Quiznos is one of the most fascinating case studies in modern franchising because the company did not fail from a lack of consumer awareness or an unattractive product. At its peak, Quiznos was one of the largest restaurant franchise systems in America and appeared positioned to become a permanent challenger to Subway. So many, including me, enjoyed the product, loved the toasted sandwich process that Quiznos introduced to the world and frequently chose Quiznos over other sub sandwich franchise brands.
Instead, the system experienced one of the most dramatic contractions in restaurant-franchise history.
Quiznos grew to roughly 4,700 U.S. locations by 2007, but a decade later had fewer than 400. Restaurant Business described the decline as virtually unprecedented for a restaurant chain of its former size.
The company eventually filed for Chapter 11 bankruptcy protection in 2014. Although Quiznos survived and continues operating today under different ownership, it never returned to anything approaching its former footprint.
So what happened to what seemed like the next great sandwich brand?
The story provides an important lesson for every franchisor, the financial health of the franchisor cannot be separated from the financial health of its franchisees.
Quiznos Started With a Great Idea
Quiznos was founded in Denver, Colorado in 1981 and built its identity around toasted submarine sandwiches.
That distinction mattered.
At a time when Subway dominated the sandwich category, Quiznos positioned itself as a more premium alternative. Toasting the sandwich became part of the experience, and its distinctive products and memorable advertising helped the company build considerable consumer recognition.
Franchising fueled explosive expansion.
By the mid-2000s, Quiznos had thousands of locations and appeared to be one of the great franchise growth stories of its era. Restaurant Business reports that the chain approached 4,700 locations in 2006.
From the outside, the system looked enormously successful.
But there was a problem beneath those impressive unit counts.
Many of the individual restaurants weren’t performing particularly well.
Mistake #1 – Growth Became More Important Than Unit-Level Economics
One of the most important principles in franchising is remarkably simple:
A franchise system is only as healthy as the businesses operated by its franchisees.
Quiznos provides a dramatic example of what happens when that principle gets lost.
Restaurant Business reported that around the system’s peak, its approximately 4,700 restaurants averaged only about $400,000 in annual sales per location. At the same time, high food costs made it difficult for franchisees to generate adequate profits.
That creates a dangerous franchise model.
A franchisor can continue generating revenue from franchise fees, royalties, products and other sources while individual franchisees struggle.
For a while, rapid franchise sales can hide that problem.
More franchisees mean more locations. More locations mean more systemwide sales. More openings mean more initial fees and potentially more purchasing volume.
But eventually the economics catch up with the system.
The real question shouldn’t have been:
How quickly can Quiznos open more stores?
The Quiznos Leadership Team should have been focused on how profitable and sustainable are the stores we already have?
ow profitable and sustainable are the stores we already have?
That distinction became critically important.
Mistake #2 – The Franchisor Made Money From the Supply Chain While Franchisees Struggled
This is perhaps the most important part of the Quiznos story.
Quiznos did not rely exclusively on franchise royalties for its economics. It also had a significant supply-chain business.
A subsidiary called American Food Distributors purchased and distributed food and supplies to franchisees. According to Restaurant Business, that subsidiary generated approximately $500 million in revenue in 2006.
Franchisees complained that mandatory supply costs were too high and significantly reduced their profitability. These issues eventually became central to major litigation between franchisees and the company. Quiznos disputed allegations concerning its practices, and litigation ultimately resulted in substantial settlements without an admission of liability.
This highlights a fundamental potential conflict in franchise economics.
A franchisor can potentially profit when a franchisee buys something, regardless of whether the franchisee ultimately makes money operating the business.
That doesn’t mean franchisors shouldn’t sell products to franchisees. Many excellent franchise systems do.
The question is whether the arrangement creates a healthy alignment of interests.
Ideally:
The franchisor makes more money because its franchisees make more money.
A royalty-based model can create that alignment. If franchisee sales grow, royalty revenue grows.
When the franchisor instead depends heavily on margins generated by selling required products to franchisees, incentives can become less aligned.
The American Bar Association recently used Quiznos as a franchise M&A case study, noting that decisions surrounding food sourcing reduced franchisee margins and contributed to tension between operators and management.
Mistake #3 – Quiznos Expanded Too Aggressively
Rapid franchise development can look like success.
It isn’t necessarily.
Opening another franchise only creates value if the market can support another location and the new unit has a reasonable opportunity to succeed.
Quiznos faced complaints that it had oversaturated markets and placed restaurants too close together. Franchisees alleged that new locations cannibalized existing stores and weakened unit economics.
This is another important franchising lesson.
A franchisor may financially benefit from selling another franchise in a market. But the existing franchisee may experience exactly the opposite result if that additional location takes away customers.
Strong franchise development therefore requires discipline.
Sometimes the correct franchise-development decision is:
Don’t sell the territory.
Protecting unit economics can be more valuable over the long term than collecting another franchise fee.
Mistake #4 – The Relationship With Franchisees Became Adversarial
Every franchise system eventually experiences disagreements.
The important question is how those disagreements are handled.
By the mid-2000s, the relationship between Quiznos and substantial portions of its franchisee community had become highly contentious. Franchisees formed associations and pursued litigation involving supply costs, advertising, royalties and other issues.
The litigation became extensive.
A major settlement reached around 2010 involved thousands of current and former franchisees and was valued at approximately $206 million, although Quiznos denied wrongdoing and the settlement did not constitute an admission of liability.
Regardless of the legal merits of individual disputes, this level of conflict is enormously damaging to a franchise organization.
Franchisees should be some of the franchisor’s greatest advocates.
They talk to prospective franchisees. They interact with customers. They operate the stores. They represent the brand locally.
When a large percentage of the franchise network becomes hostile toward the franchisor, franchise development becomes more difficult, operational cooperation deteriorates and the brand can enter a negative cycle.
Mistake #5 – Subway Eliminated Quiznos’ Competitive Advantage
Quiznos also faced an increasingly aggressive competitor.
Its signature differentiation had been simple:
Toasted sandwiches.
But competitors could copy that.
Subway began adding toasters to its stores, weakening one of Quiznos’ strongest points of differentiation. Subway then became extraordinarily aggressive on value, most famously with its $5 Footlong promotion.
Quiznos faced a difficult strategic problem.
It positioned itself as a higher-quality, premium sandwich concept, but now its much larger competitor offered toasted sandwiches at aggressive prices.
Quiznos attempted to compete with discounts and promotions of its own.
Unfortunately, discounting is particularly dangerous when franchisee margins are already weak.
Restaurant Business reports that the company’s attempts to compete on value—including coupons and discounted products—generated additional friction with franchisees who were already struggling financially.
The lesson is important:
A franchisor’s national marketing strategy has to work economically at the franchisee’s P&L level.
Generating traffic isn’t enough.
If a promotion generates customers but destroys franchisee margins, it may increase sales while simultaneously weakening the franchise system.
Mistake #6 – The Great Recession Exposed the Weaknesses
Then came the 2008 financial crisis and Great Recession.
Consumers became more price-sensitive and restaurant spending came under pressure.
A healthy franchise system can sometimes absorb an economic downturn.
A system containing hundreds or thousands of marginally profitable franchisees has far less room for error.
Quiznos franchisees were already confronting relatively low unit volumes, high operating costs, competitive pressure and disputes with the franchisor.
The recession accelerated the problem.
According to Restaurant Business, approximately 700 Quiznos locations closed in 2009 and another 800 closed in 2010.
That was devastating.
And franchise systems can experience a snowball effect once large numbers of units begin closing.
Closures weaken consumer confidence. They reduce purchasing volume. They reduce royalty revenue. They make franchise sales harder. They create negative press. They make existing franchisees nervous.
The franchisor then has fewer financial resources available to fix the system.
Mistake #7 – Quiznos Was Carrying Enormous Debt
Another major problem was happening at the corporate level.
In 2006, private equity investors acquired a significant stake in Quiznos through a leveraged transaction.
That placed substantial debt on the business. Restaurant Business reported that the 2006 transaction put roughly $600 million of debt on Quiznos, with additional debt subsequently added.
This matters enormously.
Quiznos needed cash flow at precisely the time its franchise system needed relief.
A highly leveraged franchisor has fewer options.
Reducing supply-chain margins to help franchisees becomes harder.
Increasing support becomes harder.
Investing heavily in marketing becomes harder.
Allowing weak locations time to recover becomes harder.
The company needed money to service its obligations while its franchisees needed the franchisor to help improve their economics.
Those objectives collided.
By the time Quiznos filed for bankruptcy in 2014, Restaurant Business reported approximately $875 million in loan obligations.
The Collapse Accelerated
Once these problems converged, Quiznos entered a vicious cycle.
Weak franchisee economics produced closures.
Closures reduced system revenue.
Reduced system revenue made corporate debt more difficult to service.
Corporate financial pressure made it more difficult to provide relief to franchisees.
Franchisee dissatisfaction generated litigation and negative publicity.
Negative publicity made selling franchises more difficult.
Fewer openings and more closures reduced purchasing volume and royalty revenue even further.
Eventually, the system became unsustainable.
Quiznos filed for Chapter 11 bankruptcy protection in March 2014.
The brand survived bankruptcy, but its enormous restaurant footprint did not.
Between 2007 and 2017, Quiznos declined from approximately 4,700 U.S. locations to fewer than 400, according to Restaurant Business. U.S. system sales fell from nearly $1.9 billion in 2007 to $171 million in 2017.
That is an extraordinary destruction of system value.
Quiznos Didn’t Completely Disappear
An important clarification is that Quiznos did not go out of business.
The brand continued after bankruptcy and changed ownership again. High Bluff Capital Partners acquired Quiznos in 2018, and subsequent leadership has attempted to rebuild the concept with updated restaurant formats and a renewed emphasis on franchisee economics and support.
The modern Quiznos organization should therefore be distinguished from the management and ownership structures responsible for many of the historical problems.
But the brand today is a fraction of what it once was.
That makes Quiznos an especially useful franchise case study.
The Biggest Lesson – Franchisee Profitability Comes First
The Quiznos story can be reduced to one central principle:
The franchisor cannot sustainably win while its franchisees lose.
A franchisor may temporarily generate attractive revenue from initial franchise fees, required products, supplier arrangements, rebates, technology fees, advertising fees and royalties.
But none of those revenue streams are sustainable if franchisees cannot make money.
Consider two hypothetical franchise systems.
Franchisor A has 1,000 locations with weak unit economics and constantly needs to sell franchises to replace locations that close.
Franchisor B has 500 highly profitable franchise locations whose owners renew their agreements, open additional units and enthusiastically recommend the franchise to others.
Franchisor B may have the much more valuable business.
Retention matters.
Franchisee profitability matters.
Same-store sales matter.
Unit-level margins matter.
Franchisee satisfaction matters.
The number of franchises sold is only one measurement of franchise-system health.
What Today’s Franchisors Can Learn From Quiznos
Quiznos provides several enduring lessons for anyone building a franchise system.
Build the economics before building the unit count. A business should demonstrate attractive and sustainable unit economics before accelerating franchise development.
Keep franchisor and franchisee interests aligned. The strongest economic model is generally one in which the franchisor becomes more successful as franchisees become more successful.
Don’t overdevelop markets. Territory planning should consider whether existing and future franchisees have sufficient market opportunity.
Treat required purchasing programs carefully. Proprietary products and approved suppliers can be valuable components of a franchise system, but the economics need to work for the franchisee as well as the franchisor.
Listen to franchisees. Franchise advisory councils and independent franchisee associations shouldn’t automatically be viewed as adversaries. They can provide valuable information about what is actually happening at the unit level.
Evaluate promotions using franchisee economics. A national discount that generates impressive traffic can still be disastrous if franchisees lose money fulfilling it.
Be cautious with leverage. Excessive franchisor debt can force management to prioritize immediate cash generation when the franchise network needs long-term investment.
Most importantly, don’t confuse franchise sales with franchise success.
Selling 100 franchises isn’t the achievement.
Opening 100 franchises isn’t even the achievement.
The real achievement is creating 100 franchise businesses that remain open, generate attractive returns for their owners, renew their agreements, expand into additional locations and continue producing royalties for the franchisor for many years.
Quiznos – A Powerful Warning for the Franchise Industry
Quiznos had many things entrepreneurs dream of having: a recognizable brand, a differentiated product, thousands of locations, national advertising, enormous systemwide revenue and aggressive franchise demand.
Yet those advantages could not overcome a fundamental weakness in the franchise relationship.
Too many franchisees struggled to make the economics work.
The Great Recession, Subway’s competitive response, corporate leverage and other external pressures unquestionably contributed to the collapse. But those forces became devastating because the franchise system was already vulnerable.
Quiznos therefore represents much more than the story of a sandwich chain that lost market share.
It demonstrates one of the most important principles in franchising:
Franchisee profitability isn’t merely something a good franchisor should care about. It is the economic foundation upon which the entire franchise system is built.
When franchisees generate healthy returns, they stay in business, reinvest, open additional units, validate the opportunity to prospective franchisees and generate recurring royalty revenue.
When franchisees consistently lose money, no amount of franchise sales can permanently compensate for the problem.
Quiznos grew extraordinarily fast because franchising gave it the ability to expand using other entrepreneurs’ capital.
Its decline demonstrates the other side of that equation, those entrepreneurs must have an economically sustainable reason to remain in the system.
That may be the most valuable lesson Quiznos left the franchise industry.
For more information on the franchise industry and background on franchising, visit the FMS Franchise SKOOL platform: https://www.skool.com/franchise-marketing-systems-3411
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