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The sandwich chain Quiznos has narrowly avoided bankruptcy. A private equity firm gained control of the company. Avenue Capital brought new funds and erased some of Quiznos' debt. The Denver-based chain once had more than 5,000 restaurants. Now it's closer to 3,000. Ben Markus of Colorado Public Radio reports on what went wrong.
BEN MARKUS, BYLINE: When you think Quiznos, toasted should come to mind. Andre Bonyadian owns nine Quiznos franchises in and around L.A. He stands proudly next to the toasting machine in his Pasadena store.
ANDRE BONYADIAN: It toasted the sandwich very nicely, melts the cheese, warms up the meats, and blackens the tips of the sandwich, and it's delicious.
(SOUNDBITE OF PAPER BEING WRAPPED)
MARKUS: As one of his employees wraps up a large roast beef to go, Bonyadian identifies a chief problem: He's not going to make much profit on this sandwich. That's because Quiznos' corporate in Denver is offering a buy-one-get-one-free deal.
BONYADIAN: So they get a most expensive sandwich, obviously. Who wouldn't? If you're getting it free, something free, you pick up the most expensive one.
MARKUS: Quiznos, unlike some other fast-food retailers, owns the supply chain for its franchise restaurants. If he wants to buy chicken or straws or bread, Bonyadian has to buy from corporate. So he says the chain has an incentive to push higher volumes through deep coupon discounts - discounts that hit Bonyadian's bottom line.
BONYADIAN: If the franchiser works with the franchisees, they both make money. And once this is one-sided and the franchiser is only making money, then things go drastically wrong.
MARKUS: That inability to work together and higher supply-chain costs came at just the wrong time. As the recession started eating into the profits of most chains, Quiznos found itself locked in a price war with sandwich chain Subway and its formidable advertising machine.
(SOUNDBITE OF AD)
UNIDENTIFIED PEOPLE: (Singing) Five, five dollar, five dollar foot long.
MARKUS: Quiznos couldn't keep up. Sales fell nearly a quarter from their peak in 2008, according to restaurant tracker Technomic. And Bonyadian, who's a director of the newly formed Quiznos Franchise Association, says it was franchise owners who were hit the hardest - people who in some cases invested up to $500,000 to open a store.
BONYADIAN: There has been a lot of disappointment, and lot of heartbreakings, a lot of people who have gone bust. Personally I know a couple of people who have become homeless.
JOHN GORDON: It's definitely one for the record books.
MARKUS: That's John Gordon, a restaurant analyst who runs Pacific Management Consulting Group. In 2010 alone, 600 stores closed. And he says the sudden loss of restaurants has left Quiznos without enough money to rebound with its own national advertising blitz.
GORDON: So unfortunately you've gotten smaller, you can't or you don't advertise, you get smaller again. It becomes a vicious circle, unfortunately.
MARKUS: And the smaller Quiznos got, the harder it became to pay off its massive debt. And yesterday it gave up control of the company to one of its largest creditors, Avenue Capital. The deal eliminates $300 million in debt and adds 150 million in new funding. Franchise owner Andre Bonyadian says to turn Quiznos around, new owners will first need to open a meaningful dialogue with the franchisees.
BONYADIAN: That's where the success comes from. And we are hoping that the new ownership will just do that, will work with us and listen to us, and it will be happily ever after.
MARKUS: And Bonyadian says that may be the chain's last hope. For NPR News, I'm Ben Markus in Denver.