The Quizno’s Corporation

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The Quizno’s Corporation

1415 Larimer Street
Denver, Colorado 80202
U.S.A.
Telephone: (720) 359-3300
Fax: (720) 291-0909
Web site: http://www.quiznos.com

Private Company
Incorporated: 1981 as Quizno’s America, Inc.
Employees: 421
Sales: $41.4 million (2000)
NAIC: 533110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works) ; 722211 Limited Service Restaurants

The Quizno’s Corporation is the third largest chain of submarine sandwich shops, with more than 1,150 restaurants open in the United States, Canada, Puerto Rico, United Kingdom, Australia, and Japan. Quizno’s Italian-style deli offers Italian submarines and other sandwiches, soups, salads, and pastas. The classic Italian submarines—made from proprietary recipes, such as the fresh-baked soft baguette—are the cornerstone of the Quizno’s concept.

An Italian-style Deli Named Quizno’s: 1981

Todd Disner and Boyd Bartlett formulated the brand concept and menu for Quizno’s America while operating a popular Italian restaurant, Footer’s, in the Capital Hill neighborhood of Denver. Using their knowledge of Italian foods, they developed an Italian-style deli, serving submarine sandwiches, soups, salads, and a few pasta dishes. In Footer’s kitchen, Disner and Bartlett created recipes for red wine vinegar dressing and a proprietary soft baguette, essential ingredients in the classic Italian submarine that became the cornerstone of the Quizno’s concept. They used quality meats, such as honey-cured ham and whole muscle meats, rather than chopped and formed meats; authentic Italian meats included capicola and Genoa salami. Before adding lettuce, tomatoes, and red onions, they oven-toasted the sandwich to melt the cheese and to bring out the flavor of the meat and bread.

Disner and Bartlett sought to attract an upmarket customer with a taste for a healthy alternative to fast-food hamburgers. In contrast to full-service restaurants, Quizno’s offered a less expensive option, with an atmosphere more pleasant than typical fast-food restaurants. They invented the faux-Italian name Quizno’s, using some of the most remembered letters of the alphabet.

The first Quizno’s opened in 1981, a few blocks from Footer’s and near city and state offices, attracting a white-collar lunch crowd. Over the next decade 16 more Quizno’s franchises opened in the Denver area and along the front range of the Rocky Mountains, and one franchise in Los Angeles. In 1990 each restaurant’s sales averaged $27,000 per month. The franchise grew without improvements to individual restaurants, however, and the quality of the product deteriorated at some locations. Disner and Bartlett did not have the capital to continue expanding the chain or to provide managerial or advertising support to existing franchises. They sold the company in 1991 to franchisee Rick Schaden, who owned and operated three units with his father, Dick Schaden, an aviation attorney. Disner maintained an 8 percent interest in the company and acted as consultant, while Bartlett became vice-president of purchasing.

Rick Schaden’s idea to own and operate a chain of restaurants began with employment at fast-food chains and a business plan he wrote for a university business class. Rick was prompted to open a Quizno’s franchise while patronizing one of the restaurants; he overheard a customer say, “This is the best sandwich I ever ate.” With his father, Schaden opened his first Quizno’s franchise in Boulder, Colorado, in 1987.

Early 1990s: New Ownership Structure Quizno’s for Growth

After purchasing the entire company in January 1991, the Schadens began to develop the infrastructure for future growth. Rick Schaden, as president, organized volume purchasing and standardized procedures for unit operations and new franchisee training. The Schadens planned for growth, seeking to expand into Florida, California, Kansas City, Chicago, and Detroit. New franchise agreements involved Schaden and Schaden, a franchisee separate from the corporation, for rights to two stores in the Detroit area. Four franchises were sold for the California market; in July Disner agreed to open ten stores in Florida.

To open a franchise required initial capital of approximately $100,000, including the Quizno’s franchise fee of $15,000. The franchise company charged an annual royalty of 5 percent of sales as well. The Schadens asserted substantial control over the franchises, influencing choice of location and ingredient vendors and determining training procedures. At 1,800 to 2,000 square feet, each store offered approximately 60 seats. The decor conveyed the look of an Italian deli, with artificial salamis, cheeses, and strings of garlic hung around an open kitchen and with shelves holding olive oil and canned tomatoes. Italian poster art, black and white tile floors, pine wainscoting with oak trim, and carpeting in the dining area completed the atmosphere.

Under the leadership of the Schadens, Quizno’s assisted its franchisees with new marketing initiatives. With a budget of $50,000, Quizno’s launched an advertising campaign in June, using the tagline “Good food. Good prices.” Three television commercials promoted Quizno’s as an alternative to fast food, emphasizing the lightness, taste, and healthfulness of a Quizno’s meal. In each commercial one character enjoyed a Quizno’s meal, while the other suffered the heaviness of eating bricks, the tastelessness of pillow stuffing, or the greasiness of used auto parts. Radio advertising supplemented the television ads. In 1992 Quizno’s increased the advertising budget to $250,000, raising $100,000 from franchise owners for cooperative advertising.

Rick Schaden attributed much of the success of the company’s low budget advertising to direct contact with customers as a supplement to commercial advertising. Unit managers distributed menus to businesses in their neighborhood, promoting office catering with box lunches and offering frequent buyer discounts. The business lunch crowd, patrons between 25 to 45 years of age, accounted for approximately 80 percent of store revenues, sales which occurred between 11:30 a.m. and 1:30 p.m.

To attract families in the evenings and on weekends, Quizno’s offered free kids meals. The kids menu included pizza, spaghetti, and mini-subs, regularly priced at $1.99, including chocolate pudding and fruit punch. The company coordinated a 1992 promotion with the launch of the Colorado Rockies National League baseball team; Denver-area Quizno’s restaurants sold baseballs for 99 cents with the purchase of a meal.

By the end of 1992, systemwide store sales increased from $7 million in 1991 to $8.5 million. With average per person sales at $5, average per unit sales reached $338,000 in 1992. By the end of 1993 Quizno’s’ company-owned or franchised restaurants operated in Michigan, Illinois, Kansas, Iowa, Missouri, Georgia, Florida, Oregon, California, and Colorado. Average per unit sales increased to $360,000.

In February 1994, the Schadens took Quizno’s public with an offering of one million shares of stock at $5 per share. The IPO yielded $4.4 million, which the company used to open new stores and pursue franchise sales, particularly through Area Directors.

Striving for the Number Three Spot: Mid-1990s

The Quizno’s program for expansion involved the recruitment of Area Directors. Quizno’s sold the rights to certain market territories to Area Directors who agreed to sell and open a specific number of franchises within a predetermined amount of time. The usual schedule involved four new units the first year, six new units the second year, and an additional eight units the third year. Franchise territories followed the location of television markets and general locations were planned ahead so as not to oversaturate a market area, a problem with other chain restaurants. Area Directors paid fees to sell franchises, but earned commissions and royalties from franchise sales and revenues. In 1994 Quizno’s found Area Directors for five territories: Dallas-Fort Worth; Seattle; Tucson; Omaha and Lincoln, Nebraska; and Montana, northern Wyoming, and western South Dakota.

In November 1994 Quizno’s Franchise Corporation purchased Schaden & Schaden, the Schadens’ then separate franchise company, for $2 million. The largest franchisee, Schaden & Schaden owned and operated six restaurants in Denver, three in Chicago, and two in Michigan, and held management contracts for five additional franchisees. The acquisition provided revenue and cash flow for training new franchisees and managers. Also, in order to improve cash flow, Quizno’s increased the initial franchise fee to $20,000 for full-size units and $10,000 for new, kiosk-type Express Quizno’s units. Additional units that were opened required lower franchise fees.

Quizno’s enhanced its Area Director program to promote more rapid development, waiving, for example, the requirement to open a flagship unit. In 1995 the company signed Area Directors for El Paso and Austin, eastern North Dakota, Minneapolis/St. Paul, western Nebraska, Cleveland, and Spokane. Also, BBD Management of Vancouver signed a master franchise agreement, the term for international licensing of franchise rights, to open 30 Quizno’s units in Canada over the next six years.

Prompted by higher construction and real estate costs, in 1995 Quizno’s changed the store design to reduce start-up costs by 25 percent, from approximately $60,000 to $40,000. The 1,800-square-foot requirement was modified to 1,200 square feet. To accommodate the change, the company altered the kitchen layout from a double production line to a single line. Open counter service allowed for greater customer contact and, hence, fewer mistakes on customer orders. The smaller size of each store was conducive to greater flexibility in finding good store locations.

Company Perspectives:

Quizno’s Mission: To be a leader in the sandwich segment by serving the best sandwich in the marketplace: one successful store and one “wowed” customer at a time.

New store openings in 1995 included Boise; Phoenix; Denver; Raleigh; Indianapolis; Kenosha, Wisconsin; and Loveland, Colorado. In December 1995 the 100th Quizno’s restaurant opened and, by the end of 1995, 112 Quizno’s restaurants were in operation in 19 states with systemwide sales of $26 million.

In 1996 and 1997 Quizno’s Corporation’s expansion efforts began to culminate in the sale of franchise territories and new restaurant openings. In 1996 the company opened 51 restaurants, including eight company-owned units. Over a dozen Area Directors agreed to sell franchises in Palm Beach County, Florida; Shreveport, Louisiana; Contra Costa County, California; Hartford and New Haven, Connecticut; Philadelphia; Knoxville; Richmond, Virginia; Huntsville, Alabama; and other areas across the United States. In 1997, 140 new restaurants opened. Also, Quizno’s acquired Bain’s Deli, a chain of 63 restaurants, located primarily in shopping malls along the East Coast for $1.2 million. Quizno’s began to convert several stores to the Quizno’s brand, and later converted units at shopping mall food courts and airports.

By the end of 1997 Quizno’s had become the number three submarine sandwich franchiser, with 278 locations in the United States, Puerto Rico, and Canada. Subway held the number one position with 12,000 units and Blimpie was number two with 1,500 units.

Forging a National and International Identity: Late 1990s

The company launched its first national advertising campaign in 1998 with 15-second television spots on cable stations, including CNN, ESPN, and Discovery. The three television commercials focused on the uniqueness of Quizno’s submarine sandwiches being toasted, using the terms “toast” and “toasted” as puns. In “The Wedding,” for example, the best man fumbles the toast to the happy couple by forgetting the bride’s name. The scene shifts to a view of a Quizno’s submarine rolling through the toaster oven; the tagline says, “Nicely toasted.” In the Denver area, where the advertisements aired on local stations during new shows, the commercials included a local promotion with the Colorado Lottery. The 30-second spots promoted “The Lucky Combo,” by which a customer won a coupon redeemable for a Crazy Eight scratch-and-win lottery ticket if the combination meal of the day was chosen. Winners had the option of receiving $1 off their meal.

With eight units opened and 50 units planned for 1998, Quizno’s Canada obtained master franchise rights to franchise up to 650 restaurants in Canada over the next five to ten years, paying Quizno’s $573,000 in fees. In March 1999 Quizno’s Canada paid $510,000 for the rights to franchise 100 units in the United Kingdom over ten years. Glenvista Enterprises paid $221,069 for the same number of franchises in Queensland, New South Wales, and Victoria Provinces in Australia.

Quizno’s had been looking for someone to open franchises in Japan when Nich Nishigane of KMN USA LLC approached Quizno’s to purchase the franchising rights. Nishigane thought that the food fit with Japanese tastes, finding the honey bacon club to be quite popular among KMN employees. He planned to hire a Japanese chef to adjust some of the sauce recipes and to supplement the menu with local dishes. In September 1998 KMN USA signed a Master Franchise Agreement to develop up to 300 Quizno’s in Japan over ten years. The agreement involved a percentage of territory and franchise sales as well as royalties on store revenues. The first unit opened in Tokyo in early 1999.

Quizno’s did not rely solely on new franchise openings to expand the company’s reach. In August 1998 a new subsidiary, Quizno’s Kansas LLC, purchased the Stoic Restaurant Group. The 21-year-old company owned and operated 12 Sub & Stuff units, but had filed for bankruptcy. Quizno’s Kansas, 70 percent owned by Quizno’s Corporation and 30 percent owned by two Area Directors, purchased the company for $500,000. Quizno’s planned to convert eight stores in prime locations to Quizno’s stores, and either sell or close the remaining four units, bringing the total number of Quizno’s units in Wichita to 11. Also, Quizno’s sold rights to 49 of the 63 Bain’s franchises, converted six of the shops to Quizno’s, and retained eight Bain’s franchises, hoping that the franchisees might convert to Quizno’s.

Quizno’s experienced a rise in first time franchisees with adjustments to its fees. The company lowered royalty fees a full percentage point to 7 percent of store revenues and lowered training fees from $15,000 to $10,000. Major areas of new store development included Toronto; Milwaukee; Jacksonville; Detroit; Sacramento; Baltimore; Washington, D.C.; Houston; and Columbus, Ohio. With 167 new restaurant openings in 1998 and 258 openings in 1999, at the end of fiscal 1999, 634 Quizno’s sub shops were in operation, including 25 company-owned units and 72 international locations.

Key Dates:

1981:: Denver restaurateurs open first Quizno’s with intent to franchise brand via Quizno’s America, Inc.
1987:: Father-and-son team Dick and Rick Schaden open their first Quizno’s franchise in Boulder, Colorado.
1991:: The Schadens buy Quizno’s America and rename it The Quizno’s Franchise Corporation.
1994:: Company goes public.
1995:: 100th Quizno’s sub shop opens; company changes name to The Quizno’s Corporation.
1997:: Quizno’s becomes the number three submarine sandwich franchise.
1999:: First Quizno’s restaurant opens in Japan.
2000:: Schadens take Quizno’s private with tender offer of $8 per share.

With about one unit per day scheduled to open in 2000, Quizno’s doubled its advertising budget to $10 million. The company hired a new marketing director, Rob Elliott, formerly with Little Caesar’s Pizza. Under Elliot’s leadership Quizno’s retained a new advertising agency, Cliff Freeman & Partners. Freeman’s credits included the Wendy’s Hamburgers tagline “Where’s the Beef?” and Little Caesar’s, “Pizza. Pizza.” For Quizno’s Freeman developed commercials based on the tagline “It’s that good.” In “Dog,” a man’s pet dog nabs the Quizno’s sandwich perched on the kitchen counter. The man chases his dog and a tug-of-war for the sandwich ensues. The dog manages to take a bite when the sandwich falls to the floor; the man reassembles the sandwich and takes a big bite himself—” It’s that good.” In “Trash Can” a professionally dressed woman found the leftovers of a Quizno’s sandwich in a trash can. Though her coworker tries to persuade her not to eat it, she does, licking the wrapper in ecstasy.

At the end of fiscal 2000, Quizno’s recorded corporate revenues of $41.9 million and garnered a net income of $1.1 million. Same-store sales for units open one year rose 7.9 percent. Of the 380 new sub shops opened in 2000, 52 units were located in foreign markets.

In November 2000 the Schadens restated a proposal to take the company private with a tender offer of $8 per share. The Schadens sought to take Quizno’s private in December 1998 with a tender offer of $7.84 to $8.20 per share when the stock value averaged $7.50. They felt that the stock was undervalued on the market, but withdrew an offer of $8 per share in August. When the price decreased to $6.50 per share, they reasserted their desire to take the company private, causing the value to rise to $7.75 per share. The privatization deal finally closed in June 2001, with shareholders receiving $8.50 per share.