As news of Quiznos’ financial restructuring efforts hit the street this week, franchisees reacted with a mix of fear and steely resolve, some saying they hoped the process would fix what they see as a broken business model.
On Monday and Tuesday, Quiznos’ top executives reached out to franchisees with a conference call, sources on the call told Nation’s Restaurant News, to reassure the chain’s operators that a planned restructuring of finances would not impact day-to-day operations.
Quiznos chief executive Greg MacDonald and chief operating officer Michael Roper told franchisees, according to NRN sources, that the company was simply ensuring it has the right capital structure to move forward, comparing the situation to a long-term home owner who refinances to free up cash to reinvest in his house.
One franchisee said he was more upset after the call, and another said the opportunity may be ripe to fix chain-wide problems from pricing to marketing.
Denver-based Quiznos declined to comment on the financial restructuring beyond an e-mailed statement confirming that outside advisors had been hired. The chain reportedly brought in law firm Paul Weiss Rifkind Wharton & Garrison LLP and investment bank Moelis & Co.
Franchisees want clarity, focus on biz model
Calls to franchisees on Tuesday brought a mix of opinions. Sources who spoke to Nation’s Restaurant News said they hoped restructuring efforts would result in changes to what they see as an unsustainable business model.
“My hope is that management will shift to a model more profitable to individual stores,” said Kevin Tackett, Quiznos largest traditional franchise operator and president of a newly formed Quiznos franchisee association.
Franchisees have been under pressure to discount, he said.
“They want us to sell $5 subs because Subway does,” he said. “But Subway has a model that allows them to do that where we, with our portions and costs being different, can’t always do so and make a profit.”
Tackett’s business includes 11 franchise agreements and nine opened units. He said it wasn’t surprising that corporate Quiznos officials gave a neutral spin to the restructuring news. The average franchisee “doesn’t have the ability or need to grasp what a covenant test is,” and most are just running their day-to-day businesses, he said.
The new Quiznos franchisee association is in the process of incorporating and recruiting membership. It was formed as a result of the settlement last year of class-action lawsuits filed by as many as 8,000 former and current franchisees.
The settlement ended years of litigation that involved allegations of racketeering and corruption, complaints about supply and food costs, marketing and advertising funds and royalties owed by franchisees that bought but never opened stores. Quiznos denied all claims and agreed to the $206 million settlement without admission of liability.
Still, Tackett said most other franchisees believe passionately that “there’s a lot of equity in the brand. At the end of the day, everyone just wants for market share to recover, then grow, and have all involved make a reasonable profit.”
The company has gotten a lot of things right, he added. “The food’s great and the customers love us.”
Other franchisees contacted by NRN said they were disappointed that Quiznos executives didn’t offer more clarity on restructuring plans to the franchise operators.
Scott Espeseth, owner of a Quiznos in Milwaukee, said, “I’m more scared than ever after that call. I have a significant investment in this franchise and I’m being kept in the dark.”
Espeseth said his store is No. 1 in his market, but sales are down about 10 percent year-over-year. He noted that Quiznos has relied too heavily on coupons and discounting to drive traffic.
“Whenever [corporate officials] talk about print and digital, they mean couponing, and that’s not marketing,” he said. “I should be the one couponing. The brand should be marketing the brand.
“Until this brand gets in front of the consumer, we are going to continue to have the problems we have,” he said.
Quiznos’ money trouble
According to The Wall Street Journal, Quiznos is grappling with more than $850 million in debt that could put the company in default. The report, which cited unnamed sources, said Quiznos is asking the holders of about $225 million in debt to forgive those obligations in exchange for equity.
Other reports indicated that Quiznos founder Rick Schaden and partners were considering another $50 million investment in new equity to help refinance debt to avoid potential default this year. The chain’s ownership team includes CCMP Capital Advisors LLC, and Schaden’s private equity firm Consumer Capital Partners.
Observers said one problem is the large number of closures the chain has suffered.
Since its peak in 2007, Quiznos, which franchises about 2,600-units in the United States has seen between 1,500 to 2,500 locations shuttered, by some estimates.
John Gordon, principal of Pacific Management Consulting Group in San Diego, said Quiznos will “reach an inflection point where the number of stores left will be able to make a go of it.”
However, Gordon said it remains to be seen “how low they need to get.”
What the future could hold
Franchisees told NRN that MacDonald said the company had been working with advisors over about six months to improve the company’s financial structure.
The chief executive also said same-store sales trends in the third and fourth quarters last year, and first quarter this year, were positive, though dipped in late April and May, likely the result of a gap in advertising.
Franchisees also told NRN that the executives outlined a plan for more advertising support for franchisees to reduce such gaps later this year, including print, television and radio. The 3,500-unit chain is also planning another nationwide Groupon event, though slightly different than the punch-card multiple-visit deal it offered in May, sources said.
Franchise attorney Peter Silverman of Shumaker Loop & Kendrick LLP in Toledo, Ohio, urged Quiznos franchisees to organize to ensure their interests are protected as the company reworks its financing.
Silverman, who worked with Bennigan’s franchisees through that company’s bankruptcy, said it’s not unusual for franchisees to be kept in the dark on such matters.
“At Bennigan’s, franchisees learned about the [bankruptcy] filing by reading it in the newspaper. That was the worst scenario, but that shows why you should be organized and get a seat at the table,” he said.