As a sandwich franchise, Quiznos was once a true competitor for Subway. But since their 2006 peak of more than 5000 stores, they are now sitting at just over 2000, embroiled in several lawsuits from former franchisees, and heading for a bankruptcy restructuring. The downward spiral of the once proud franchise should serve as a warning to investors looking toward franchises as a safe place to put their money.

Failing Franchisees

One of the first signs of franchisee failure was an internal memorandum revealed in a 2003 lawsuit stating that “40 percent of Quiznos units are not breaking even”. Potential franchisees were not privy to this statistic, nor did they know that, according to the Small Business Association, more than 23% of Quiznos franchises with SBA loans failed, compared to 4.8% of Subway stores. Another lawsuit alleges that Quiznos claimed to have sold 234 “trade areas” in New Jersey to franchisees that never opened stores, despite the $25,000, non-refundable franchise fee each paid. Several other lawsuits have also cropped up, alleging that Quiznos collected a lot of fees but was unable or unwilling to find suitable locations for their stores. In all, a legal research firm has tabulated that Quiznos has faced more law suits than much larger chains, including McDonald’s and Subway.

Costs Without Control

Other owners complained about the costs of buying ingredients from Quiznos. Franchisees had to buy everything from Quiznos distribution centers, which in some cases had higher prices than local farms. Many franchisees struggled even with busy stores, facing monthly losses despite a high volume of sales. When Quiznos attempted to make home delivery a part of their strategy, some owners balked at the $10,000 required for delivery car signs and decals.

A Tarnished Brand

Despite charging 7% in royalty fees and 4% for advertising, both higher than industry average, Quiznos no longer has enough franchisees to mount any sort of marketing challenge to its biggest rivals (Subway has 41,000 stores paying advertising fees, and national ad campaigns featuring professional athletes and Olympians). The press that does come out about Quiznos has been mostly negative for owners. A hepatitis scare at a Boston store damaged the entire brand, and the 2006 suicide of a California franchise owner, which he blamed on his ongoing legal disputes with the franchise, did not paint the sandwich company in a positive light.

Lessons for Investors

The bankruptcy is just another in a long line of bad headlines. While the restructuring plan will allow them to eliminate some debt and get out of bad leases, it will also confuse consumers as to the status of individual stores. Quiznos has promised that the deal will improve supply prices for franchisees and give the company better footing for growth, but they promised the same in a previous restructuring that was based more on optimism than real numbers. When entrepreneurs look for business opportunities, they would be wise to keep the fate of Quiznos in mind. Putting your investment at the mercy of a franchise opens you up to these and other issues.

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