How Quiznos Failed Itself By Failing Its Franchisees

In the late 1950s, you could get a one-location McDonald’s franchise license from Ray Kroc for just $950.

Sure, there was $80,000 or more to invest in land, rent, building costs and startup (less if you found a mortgage, existing location to rent, etc.), but yearly revenue could hit $200,000 or more with a 20% pretax margin. And the royalty fee was minimal — 1.9% of sales. Kroc didn’t force his franchisees to buy supplies from a McDonald’s commissary. He was strict about operational excellence, pricing and the menu, but in general, the main job was sticking to the menu, committing to hard work and quality, and watching the money roll in.

Let’s fast forward to today and look at fast food from a different angle — sandwich maker Quiznos. The startup investment isn’t too bad: $10,000 franchise fee, $155,547 to $233,726 (before real estate) investment. That’s roughly equivalent to the 1958 McDonald’s franchise fee when adjusted for inflation, and you’d have to spend at least a few hundred thousand on real estate to equal the 1958 McDonald’s full initial investment in 2014 dollars (via the Bureau of Labor Statistics CPI inflation calculator). McDonald’s, meanwhile, is considerably more expensive these days.

So, why is Quiznos about to file for bankruptcy while franchisees (current and former) badmouth the company?

Well, as usual, the answer is complicated. There’s the competition factor, particularly Subway and its $5 footlongs and other hot sandwich outlets like Jimmy John’s and Potbelly (the latter, only recently getting into franchising, is to my mind superior to Quiznos in product, atmosphere and process). It seems obvious the chain, which once had more than 5,000 locations but is less than half that now, grew faster than it could manage while overestimating demand.

All this adds up to terrible economics: The top-performing franchisees are making more than one-third less than the average Quiznos did in the middle of last decade, according to the Wall Street Journal.

Franchisees are obviously hurting, and they are further squeezed by the fees: 7% in royalties, 4% for advertising, and an additional 1% in some markets. These fees are not necessarily out of whack for the industry, but they don’t help when the boom times are over.

What really seems to irk franchisees, however, is being forced to buy supplies from Quiznos, allegedly for more than the open market would charge:

Franchisees long have complained that Quiznos requires them to buy food and other supplies from a Quiznos subsidiary, which they allege charges more than what they would pay to purchase those goods themselves.

Those complaints were the basis of five potential class-action lawsuits that franchisees filed against the company in the 2000s. Quiznos settled all of them in 2009 without admitting liability.

Several other suits are unresolved, however.

Again, Quiznos is not the first chain to have its own distribution business that franchisees must buy from. Surely, bad luck is part of the equation, compounded by a product type that’s not terribly hard to mimic and some formidable competitors. And the struggling economy, layers of regulation, et al.

But Quiznos also made self-evident, serious mistakes in how it treats its franchisees, as the lawsuits keep coming and many franchisees simply give up and don’t give notice. And it’s had plenty of time to try and change —this 2010 article details nearly all the problems franchisees still face, most of which appear to be caused by poor corporate management and top-down communication that was lacking or inept.

When your customers or employees — and, in an inexact way, franchisees are a little of both—have long-standing, vocal complaints and are willing to break contracts to get out, how do you respond? You do what you can to address those complaints without sacrificing core principles. And if you can’t satisfy those complaints, arrange for both parties to move on in an orderly fashion. Easier said than done, of course, but it seems clear that Quiznos hasn’t succeeded here. And if these franchisees are all bad eggs—let’s assume this for posterity’s sake— then Quiznos is failing to properly vet franchisees and communicate expectations.

One more anecdotal piece of evidence, this one from the history of fast-food franchising. It’s a passage that sounds a lot like the problems Quiznos has created for itself— except this is about what franchises were doing more than 50 years ago. As John Love writes in “McDonald’s: Behind The Arches,” which came out in 1986 but I’m only recently reading (hey, I was only 3 when it published):

“Franchisers have to have some means of generating income, but selling products to franchisees can create the appearance — real or imagined—of a conflict of interest between the franchiser and franchisee. In fact, the practice has led to some of fast-food franchising’s most nettlesome litigation. … A greater, but more insidious, problem with supplying franchisees is that it can encourage restaurant chains to tend to their commissaries and manufacturing plants rather than to their stores. Their orientation increasingly shifts to the profits they make as suppliers, not as retailers, and as a result they begin to ignore store operations and their retail customers.”

Quiznos has for years faced a difficult financial future, but one would have thought it would have the fundamentals down. After, all the dummies’ guide to franchising surely advises knowing the past and present of your sector and taking care of customers, franchisees and brand advocates.

If Quiznos can’t do either, and is being flat-out beat by competitors, maybe it deserves to fail. Either way, it’s likely we’ll read much more on the financial woes of corporate than we will on the franchisees, ex=employees and local economies left behind.