Quiznos' Turnaround Plans Won't Fix Its Biggest Problems

Last Updated Jul 16, 2010 4:30 PM EDT

After shrinking by nearly 1,000 restaurants in the past few years, sub-sandwich chain Quiznos has a plan to get the chain growing again. Unfortunately, Quiznos' growth strategies for adding 600 new stores by year-end are likely to worsen its already contentious relationship with the chain's franchise owners and may weaken its franchise network.

An Ohio-market report by The Columbus Dispatch reveals Quiznos has a new plan to lure franchisees. The company is cutting its initial fee for opening a restaurant from its usual $25,000 to $5,000. Quiznos then gives the franchise owner a two- to five-year loan of $65,000 at 15 percent for working capital. While the loan is being paid off, the owner gets a salary from Quiznos in the low five figures -- less than $24,000 -- plus 20 percent of restaurant profits. This is a pretty harsh work-to-own plan that seems only a half-step from indentured servitude, given that restaurant owners can easily put in 80-hour weeks, and restaurants can take a year or two to start showing a profit.

This plan is sure to lure more would-be franchise owners... but not the right kind.

Often, franchisees who come in on this type of cheap deal don't really have the capital required to invest in their stores and deal with the cash-flow potholes that inevitably appear in the restaurant business. The failure rate is bound to be higher for these new franchises. The company gets a short-term bump in its store-count, but it may be temporary.

The barrier to entry is substantial in most food franchises for good reason -- it takes substantial resources to run them right. Owners who don't have liquid assets, can't borrow money cheaper than 15 percent, and are willing to work cheap for five years to end up owning a Quiznos store probably aren't the cream of the franchise-owner crop.

Another initiative involves opening small, 400-square-foot grab-and-go eateries inside convenience stores. While this isn't entirely a bad idea, Quiznos will have to watch carefully to make sure these locations don't infringe on existing franchise owners' territories and sow bad blood with owners.

The final part of its plan involves opening corporate-operated stores. This plunges Quiznos into an area where it has little expertise -- it has just three company-owned stores now. It could also put the corporate parent into competition with franchisees. Given the dark history between Quiznos and its store owners, who are close to inking a settlement to their long-running class-action lawsuit against Quiznos, this seems like a bad idea. On the plus side, those considering the cheap-entry franchise deal might earn more as managers at Quiznos' corporate units, save their money, and then buy a store.

The biggest problem with the turnaround plan is that it does nothing to fix the most basic problems with Quiznos' business model. One, franchisees are compelled to buy everything from sliced turkey to toilet paper from Quiznos at above-market rates. Second, Quiznos store owners continue to complain that the company opens stores too close together, cannibalizing sales at existing locations and driving down their profits.

Rather than just flinging open hundreds of new stores, Quiznos needs to look at how it does business, and make sure its model is designed to make franchise owners successful. Buried in this operations mess are some tasty, toasty subs, and with a sound strategy, the company could be selling more of them.

Photo via Flickr user Jeffrey Beall Related:

  • Carol Tice

    Carol Tice is a longtime business reporter whose work has appeared in Entrepreneur, The Seattle Times, and Nation's Restaurant News, among others. Online sites she's written for include Allbusiness.com and Yahoo!Hotjobs. She blogs about the business of writing at Make a Living Writing.