Doug Pendergast joined Quiznos as president and CEO in January, with a number of challenges to address.
After emerging from bankruptcy last year, the Denver-based sandwich chain’s domestic unit count has dwindled, reaching 1,000 locations at the end of fiscal 2014, compared with around 5,000 units in 2006.
At the same time, the sandwich landscape has become increasingly competitive, with brands like Potbelly, Jersey Mike’s and Jimmy John’s stealing market share. Franchisees have long complained that Quiznos’ business model is broken, in part because the franchisor controlled the distribution and supply system.
Pendergast, however, has already begun to address those challenges. For instance, at the end of 2014, the company restructured its distribution and supply system.
The chain is testing menu revisions designed to enhance efficiency and improve profitability. And a new point-of-sale system is expected to roll out this year that will set the stage for mobile and online ordering, as well as a systemwide loyalty program.
Pendergast recently discussed the year ahead for Quiznos with Nation’s Restaurant News.
Where do you see Quiznos now?
Quiznos today has a tremendous number of assets and things that we can build upon. There’s tremendous recognition of the Quiznos brand in the U.S. and Canada, and increasingly around the world. The overall associations that customers have with our brand are positive: about toasting, about flavorful recipes and innovative products. We also have a wonderful mix of tenure and experience on our team and franchise system, along with new talent and energy that has joined the brand over last few years.
What are your challenges?
The areas we’re working to improve are the mutual trust with the franchise community, the systems and support that we provide and the restaurant-level economics.
Perhaps the single biggest recent change has been improving restaurant economics by completely changing our supply chain and distribution system.
Can you describe the changes?
Under the former model, the supply chain and distribution system was controlled by Quiznos. Starting at end of last year, we have completely changed that model. Now our franchise owners buy directly from distributors. And instead of having a patchwork of regional suppliers and distributors, we now have a national contract with Sysco … and we’re in the process of rolling it out to the entire system.
It hasn’t been fully implemented yet, but already we have seen significant improvements in restaurant-level food costs. In fact, some of members of our franchise council have reported 350 basis points of improvement in their food costs.
When will it be fully rolled out?
By middle of summer, the transition from the regional distribution centers to the Sysco nationwide process will be complete. It’s happening on a region-by-region basis as these old contracts expire and we’re able to transition to Sysco.
How else are you addressing the mutual trust issue?
A second area is improving sales, and we have an effort underway with a revised and focused menu that is in test today. We are seeing very encouraging results in terms of customer response, sales increases and also in ease of operations, and ultimately the labor investment that our franchise owners are making.
What do you mean by “revised and focused”?
There are fewer items on the menu. Some poor-selling items have been removed in test. The specifications, the builds are simpler. So the amount of proteins, for example, on the eight-inch subs are consistent across the board, so it’s just easier to execute. And the amount of the protein is quite a bit higher, so the guest perception of value we have found to be quite a bit higher.
Is Quiznos looking to offer more customization?
Customization is not really the core of Quiznos value proposition to customers. Our benefit is chef-inspired recipes. Certainly, if the guest wants a change to their sandwich, we’re thrilled to do that. But there’s a lot of thought and study that’s gone into designing the recipes, the mix of meats and cheeses and sauces. We find the vast majority of guests prefer their mix according to that recipe.
When will the new menu roll out?
That revised menu is in about a dozen restaurants today. We’re encouraged by the results we’re seeing, from customer feedback, sales, transactions and ultimately gross profit. But we have a little more work to do to fine-tune that. We will look to roll that out hopefully this year. We’d rather do it right than fast.
Online ordering, international presence
How else will Quiznos offer support?
A third major initiative we’re rolling out this year is a new POS system, which is also in a test market. We’re moving through a staged process, ultimately for a nationwide rollout.
This will have multiple benefits: an improved interface for team members and for the guest to make sure we’re getting orders correct. We’ll have better tracking on a real-time basis of what’s selling and what’s not selling. We’ll have the ability for online ordering to be fully integrated. We’ll have the ability to do a nationwide loyalty program, and finally we’ll have back-office tools and reporting to support the improved profitability of our franchisees.
When might we see online ordering?
Many units have online ordering today, so the benefit of this new system is full integration. Again, the focus is on getting it right, not getting it fast. The expectation is to roll out this year.
Is there a loyalty program now?
Not one that is systemwide and leveraging all the best practices out there. There’s a collection of regional programs. This gives us the capability to do systemwide loyalty program.
How is the increasingly crowded sandwich landscape affecting Quiznos?
Our core of hot-toasted, high-quality, chef-inspired sandwiches is still very relevant. But how do we deliver that in a way that’s innovative and distinctive in the market place? That’s really our focus. If we worry less about competition and more about customers, that will lead us to the right path.
Quiznos’ unit count has shrunk dramatically in recent years, but is growing internationally.
It’s no secret that the restaurant count domestically has declined. In fact, the single largest customer complaint is that they’re not able to find a restaurant. That, to me, is a very high-quality problem. That means people like us and want to dine in our restaurants and just want to find one that’s conveniently located.
There was a tremendous focus in the past on the expansion of restaurant locations. Certainly, lots of good things come from expansion, like more convenience and access to customers, a larger advertising fund to invest with, a more visible and recognized brand. However, some of the locations over time have proven to be not viable sites. That, combined with some of the issues and concerns about the supply chain, has reduced the restaurant count.
Our focus today domestically is to ensure every viable location remains open and is successful in delivering the promise to customers and raising sales and profits and sales for franchise owners.
One of Quiznos’ minority stake holders, hedge fund Avenue Capital Group LLC, is embroiled in a lawsuit with the chain’s founders, charging that the company’s financials were misrepresented when investors bought in in 2012. How is that impacting Quiznos?
We are not a party to the lawsuit and fortunately it’s not impacting our day-to-day focus on running great restaurants and supporting our franchise owners.
Following the bankruptcy last year, the collection of new owners, including Oaktree Capital Management, Fortress Investment Group, Caspian Capital Advisors, MSD Capital LP and others, reduced debt to about $170 million after the restructuring. How is that debt today?
The overall point that the amount of debt on company is significantly reduced is absolutely correct. This has enabled us to have the breathing room and the resources to make important changes and investments in the business, like restructuring the supply chain and investing in innovation on the menu, testing new products and really thinking about and investing in the future.
Can you give any indication of how sales are performing?
As a private company, we don’t want to get into specific sales guidance. But we are certainly focused on increasing same-store sales, opening successful restaurants and keeping all the viable locations open.
Last year, the Wall Street Journal reported prior to the bankruptcy that Quiznos’ average restaurant sales dropped to about $300,000, from $425,000 in mid 2000s. Is that correct?
That’s a reasonably accurate number. Not only have we been impacted by the number of restaurants, the average unit volume has been impacted by the economic declines and competitive intensity you mentioned.
How has that impacted funds available for marketing?
Having a highly recognized, valuable brand and 1,000 restaurants in the U.S. is a position many chains would envy. We’re excited about the brand presence we have today. What we think about is how to best invest marketing resources that are available.
We believe the best investment is to leverage digital and social channels, and also invest behind efforts like the systemwide loyalty program. We don’t believe broadcast TV has the same return on investment that these other channels do.
Contact Lisa Jennings at [email protected].
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