Five Things Quiznos Can Do To Fix Itself



Multiple reports this week have suggested that beleaguered, Denver-based sub chain Quiznos is preparing to file for bankruptcy as it seeks to reorganize its debt. Years of store closures have sapped the chain's earnings to the point where it doesn't make enough to fund interest payments on the reported $570 million in debt the company has left over from its previous restructuring two years ago.

Assuming that a bankruptcy does come, the question then becomes how the chain can right its ship and start growing again—if it can right that ship at all, after losing about 75 percent of its domestic units.

But, in spite of all that it's been through, Quiznos can survive. It's almost impossible to truly kill a restaurant chain, and as long as there are operators out there willing to show up at the store every day, the brand will be able to keep going. But it's not an easy fix. The problems that have hurt Quiznos are numerous, and many aren't going away.

We're guessing that many of these are already being considered in the company's Denver headquarters, but here are a few things we think need to happen after the chain finally restructures.

Eliminate its debt. Quiznos neared bankruptcy two years ago, when one of its lenders, Avenue Capital, exchanged some debt for controlling equity in the chain, pumped some funds into marketing, and made an effort to turn around the company. The problem: That deal kept $600 million in debt on the books. Quiznos has no real assets beyond its name and its franchisee base, and that base was declining rapidly, from a peak of nearly 5,000 locations in 2006 to roughly 1,200. The remaining debt hamstrung the company and reduced the chain's restructuring options. Whatever happens in the current restructuring, most or all of Quiznos' existing debt should be exchanged for equity, to give the company flexibility for fixing the business.

Start a food co-op. Quiznos makes much of its money off the sale of food to franchisees. That food has traditionally been priced higher than other concepts—the restaurant consultant John Gordon estimates that its operators pay 6 to 7 percent more for their food. Franchisees have told us they have traditionally paid 35 to 40 percent for food costs. By comparison, Potbelly pays about 29 percent. By replacing its distribution subsidiary, American Food Distributors, with a food co-op, those costs would be reduced. It would also go a long way toward repairing a long-frayed franchise relationship. Incidentally, Quiznos won't be able to take this step unless it's able to greatly reduce or eliminate its debt load.

Give out some royalty breaks. Quiznos can't begin growing again unless it stops the store closures. Increasing revenue and profitability would help. But in the short term, giving out royalty breaks to franchisees to encourage them to remain in the system would also help. Remember: Quiznos' rapid growth came about a decade ago. Many of those franchisees are coming to the end of 10-year lease deals, and may not be so eager to re-up with the chain. The company should do what it can to convince these operators to stick around.

Simplify the menu. Quiznos' menu has 100 items, not including its most recent pasta bowl addition. That's more than twice the menu size of Subway. It's also twice the size of Firehouse Subs, the Florida-based chain that has rapidly grown by selling hot subs. By reducing the menu size, Quiznos could ease operations for franchisees, lower costs a bit and simplify matters for consumers.

Get its marketing mojo back. When Quiznos was in its growth mode more than a decade ago, the chain made a name for itself with humorous and innovative ads that focused on the quality of its toasted subs. That marketing was a competitive difference and helped it gain ground against Subway. But it lost that edge over the years. Whatever it does, the company needs to work hard to gain it back.

None of this guarantees success, by any stretch. And there are a lot of issues right now that are simply out of its control. For instance, a big reason Quiznos is struggling now isn't necessarily due to Subway, but to Firehouse, Jimmy John's, Jersey Mike's, Potbelly and other high-growth competitors that are taking a lot of sandwich business. It's a hotly competitive market. And consumers' dining dollar is limited right now.

But for all of its issues, Quiznos remains a strong, well-known brand. And there's always some value in that.