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Has Quiznos changed?


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Quiznos opened 2007 with a new CEO and an almost entirely new executive staff. That group is now working off a single-page plan, known as the "Go Forward Plan"  named by Greg Brenneman when he was the turnaround guy at Continental Airlines because airplanes don't go backward.

After getting on a crowded elevator in a nondescript Denver office building  on their way to work one recent morning, two coworkers greeted one another and started some small talk. "Did you go to the meeting last night?" one asked. "Boy, were those franchisees mad."

It was an inauspicious beginning to my visit. This was Quiznos, after all, the 5,000-unit chain whose problems with franchises are so well documented in the press -- class action lawsuits, money losing franchises, a tragic suicide -- that they are barely worth repeating.

The company spent much of 2007 trying to improve this image -- and its operations. It is a different Quiznos now, with a new CEO in Greg Brenneman, who has surrounded himself with franchising veterans in an almost completely overhauled executive staff. That staff is using Brenneman's Corporate Turnaround Playbook to boost unit profits, increase sales and get the chain back on a growth track. 

Greg Brenneman

Many franchisees, including some of the chain's harshest critics, say that the efforts are showing results. Food costs are down. The chain's new and profitable $2 Sammies, flatbread sandwiches, are drawing positive early reviews. New ads are bringing in traffic to the restaurants, and the company is more responsive to complaints.

But as the overheard remark indicates, the chain still has a way to go. Many franchisees harbor doubts about the company along with a lingering resentment for the past problems. A number of franchisees may be looking to sell.

Company officials acknowledge that their work is not done, even as they note that they'll never completely silence critics. "It takes time," said Brenneman, who is given credit for boosting the fortunes at companies like Continental Airlines and Burger King. "But Rome wasn't built in a day. Neither were franchise systems."

Brenneman grew up on the edge of a farm in rural Kansas. He held his first paying job in the third grade. In the summer of his junior year in high school he held three jobs that kept him working from 6:30 a.m. to midnight. "Frankly, I'd rather be working than not any day of the week," he once wrote in an article for the Harvard Business Review on the Continental turnaround. His schedule is tougher these days -- he wakes up at 3:30 a.m. and is in the office by 5:30 a.m. He's frequently there past 10 p.m., answering e-mails. "I just love this stuff," he said.

It is a demanding schedule, but those who work with him say there's no concern that it could lead to burnout, either with Brenneman or with them. "He can make you run fast, but it's fun," said Steve Provost, executive vice president of marketing for Quiznos. "He loves his family. He loves business. He loves sports. But he really loves work. It's just the way he is."

Brenneman was a turnaround specialist at Bain & Co. in 1994 before taking the job as president at the struggling Continental Airlines -- which he bluntly called the "world's worst $6 billion company." He proceeded to help improve the company's finances, rescuing it from the brink of its third bankruptcy in a decade.

He became CEO at Burger King in 2004 and was given credit for improving franchisee relations. The company went public two years later, and Brenneman left the chain and started pondering investment options. His family pushed for Quiznos, where they'd been customers for 10 years.

Brenneman said he called Rick Schaden, Quiznos' owner and chief executive. They met twice. On the second meeting, in Houston, Schaden told Brenneman that he would sell him equity in the company only if Brenneman became CEO. He agreed, and became the third major investor in the chain -- JP Morgan had previously bought a sizable stake in the company.

It was clear at the time that Quiznos had hit a wall. Aside from the lawsuits, 600 storeowners left the chain between 2004 and 2006. Hundreds others weren't opening stores. Annual sales per store, which had grown to $436,573 in 2004, had fallen 5 percent in 2005 to $414,635, where sales stayed in 2006.

Brenneman attributed the sales decline to growth in the number of stores. "Almost every brand goes through that cannibalization of the existing store base," he said. But the chain still needed work.

One important step: overhaul the executive ranks. Brenneman has said that replacing top executives is key in any company turnaround, and he told me, "The people who put you in the ditch rarely pull you out." Still, "most of the executive offices were empty" when Brenneman arrived because the company felt the previous staff had taken Quiznos as far as it could go. He quickly filled them with franchising veterans.

Two, Chief Operating Officer Steven DeSutter and Chief Administrative Officer Clyde Rucker, had been with Brenneman at Burger King. Another, Chief Legal Officer Rich Emmett, is a large Papa John's franchisee. Provost had been a speechwriter for the first President Bush and was in marketing for years at Yum! Brands. Many of them were lured to the company with promises of equity. In Brenneman's previous stops, stock options given to keep or lure talent turned some people into millionaires.

Their bonuses are tied in part to franchisee profitability -- and DeSutter said that 25 percent of his staff's bonuses depend on store profits.

That group is now working off a single-page plan, known as the "Go Forward Plan" -- named by Brenneman at Continental because airplanes don't go backward. The plan is displayed in each office and has four steps: "grow profitably," "fund the future," "excite the customer" and "work together." Brenneman, in a typically self-effacing manner, said that he is the "weak link" among executives. "There's nothing special about me," he said. "I just went out and got the smartest people and I put together a simple plan."

Improving franchisee relations exists throughout the plan. Brenneman ordered that any franchisee voice mail or e-mail is returned within 24 hours -- and he's the one who often answers them. He also leaves franchisees a weekly voice mail. Executives have created ad councils and Brenneman has made presentations to owners around the country. "He probably listens more than most upper management I've seen," said Steve Price, who owns two stores in Indianapolis. "He's out there every week communicating with us about how he's changing things internally."

A big complaint among franchisees has been food costs. Food and paper costs should be less than 30 percent of revenues for a franchise to be profitable, yet many store owners said their costs ran well into the mid to high 30s. Some sandwiches were even worse -- food and paper for the Prime Rib sandwich, with 5 ounces of meat, was $4.50. The suggested price for the sub was $10. Because of the cost, many storeowners boosted the sandwich's price to $12 or $13, which hurt sales.

Franchisees say that the company had a big incentive to force higher food costs on them because much of the chain's revenue comes from American Food Distributors, the Quiznos subsidiary that buys food from vendors and distributes it to franchisees. AFD took in nearly $500 million in revenue in 2006, according to Quiznos' uniform franchise offering circular, and took in $26.6 million in rebates from vendors.

Under Brenneman, Quiznos has taken several steps to get food costs in line. The chain renegotiated deals with vendors and lowered its charges for many items. Franchisees say that charges for sandwich bags, for instance, were cut in half.

The chain has also controlled portioning, largely by reducing the amount of meat on sandwiches -- company executives insist that this was done because some customers say the subs are too big. Larger subs, which once had five ounces of meat, now have three ounces. Smaller sandwiches have two.

DeSutter said that food costs are hovering between 28.5 and 29.5 percent, systemwide. "We're in the sweet spot," he said. Franchisees agree. "You can really feel a lot of improvements," said Christina Stanulet, who owns a Quiznos in Brook Park, Ohio. She said her food costs are around 29 percent. Every other franchisee interviewed echoed similar sentiments.

The recently introduced Sammies, small flatbread sandwiches that cost $2 apiece, cost 50 cents for food and paper. Sandwiches that will be introduced in the future will also have food costs in mind. "The goal is to get to the industry average on food and paper," Provost said. "It's not easy. It's very tempting to develop a great product that's 40 percent."

Still, Quiznos will not take the step that some company critics would like to see: the replacement of American Food Distributors with a food co-op. "At Burger King, we had a franchise co-op," Brenneman said, "and we still had complaints. There are always going to be complaints." He noted that Quiznos' profits versus total system sales are in the bottom quarter of quick service restaurants, though "we hope to change that."

One way is by increasing revenues. Company officials believe Sammies are a major step in that direction. Sammies come in four varieties with more to be introduced this year. After test marketing the sandwich, the chain introduced them in November.

Designed by the chain's executive chef, Zach Calkins, the purpose of Sammies is to bring more people in the door, particularly women and others who don't generally eat at Quiznos because of the size or expense of the company's subs. Brenneman said that as many as 24 percent of the entrees being ordered include Sammies. "There's huge demand," he said.

Many franchisees agree that Sammies are a high-demand item, and report that the sandwich appears to be luring different customers. "They're pretty popular," said Price, who was a test market for Sammies. "People who try them really like them. If they order one, they jump back in line and get another one. It's a good way for us to have everyday affordability."

Brian Wise said the sandwiches have been so good at bringing in new business that he has to rethink staffing at some of the six locations he owns in Kansas. "It fixes a hole in our menu offering," he said.

Some aren't entirely convinced, mostly because at $2 the sandwiches may be too cheap, even with the food costs at 25 percent. "I'm still a little indecisive as far as the Sammies," said Jeanne Rice, who owns a store in Brownsburg, Indiana. "They're a good product. But at $2 I have to sell so many. I'm working twice as hard." Still, she agreed that a different group is coming in to buy them.

The chain is also banking on delivery and catering -- services that help drive per-store sales at the sub chain Jimmy John's to near $1 million. Quiznos began its systemwide program in July. So far, 1,100 of the 5,000 locations have agreed to participate. "That alone could double unit sales," Brenneman said.

The chain has taken other steps, too, such as a simplified menu with fewer sandwiches to speed up ordering, and fewer bottled drink and chip options to devote space only to those that sell more -- a step that increased bottled drink and chip sales, officials say, while reducing store costs.

Company executives say that, with these steps and others, franchisee profits should increase 60 percent. They also say that the chain's earnings were expected to increase 32 percent in 2007. "In our business, if franchise owner profitability is not next to godliness, it's awfully close," Brenneman said.

There is some speculation among franchisees that the chain is gearing itself to go public, like Burger King did in 2006, but Brenneman said that hasn't been discussed. "If it were up to me I'd never take it public," he said before noting that the decision isn't entirely up to him. Officials also say they're being more judicious with store placement -- a big problem many franchisees have is the opening of units near existing stores. Brenneman indicated that the chain's major expansion emphasis would be on alternative sites, like airports, and international.

Still, for all the chain's openness with franchisees and its improved relations, the company is taking a hard line in some areas. Executives dismiss the Toasted Subs Franchisee Association, the group organized by disgruntled storeowners that is behind numerous lawsuits, and say that its membership is only 50 franchises -- a number disputed by the association. The company is also defending itself vigorously in the lawsuits.

Executives point to a recently dismissed class action lawsuit in Wisconsin -- along with another in Michigan in which the storeowners backed out -- as proof that the company is on firm legal ground. They believe other lawsuits will fall, especially because many are similar to the Wisconsin action. "I believe it's a portent of things to come," said Emmett.

The company's UFOC lists 36 pending lawsuits, most of them against the chain by franchisees, while another dozen have been settled since 2006. Emmett says many of the suits are not substantial. He and others say the amount of litigation is not unusual for a chain at this stage in its growth.

Byron Augustine sued in Denver court last year after his franchise agreement was terminated because a secret shopper didn't get enough meat in his sandwich. Augustine sued because the termination came just as he was about to sell one of his two Arizona stores. "Since then it's all been down hill," he said. The one store was terminated, and he still runs his other store while his suit plays out. It's expected to go to trial this year, though he plans to sell that store.

Augustine isn't the only one looking to sell. A search at the Web site Bizbuysell.com found 356 listings for Quiznos stores for sale. By comparison, there were 76 listings for the much larger Subway.

Bill Elmore has been trying to sell his store in Milford, Connecticut since September 2004 -- six months after he opened the franchise. His main complaint: falling revenues. His store did $11,400 a week in sales his first year. It's now down to $6,500, which is well below the chain's average. He breaks even, largely by low labor costs.

He said his store struggled in part because there were too many nearby Quiznos locations, but his sales lagged this summer even after many of them closed. He said conditions are better under the new management, "but I think it would have been impossible to get worse, really. There was nowhere to go but up." He is hopeful that Quiznos' improvements will be enough to enable him to sell his store.

A number of franchisees remain disillusioned with the system. Augustine called Brenneman a "talented guy" who's "trying to patch a sinking ship."

Mike Campo said his store is profitable now, but it ran up considerable debt in the past and so he is selling his store in Carmel, Indiana. Still, he said the chain is making "tremendous strides." "Can it turn around in time? They're trying to. But there are so many issues out there," he said.

Other franchisees are more confident in the company's future. "My impression is that they're doing pretty fantastic, really," Price said. "They've got their eye on the ball." Wise had been holding off opening his sixth location, in Salina, Kansas, for two years out of concern over the direction of the company. He's so confident in the chain now that he's building that unit and is buying two others. "My bank account is bigger," Wise said.

Stanulet, of Ohio, said, "They're doing really good. They're trying to make a lot of changes. Hopefully, it'll be even better next year."

Quiznos executives believe it will be. "It's better than it was," Brenneman said. "And I think if you come back in six months, it'll be a little bit better. And six months after that, it'll be a little bit better."


Let them eat Sammies 

Executive Chef Zach Calkins

A visitor to Quiznos recently asked Executive Chef Zach Calkins a question that he has obviously heard a few times before.

“So,” the visitor asked, “did you ever think you’d end up ...”

“In quick service? No.” he interrupted, shaking his head. “Not in a million years.”

Still, the veteran of fine-dining restaurants in Santa Fe and Denver says, “It’s fun. I’ve got the best job in the company.” It may also be the most important.

Calkins’ task is to use bold flavors and unique ingredients—like, chipotle sauce and fire roasted Poblano chiles—while keeping in mind that sandwiches can’t cost too much to make.  So far he’s succeeded. The new $2 Sammies’ food costs are about 50 cents, and so far they’re receiving rave reviews. “We’ve got to put more money in franchisees’ pockets,” said Calkins, who has been with Quiznos for more than five years. “But we’re still being innovative.”

 

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