By Steve Raabe
The Denver Post
Posted: 03/17/2013 12:01:00 AM MDT
Updated: 03/17/2013 12:54:34 PM MDT
Analysts say franchisees’ friction with Quiznos has created a debilitating spiral of closures and falling revenue. (RJ Sangosti, The Denver Post)
Quiznos’ long-standing friction with disgruntled franchisees has surfaced again in a new round of lawsuits.
Since December, 10 suits have been filed in Denver District Court, alleging that the Denver-based sandwich chain has treated its restaurant owners unfairly.
The claims are similar to those in a long history of related legal actions — that the company has taken actions to increase corporate profits at the expense of franchisees who are struggling to break even.
Analysts say the new legal disputes signify more problems for a chain already beset by declining sales, store closures and stiff competition in the sub-sandwich sector.
The latest lawsuits come three years after Quiznos agreed to a $95 million settlement with 6,900 class-action franchisees who said the company overcharged them for supplies and failed to provide adequate marketing support.
In the new round of lawsuits, store owners claim Quiznos continues to overcharge by forcing them to buy food at marked-up prices from a Quiznos-affiliated supplier.
“The hidden mark-ups, which are the keystone of Quiznos’ scheme, have generated massive profits for Quiznos while simultaneously driving its franchisees to financial ruin,” one of the lawsuits says. Most of the suits contain similar or identical language.
The lawsuits allege that Quiznos management increased the use of coupons for free and discounted food — costs that are absorbed by restaurant owners — in order to make the franchisees buy more food at marked-up prices from Quiznos’ supply affiliate.
Denver attorney Jeffrey Cohen, representing the franchisees, said he would offer no additional comment.
Quiznos issued a brief statement and said it would not comment further.
The statement reads: “We believe that these lawsuits are completely without merit. Quiznos management team will not allow these lawsuits to distract us from our mission. We remain committed to delivering a premium product and experience to our guests, and helping our franchise owners grow their sales and profits.”
Named as defendants in the suits are a number of Quiznos corporate entities, including its franchising arm; the supply affiliate; the company’s majority owner, investment fund Avenue Capital Group; and former owners Richard E. and Richard F. Schaden.
Franchisee John Portrera of Petoskey, Mich., a longtime critic of Quiznos’ management, said he shut down his restaurant Dec. 31 after 4½ years because of mounting losses and resulting personal turmoil, including a divorce.
“What they’re doing is criminal,” he said. “I lost my savings. I lost my wife. I cashed in my life insurance policy. I lost everything, but now I’m so happy just to be out of it.”
Portrera said that even though his restaurant was rated highly by Quiznos in categories such as customer satisfaction and cleanliness, he lost about $400,000, including his initial investment and operating losses.
Disputes between franchise companies and their franchisees are relatively common, but few have the persistence and animosity as Quiznos’.
For example, Burger King restaurant owners sued the parent company in 2009, arguing that they were losing money by being forced to sell some menu items for $1. The suit was settled 17 months later, with both sides saying they would collaborate on future pricing decisions.
Analysts say Quiznos’ friction with franchisees has created a debilitating spiral of store closures and declining revenue.
“The sales decline and the heavy couponing have really made it tough for franchisees to make a profit,” said Jonathan Maze, an analyst and writer for Franchise Times magazine. “Quiznos charges a lot of money (to franchisees) for its food.”
University of Denver finance professor Mac Clouse said some restaurant chains with franchise supply agreements use their buying power to acquire food at low prices, and then pass the savings on to franchisees.
Yet the lawsuits claim that Quiznos has taken the opposite approach — using economies of scale to negotiate low prices for bulk-food purchases, then reselling the food at higher prices to restaurant owners.
Quiznos is privately owned and is not required to report financial results to the Securities and Exchange Commission. However, some of its performance metrics can be found in franchise disclosure documents that the company is required to file in some states.
The documents show that Quiznos collected much more money from selling food and supplies to franchisees than it took in from royalties based on sandwich sales.
The supply company, American Food Distributors LLC, which Quiznos describes as an “affiliate,” had 2011 revenue of $225.3 million. Quiznos’ franchise operation, QFA Royalties, collected 2011 royalties and fees of $73 million from franchisees.
The disclosure documents show that the chain’s number of stores fell from 4,381 in 2009 to 2,834 in 2011, a decline of 35 percent over two years. At the peak in 2006, there were more than 5,000 outlets.
Total revenue for QFA Royalties has plunged 41 percent in two years, from $123 million in 2009 to $73 million in 2011. Net income declined by a similar margin in that period, from $47.7 million to $28.4 million.
“Quiznos has struggled, primarily because they’re in an intensely competitive market,” said Darren Tristano, executive vice president of food-service analysis firm Technomic.
“It’s always been a difficult relationship between the parent company and the franchisees,” he said. “It seemed as though they had gotten past that (with past settlements), but now they’re battling again.”
Steve Raabe: 303-954-1948, email@example.com or twitter.com/steveraabedp