Quiznos Moves Toward Bankruptcy Filing

February 28, 2014

Sandwich chain Quiznos is preparing to file for bankruptcy-court protection within weeks as it contends with unhappy franchisees and a $570 million debt load, according to people with direct knowledge of the matter.

Quiznos has been negotiating with creditors for weeks on a restructuring plan that would streamline its trip through bankruptcy court, these people said, but a deal hasn’t yet been reached.

The chain’s move toward bankruptcy comes two years into a major turnaround effort that included an out-of-court debt restructuring and a management shake-up. While a Chapter 11 filing would give the company much-needed flexibility on leases and unattractive contracts, the company must repair its damaged relationship with franchise owners who say they’re being squeezed out of business by the high cost of operating a Quiznos outlet.

“If a brand wants to succeed, its franchisees have to succeed,” said Darren Tristano, executive vice president at restaurant consulting firm Technomic Inc.

Thousands of Quiznos locations have shut down in recent years as the company’s competitors have opened new locations at a rapid pace. Quiznos’s world-wide store count now stands at about 2,100, while its chief rival, Subway, has 41,000.

Founded in 1981, Quiznos was considered innovative at the time with its toasted subs. But its sales have suffered as Subway offered a $5 foot-long sandwich starting in 2008 and new competitors such as Potbelly Corp. PBPB -0.84% and Jimmy John’s Franchise LLC moved into the crowded sandwich market.

In its heyday in the mid-2000s, Quiznos stores, on average, rang up $425,000 in annual sales; since then, that figure has dropped to around $300,000 for the top-performing stores and to far less at the weakest stores, according to people familiar with the matter.

Quiznos franchisees say they’re struggling to stay in business. In addition to the fees the company charges them to use its name, store operators must also buy most of their supplies and ingredients from Quiznos’s distribution business.

Franchisees long have complained that the subsidiary charges more than what they would pay to purchase those goods elsewhere.

Mr. Tristano said the fees Quiznos collects from franchisees—7% in royalty fees and another 4% for advertising—is higher than the industry average of 6% in royalty fees and 2% for marketing.

Fabian Andino opened a Quiznos franchise in 2006 in Port St. Lucie, Fla. It wasn’t long before he realized that he was paying higher prices for items like tomatoes through Quiznos’s distribution business. To save money, he bought produce from local farms but said the company charged him weekly penalty fees for not placing minimum food orders.

A person close to the company said it didn’t assess such penalty fees, but that franchisees who wanted to receive rebates for food costs were required to place minimum orders.

When Quiznos decided to offer delivery service in 2008, he recalled, franchisees were told to pay $10,000 to the company in return for signs and decals for their delivery cars and in-store inserts.

“They marketed it as though it would be the magic wand that would save the operation, but I knew it was another ploy Quiznos was using to raise more funds for them,” Mr. Andino said. “I refused.”

Mr. Andino said the company withdrew the payment request and supplied him with the materials free of charge. He said he couldn’t make his Quiznos business work and closed his store in late 2009.

“Quiznos did not have the proper name recognition or great marketing,” said John Medici, a 71-year-old retired warehouse manager in Longwood, Fla., and onetime Quiznos customer. “You have to give people the impression that your food is better than the food down the street.”

Steven Raposo said he spent a total of $350,000 to open a Quiznos franchise in Norton, Mass., in 2005. He said he and his family soon realized they wouldn’t be able to bring in enough money to cover expenses and put the franchise up for sale. They sold the business less than a year later for about half the price.

Mr. Raposo said his annual sales would have been about $600,000, but he was still facing monthly losses of between $3,000 and $5,000.

“It sounds like we were doing a lot [of business] but there was actually no profit because of food costs and labor,” said Mr. Raposo, a practicing chiropractor.

To address franchisees’ concerns, Quiznos management cut food and supply prices last summer, a person close to the company said in December. The company has also tried to improve store operations in the U.S. by making sure restaurants were clean, adding new menu items and removing slow-selling ones.

But so far, Quiznos’s turnaround efforts haven’t met expectations and the company has missed key performance targets, according to people familiar with the matter. The company also has a high debt load for its size, in part the legacy of a 2006 leveraged buyout.

Quiznos missed a loan payment at the end of 2013 and has been operating under a forbearance agreement with its lenders, which delays a potential default, as it negotiates with creditors including Fortress Investment Group FIG +1.87% LLC, Oaktree Capital Management and Avenue Capital Group, which is also its majority owner.

Finding the Sweet Spot’ for Fast Casual Pricing

February 11, 2014

Screen shot 2014-02-01 at 5.36.37 PMFast casual continues to generate strong appeal with American consumers. That success has been based on the competitive positioning of the segment compared to traditional quick service and casual dining. Patrons continue to trade up from quick service to the made-to-order, fresh quality and contemporary experience, and trade down from the less convenient, higher-priced casual dining segment, especially at lunchtime.

But what are the price thresholds for consumers at Fast Casual?

A recent survey for Technomic’s Value & Pricing Consumer Trend Report asked consumers to define the price at which a product is too cheap so as to impact quality (low price); the price at which the item is a bargain (optimal price); the price at which a product is starting to become expensive, but they would still purchase it (indifference price); and the price at which a product is so expensive they would no longer purchase it (high price).

Consumers indicated that at breakfast, the sweet spot between optimal and indifference was $6.01 to $6.50. At lunch, the sweet spot increased to a price point between $7.00 and $7.60, with dinner results from $8.54 to $9.09. Also, some consumers indicated their thresholds for high price were as high as $8.51 for breakfast, $10.07 at lunch and $12.46 for a meal at dinner.

This chart provides a strong tool for fast casual operators to review their pricing and see how each of their meal bundles or a la carte items fit within the price points consumers indicated for meals at each daypart.

With regards to traditional quick service, the optimal price point for breakfast was $1.50 lower, lunch $2.00 below, and consumers indicated at dinner they would pay $2.50 less than fast casual. Interestingly, fast casual optimal prices increased by 50 cents throughout the day with each daypart.

So what does this all mean to operators?

Consumers continue to be sensitive to pricing and spending at meals away from home. As a result, operators should follow a “barbell” strategy by offering a broad pricing mix for high, medium and low prices. Some opportunities for strategies are as follows:

  • Vary portion size and price. Offer opportunities for customers to upgrade to larger portions or reduce spend with smaller plates or samplers. A “one-size-fits-all” approach may not suit differences in demographics between men and women or health vs. indulgent diners. A range of prices from high to low allow diners to spend what they want and get what they are looking for.
  • Promote value through offering full meals. Recent Technomic consumer research indicated that, in general, 80% of consumers purchase value meals at fast food restaurants at least once every two to four weeks. As consumers grow accustomed to purchasing “meals,” fast casual operators should offer meals that simplify the ordering process, increase check average and provide higher value.
  • Provide fresh and premium products. Nearly 48% of consumers polled indicated they would likely purchase and pay more for a food or beverage that is fresh. In addition, 37% say the same for premium food and beverage options. Taking credit for the fresh ingredients and preparation of food and beverages is important in justifying your prices. Menu descriptions, fresh images and interaction with customers build the story and give patrons a connection with a better-for-you offering.
  • Enhance your value positioning with customization. As the consumer’s need for greater control increases, giving them more options for having it their way enhances the value they receive. Providing patrons with the ability to allow ingredient substitutions, vary spiciness, and add more toppings are opportunities to delight the customer, build loyalty and get them back through the door.

Overall, operators who are able to provide broad options and keep it simple will win over customers with the right price and the right value.