as sandwich toppings. Meat portions on some subs have been increased by 25 percent.
Gone, in addition to Sammies, Bullets and Torpedoes, are value classics such as turkey, ranch and swiss; veggie; and tuna sandwiches. Consumers can re-create those offerings from the new “Create Your Own” menu, but prices are 50 cents to $1 higher than before, reflecting the higher-cost ingredients.
Being tested in some markets are sandwiches made from rotisserie chicken and New York strip loin.
Along with higher retail prices are higher supply prices for franchisees — already a sore point with many franchise owners who have been critical of a requirement that they 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 settlement included an annual review by independent auditors of Quiznos’ food and supply prices charged to franchisees.
Some owners say prices still are too high, and as a result profit margins are low or nonexistent.
“For me, I’m still struggling, and hundreds and hundreds of others are still struggling and barely hanging on,” said John Portera, owner of a franchise in Petoskey, Mich. “I’m doing $1,000 a week less (in sales) than last year, and I need that to survive.”
MacDonald said franchisee criticism over supply prices is being addressed by a new program in which restaurant owners receive a partial rebate on supply costs if they reach certain performance goals.
“Our food cost is very competitive (compared with) competitors,” he said. “The costs are lower than they’ve ever been with the rebate.”
On the issue of franchisee profitability, MacDonald said: “That’s still a continuous journey for us. It’s not something you can fix overnight.”
MacDonald, a 14-year veteran of various management posts at Quiznos, was named CEO in 2010, taking over from former chain co-owner Rick Schaden. MacDonald retained the title when Avenue Capital acquired Quiznos and replaced the entire board of directors.
Through a spokesman, Avenue Capital officials declined to comment for this article on Quiznos’ prospects for a turnaround and the performance to date of the new branding campaign.
Owners craving change
The Quiznos Franchisee Association issued a sobering memo recently to its members after a meeting among franchise owners, Quiznos executives and Avenue Capital representatives.
“We clearly communicated to all parties at the meeting the true sense of urgency that is currently at hand for franchise owners, and the need for serious change ASAP that directly relates to our bottom-line profitability,” the memo said. “We made it clear that immediate change and relief was needed to keep a large wave of stores from closing in the very near future.”
Justin Klein, a New Jersey attorney who represented Quiznos franchisees in their class-action lawsuit against the company, said his feedback from franchise owners is that “it will take some time to right the ship.”
“There are folks out there still struggling,” he said. “They’ve had a very rough time for an extended period of time. I think it will take more than a couple of years for improvements to be felt.”