Lawsuit woes in sub sector face BK vet in Quiznos role

Nation's Restaurant News,  Jan 22, 2007  by Dina Berta

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Amid widespread litigation affecting franchisees in the multibillion-dollar sandwich segment, competitors of Quiznos Sub are watching to see whether its recruiting of an ex-CEO of the restaurant industry's No. 3 franchise system can help make peace and restore order.

Greg Brenneman, who is credited with engineering turnarounds at Burger King and Continental Airlines, is on a mission to reverse the financial setbacks and negative perceptions among some of the owner-operators who have fueled Quiznos' rapid growth.

The Denver-based chain of more than 5,000 outlets has been plagued with conflicts and lawsuits involving its franchisees, a situation that has been common in the relatively lower-cost-of-entry, lower-volume sub sandwich field.

After taking the reins of Quiznos as president and chief executive earlier this month and succeeding Rick Schaden, who remains chairman, Brenneman said he would focus on improving communications with franchisees and helping them make more money.

"It's incredibly important to us to reach out to franchisees and improve their bottom line," Brenneman said, adding that he plans to start his tenure by spending time in the chain's shops, talking to franchisees. "We want to evangelize the brand together."

Gaining converts could prove challenging, given the recent problems Quiznos has experienced along with other brands, such as Subway and Blimpie's, according to industry observers and some franchisees.

"The jury is out on Mr. Brenneman," said Chris Bray, an Arizona-based Quiznos franchisee and founder of the independent Toasted Subs Franchisee Association. "Right now, franchisees are cautiously optimistic, but we have been optimistic in the past, only to be severely disappointed."

Although Quiznos has successfully defended itself against past lawsuits, it still faces court challenges in New Jersey, Wisconsin and Canada, where franchisees have accused the chain of violating development agreements and allowing new shops to encroach on existing locations. In November a former Long Beach, Calif., Quiznos franchisee committed suicide in a Quiznos store, leaving behind a two-page letter that accused the franchisor of ruining his life.

After Toasted Subs posted Bhupinder "Bob" Baber's suicide note on its website, Quiznos terminated the franchise agreements of the group's board members. A Denver federal judge granted a temporary halt to the terminations in December and issued a gag order to all parties at a later hearing. Another hearing is scheduled for February.

Quiznos is not alone in dealing with disgruntled franchisees. Doctor's Associates, the Milford, Conn.-based franchisor of Subway, Quiznos' chief competitor, also became embroiled last year in lawsuits with franchisees who are among the operators of that chain's 25,000-plus outlets.

The North American Association of Subway Franchisees sued Doctor's Associates after it issued a new franchisee agreement containing a provision giving the company control over a $500 million advertising fund. The directors of the fund, Subway Franchising Advertising Fund Trust, also sued the franchisor. Doctor's Associates, in turn, filed 11 lawsuits in federal court in Connecticut against the NAASF's directors.

Under a new owner, the Blimpie's sub sandwich chain has been working to overcome past rifts with franchisees. Phoenix-based Kahala Corp., now the franchisor of Blimpie's, has said its seeks to mend fences and rebuild the brand, which fell from a one-time high of more than 3,000 stores to about 1,600 currently.

The Blimpie's system also was dogged by fractured relations with franchisees and allegations of malfeasance under a former leadership regime.

Sandwich chain franchisors have said the lower percentage-of-sales royalties they derive, compared with those of a quick-service burger brand, for example, makes it relatively harder to support their operators. They also assert that their franchisees often must be hands-on owner-operators, making them less able to find time to tap whatever support systems are provided.

Indeed, franchisor-franchisee rifts may be intrinsic to the sub sandwich category, given the lower investments and experience required of its operators, according to Jeff Johnson, a former multiunit Schlotzsky's Deli franchisee and area developer who now runs a franchise consulting and research firm in Omaha, Neb.

A 2003 survey sponsored by his company found a far greater level of dissatisfaction among sandwich chain franchisees than among those in other restaurant sectors and industries. The study also found that sandwich shop operators, with much greater frequency than others, reported lower profits than they had been told to expect, as well as shortfalls in perceived value for their marketing fees and assistance from franchisors.

"The entry point is lower, so a lot of folks get involved because they can afford it, and they like the food and the place seems busy," Johnson said. "But this category is a real challenge. It's a tough market and tough to find differentiators between sandwich chains."