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Quiznos: Some lessons in business problem-solving

In Restaurant Finance Monitor, Dec, 2013, “Why Quiznos is Near Bankruptcy Again,” RFM Analyst Jonathan Maze writes, “It's not true that Quiznos has to work out a deal with its lenders every Christmas. It's only every other Christmas.” Two years ago, they averted bankruptcy in a debt-for-equity deal with lender Avenue Capital which eliminated $281-mil in debt. But that left almost $600-mil of their $875-mil total debt in place. [In other words, they shed 32% of their accumulated debt, leaving 68% in place.]

In Aug, 2013, Maze detailed in his article “Sales still declining at Quiznos” what went on behind the scenes in late 2011: a new CEO (from Mail Boxes Etc.) plus other new execs and a new Board member. But, sales declined 12% in 2012, 13.5% in 1 Qtr 13, 5.8% in April, and 11% in May. Compounding the franchisees’ financial problems are those of the franchisor: Quiznos distribution revenue was down 16% last year, and manufacturer/supplier rebates were down by a full 25%. Falling sales means closure of franchise locations. In 2009, Quiznos had 4,378 locations; at year end 2013, they had only 1,935. That means they’ve lost more places than they now have, and about 400 of the remainder are mini-locations in gas stations and convenience stores. Stated plans to turn things around rested on a revised menu and an “improved restaurant experience.”

Forbes Staff Writer Brian Solomon reported on Mar 14, 2013 that Quiznos is again filing for reorganization which will allow the franchisees to continue to crank out the sandwiches. This announcement followed by days a similar message from pizza franchisor Sbarro. Quiznos has a prepackaged deal to address $400-mil of it’s $570-mil cumulative debt [they’ve only reduced their debt load by about $20-mil in two years, and this deal clears 70% of their owings]. Solomon observes, “While other fast-casual restaurants like Chipotle and Panera Bread continue to surge, brands like Sbarro and Quiznos have failed to adapt to new tastes and customer behavior.”

A final point: Steve Raabe of The Denver Post (that’s Quiznos’ home town and headquarters) reported on Mar 13, 2013 that another round of lawsuits had been filed by franchisees for unfair treatment, just three years after Quiznos agreed to pay $95-mil to the then 6,900 franchisees over similar complaints. “Total revenue for QFA Royalties has plunged 41% in two years, from $123-mil in 2009 to $73-mil in 2011. Net income declined by a similar margin in that period, from $47.7-mil to $28.4-mil.”

While none of us know the inner machinations at Quiznos, a few lessons might be gleaned from what we do know and how they apply to small businesses:

1) Don’t apply a BandAid® when surgery is needed. Quiznos had already been in decline for years before they refinanced 1/3 of their debt. The new owner then put in $225-mil to bolster the chain. It’s easy to fall into the trap of a short-term solution to a long-term problem. In none of the articles I researched was cost-reduction mentioned in their battle plan, and nothing was said to explain why management/ownership expected the years ahead to be significantly better than the years behind them. In short, it appears their plans addressed symptoms instead of the disease. You probably don’t generate anywhere near $75-mil in annual sales, but look at the proportions the numbers above represent. The same kind of faulty logic in a big company can apply to inventory control, product support, staffing, and other business functions which can be made subject to knee-jerk decisions in a small organization. Decades ago, the Rand Think Tank in Santa Monica devised a problem-solving process, and their first step, while obvious, was also brilliant: make sure you correctly identify the problem. Their second step was equally good: make sure you correctly categorize the problem. I submit Quiznos’ real issues were marketing and operations, not finance.

2) When surgery is necessary, sooner is better. As part of their recent bankruptcy filing, QFA states they will focus on lowering food costs. This sounds like something that should/could have been addressed the last time they were in financial distress: cost-cutting is always a good remedy for a debt load. Not only might they have made better financial progress over the last two years, but consider the economic environment they’re in now. There are still many consumers feeling the pinch of the recession that officially ended years ago, and consumer optimism still is not back at its best. But, anyone who’s been to the grocery store recently has experience sticker shock, particularly in the meat department. Just today, my local grocer surprised me with a label on one cut of meat that is up 60% from last Summer. It will be difficult for a meat-based business to shave a few percentage points off its materials costs when the wholesale market is inflated. Of course, they could not have seen this coming, but my point is that none of us know what market/supplier conditions will be two years from now, so act decisively when a problem is identified. I guess I should take my own advice; gas at my local station went up 8¢ over the weekend…should have tanked up Friday when my low fuel light came on.

3) Define a positive goal for every negative problem. In none of the published reports I’ve found about Quiznos in the last two years was here anything said about percent or dollar goals/improvements. That doesn’t mean they didn’t have them; they may well have just played their cards close to their chests. But, I suggest you’ll achieve better results digging yourself out of a hole if you have a goal than if you don’t. You may not attain what you specified, but having it documented and using it as a constant benchmark will help keep you and your team on track towards best possible results. I’m reminded of one of the most-taught sales basics: ask for three referrals. If you ask for one, you’ll probably get one. I you ask for three, you’ll likely get at least two and, sometimes, you’ll actually get all three.

4) Let your marketplace help you define your problem and its solution. If it’s obvious to industry analysts that Quiznos has yet to carve out a niche in line with consumer expectations, then another refinancing effort could prove to be a futile exercise akin to rearranging deck chairs on the Titanic. Their sales are in the fifth consecutive year of decline. That’s their problem. Easing their debt load extends their viability and gives them breathing room. But there’s been no big news about something better or different at Quiznos, nothing to make me want to drive past Subway to see if my sandwich experience will be any better than the last time. Your customers will help you identify what’s wrong…if you’ll ask them and listen to them.

As a consumer, I can’t say that I’ve seen anything dramatically different about Quiznos in recent years, save for their recent introduction of a lobster sandwich (which ain’t bad). Yet, they’re long-gone from the Top 10 list of sandwich shops, lead solidly by Subway. So, here’s another tip for small business owners: if you want to try the lobster sandwich, get one while Quiznos can still get their hands on those tasty shellfish and before your local store disappears.

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