Quiznos Flounders As Chipotle Sizzles

Quiznos, which at one time looked liked a credible competitor in the toasted-sub segment to the (mostly) successful Subway franchise, is preparing to filing for bankruptcy, according to a story by Emily Glazer and Julie Jargon in the Wall Street Journal this morning that’s packed with insight into how to make a sow’s ear out of a silk purse.

Glazer and Jargon had reported earlier that the “once-booming sandwich chain” was “stumbling two years into a major turnaround effort, prompting the company to seek concessions from creditors owed nearly $600 million.” It reportedly had missed a loan payment and was renegotiating with lawyered-up creditors at the time.

Reacting to that piece in December, Restaurant Finance Monitor’s Jonathan Maze wrote: “It's not true that Quiznos has to work out a deal with its lenders every Christmas. It's only every other Christmas.”

Maze summed up the vicious cycle of decline at Quiznos in two paragraphs: “Like all franchises, Quiznos gets its revenue from franchisee royalties. But its bigger business involved the sale of food and other products to operators.

“But Quiznos charged franchisees too much for food — operators had been complaining about them for years. When sales began falling, franchisees began closing. To get sales up, Quiznos discounted and couponed, which only made profit matters worse, and store closures accelerated.”

The Denver Post’s Steve Raabe reports that “Quiznos operated about 5,000 restaurants at its peak in 2008, but the count has since dropped to an estimated 2,100 worldwide, including 1,400 in the U.S.” 

It has been owned for the past two years by a hedge fund, Avenue Capital Group, which acquired majority interest from Quiznos' founder, Denver-based Consumer Capital Partners, in a debt restructuring in January 2012. Creditors wrote down about $300 million of Quiznos' $875 million debt, in exchange for equity in the firm, Raabe reported at the time.

As Glazer and Jargon put it in this morning’s story, “with fewer stores contributing to an advertising fund, the chain had fewer resources to promote new products, hurting sales, which resulted in more store closures, they said.”

The average store had $425,000 in annual sales in the mid-’90s but that figure had dropped to about $300,000 at the top performers in recent years. Technomic EVP Darren Tristano tells Glazer and Jargon that Quiznos collects 7% in royalty fees and 4% for advertising — higher than the industry average of 6% and 2%  respectively.

“If a brand wants to succeed, its franchisees have to succeed,” Tristano points out. And so does the marketing, which starts with the product, of course.

“Quiznos did not have the proper name recognition or great marketing,” a “onetime Quiznos customer” tells the reporters. “You have to give people the impression that your food is better than the food down the street.”

It did just introduce a new line of “Toasty” pastas and lobster mac and cheese. 

“Well, sort of,” as the Los Angeles Times’ Jenn Harris puts it. “Their version of the dish involves cavatappi pasta (the ones that look like corkscrew tubes) and a cheese sauce. It's topped with what appeared to be bits of lobster and the imitation crab you'd find in a California roll.”

It was “fishy,” all right, Harris concludes. And cheap at $6.99. But there was “not much lobster flavor.” 

The new line of premium pasta, a Restaurant News headline tells us, is “Perfect for People That Can’t Boil Water” in a review that otherwise reads like a press release. But with a hed like that, who needs critics?

Chipotle Mexican Grill fares much better in Bret Thorn’s story in Nation’s Restaurant News story about the national rollout of its tofu-based Sofritas, its first menu introduction since 2005.

“Many of our customers, we’ve realized, are vegetarian or vegan, or generally meat-reducers or concerned about their diet and questioning about how the animals are raised and how much meat they should be eating,” Chipotle founder and co-chief executive Steve Ells says in the piece. “And the amount of vegetarian burritos that we serve at Chipotle has increased over the years.”

Meanwhile, Chipotle’s “anti-GMO (genetically modified organism) mission coincided with a 30% jump in fourth-quarter profits,” Shamus Funk reports in Motley Fool, before pointing out that its success is also due to its “constantly growing number of new store openings (nearly 200 are planned for 2014) and quickly increasing advertising expenses.”

A Slate piece by Matthew Yglesias a couple of years ago compared Chipotle to Apple and said its “burrito is very similar to the iPhone.”

Clearly, Chipotle’s healthy bottom line is attributable to its staying ahead of consumer taste while Quiznos wallows in the ’80s. Or, perhaps, the ’50s. “Fishy” mac & cheese. Really?

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1 comment about "Quiznos Flounders As Chipotle Sizzles".
  1. Neil Mahoney from Mahoney/Marketing , February 28, 2014 at 5:10 p.m.
    Quiznos failure, I believe, is that its ads greatly oversold what they delivered. Red Lobster borders on that frequently. The difference between the two is that in many areas Red Lobster is really the only seafood game in town.