You're Toast!

Franchise owners thought they'd make a fortune serving the toasted sandwiches created by Quiznos. Instead, they got burned.

"What's funny is the owners that seem to be most perturbed about this thing are the owners with the highest-volume stores," says another Colorado franchisee. "I think it's because we run good stores. We're there and we're conscientious, and we realize how much we should be making. We're doing okay, but that's the top ten stores. The ones on the bottom..."

He shakes his head.

When he bought into Quiznos, in 2001, he'd been eating there since he was a student in Boulder and there were only two stores. He held out for a high-traffic location and was pleased with his sales from the start.

Toasted bread wasn't enough to keep Ratty Baber, Chris Bray and Bob Baber from struggling with their franchises.
Toasted bread wasn't enough to keep Ratty Baber, Chris Bray and Bob Baber from struggling with their franchises.
Attorney Ted Bendelow represented Quiznos franchisees.
Anthony Camera
Attorney Ted Bendelow represented Quiznos franchisees.

There were a few red flags. Design and construction took longer than it should have because he claims he couldn't get his area director to return his phone calls. All the support he'd been promised proved to be non-existent.

In the spring of 2003, not long after his opening, franchisees were invited to a conference in Las Vegas. It was soon after the Super Bowl commercial aired. Jay Leno gave a private show, and Rick Schaden gave out keys to new Mini Coopers to the best stores in the country. What stuck in the mind of franchisees was not all the hype and glitz, but something their CEO said. "Rick Schaden got up there and told everybody that one out of every three Quiznos was not making money," the Colorado franchisee recalls. "He just came out and told us that. One out of three Quiznos did not make money. I thought, 'My God, what did I get into here?'"

But he was making money, and he continued to do so. It was only late last year that he joined the TSFA, even though he had one of the most successful stores in the state and was someone the company had chosen to train dozens of franchise owners and corporate employees.

"It just slowly started building over the years to where you start seeing your profit-and-loss statements and thinking, 'Gee, I'm doing as good or better than last year. How come I'm not making as much?' You notice that food costs, paper costs and equipment have gone up. Everything we touch with these guys, the price goes up and a kickback goes to them. The general consensus now is that they make more money off the food [they sell to franchisees] than the royalties, and this was just coming to light to most people last year."

When he received a corporate e-mail to all Colorado franchisees, he kept the addresses. The chatter among owners had already begun when Quiznos decided to start selling gift cards last September. It was a bad deal for the franchisees because Chase was going to take 8 percent of each sale for administering the program. The fact that Chase was owned by JP Morgan -- which had just bought into Quiznos -- made franchisees wary that this was just another kickback scheme. They were made more skeptical by the reference -- in the contracts they were being asked to sign -- to a second agreement between Quiznos and Chase, which they were not permitted to review.

Some owners refused to sign, but Quiznos threatened them with a "default" if they didn't change their minds. Defaults are normally issued during regular inspections if something isn't up to par -- like food not being stored at the right temperature or an unclean shop; enough defaults can justify shutting down an owner. The gift-card holdouts acquiesced and signed the contract.

"That prompted a lot of people right there to go, 'Wait a minute,'" says the franchisee. "Isn't a default supposed to be about an unsafe practice or health issue? This was all about money. That was what prompted me personally to start taking some action. To me, that was the final abuse of their default system. How stupid do you think we are?

"That's another thing. A lot of people that get into Quiznos are from other countries. They've saved all their money and put it into this. Their command of English isn't good, and they don't understand our legal system. I honestly think Quiznos is preying upon them. I just hope through some of these cases we'll set some precedent and change some of that. There's plenty of money for a franchisor to make. But when they get greedy like that, they have a way of wringing every dime out of the system. It's not even clever. It's just forceful."

Last year, the Schadens put Quiznos on the market with an asking price rumored to be as high as $2 billion. A few months later, JP Morgan bought an undisclosed stake in the private company. In January, Greg Brenneman was appointed the new president and CEO, and his company, TurnWorks, took an equity position in Quiznos. Rick Schaden stepped down as CEO, though he remains chairman of the board.

"Moving forward, our primary mission will be to relentlessly work on increasing restaurant profitability for our franchise owners," Brenneman said in a press release. The turnaround specialist is credited with fixing Continental Airlines and improving Burger King's relations with its franchisees before taking the company public last year.

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