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Stellar days for sandwich sellers pass Quiznos by

The Exchange
Stellar days for sandwich sellers pass Quiznos by

If it isn't the pinnacle for American sandwich shops, it's certainly a time of plenty.

Despite uneven results for restaurant chains in these days of dollar-conscious consumers, a fact belied by last year's market performance for the industry, sandwich sellers have continued to proliferate. That's been true for the likes of Jimmy John's, Firehouse Subs, Jersey Mike's, Panera Bread (PNRA), McAlister's Deli and the biggest of them all, with more than 40,000 units, Subway. Competition and economic uncertainty be damned.

The polar opposite has been the case at Quiznos. Here, it's a story of burdensome debt, along with a sour relationship with its store owners, and The Wall Street Journal has reported a bankruptcy filing is likely approaching. The development makes the sandwich seller stand out not only for its financial struggles but for the fact that its decline has come amid a period of impressive expansion for many of its peers.

How are others winning while Quiznos is losing? Because Quiznos has a set of problems that are all its own, industry watchers say, a fact displayed nowhere more clearly than in the steep decrease in its store count, to about 2,000 now from 5,000 a few years ago.

While that doesn't mean the other sandwich sellers can operate free and clear of stress in perpetuity, there's hardly a budding contagion. In fairness, there are others who've disappointed small operator Cosi (COSI) has walked a troubled path for some time, and Blimpie has reportedly seen its store count fall but they're not the rule. Shareholders of Potbelly (PBPB) do have every right to be upset by the 40% dive in the stock since the high it reached right after its initial public offering. Still, they likely don't have to worry about seeing their investment fall victim to Quiznos-type woes or to a pullback in expansion plans, for now at least.

Below is a look at the growth patterns of a sampling of sandwich shops.

Quiznos theoretically could still have a bright outcome. Even a bankruptcy, should it come to pass, might not be the end of the line. Though it may remain a zombie for who knows how long, it's not a stretch to imagine a rebirth eventually.

"The restaurant world is littered with chains that continue to hang on, long after they, for all intents and purposes, should be dead," says Jonathan Maze, editor at Restaurant Finance Monitor.

For one, he says, that's because brands are hard to destroy altogether. It happens, but lifelines get thrown, too. One case for the latter is Schlotzsky's, another sandwich maker that had a bankruptcy in the mid-2000s. It's bounced back, rebuilt and become part of Roark Capital Group, an Atlanta-based private equity firm with numerous food interests, including Auntie Anne's and Cinnabon. (Incidentally, pizza seller Sbarro may be next in the restructuring line.)

Second, Maze says the franchise-heavy nature of Quiznos, which wasn't necessarily always discriminating about the suitability of its owners, factors in to its future viability, as well.

"Those franchisees, I guarantee you, there are some out there that will hang on as long as they possibly can," he says. They've potentially put their life savings into the store, so it's not something to simply walk away from. Perhaps patience will reward them, if they can hold on. However, not everyone's had a choice in the matter. "A lot of people have lost a lot of money investing in Quiznos over the years," he adds.

Maze has a few ideas on how Quiznos could dig itself out of its hole. Beyond the big one, repairing its financials, he advocated a simpler menu although it's making a questionable bet on pasta and retooling how it supplies the franchises. Quiznos relies heavily on revenue from selling food to the stores. A better way, he believes, would be a purchasing co-op, a method Yum Brands (YUM), the owner of KFC, Taco Bell and Pizza Hut, employs in the U.S.

Quiznos' public relations firm didn't respond to two emailed requests for comment.

Consistent stores

The sandwich chains at large find themselves in the right place at the right time. Smarter eating is in, and all manner of restaurants are trying to capitalize on it, from egg whites at McDonald's (MCD) to talk of an in-house fast-casual offering at DineEquity's (DIN) IHOP. The fast-casual restaurants, Chipotle (CMG) being most emblematic, often promise diners a mix of better ingredients and conscientious business practices, while charging a higher price than fast-food stores such as Burger King (BKW). That model is working, as traffic to the fast casuals grew smartly last year and beat the other restaurant segments.

Clearly, sandwiches lend themselves to customization, another top trend in the eating-out arena. What's perhaps more crucial is that, right now, consumers perceive sandwich chains to be healthier, Sam Oches, editor of QSR Magazine, says. "They generally find that they're more satisfied in the convenience of sandwich chains, in the speed, in the innovation of sandwich chains," he says.

Both he and Maze believe the sandwich shops have further to go in terms of populating our towns, which, let's not forget, are also home to any number of local delis. Oches says that's especially true for chains that manage to stand out, whether through means such as delivery at Jimmy Johns or  efficiency at Subway.

"There's certainly room to grow in this market so long as you stick to a unique position," he says. "So long as you can create something different from those competitors that consumers can really grasp on to and appreciate."

It matters a great deal. Even as Americans have been increasing the percentage of food dollars spent outside the home over time, one new survey says consumers are planning to spend less this year.

Unlike the others?

Potbelly's entered the crucible of Wall Street, so in addition to competitors, it's got analysts and investors to fret about. The Chicago-based company went public last year, and in terms of its share price, it's been nearly all downhill ever since. It still expects growth many companies would envy, but it's also richly valued, even after dropping from above $33 to around $20.

The company makes clear it wants to be known as a neighborhood-relevant store, with fresh vegetables and all-natural chicken served amid wood-heavy décor while musicians play in the background. Considering how it slid after its recent earnings, it's entirely likely at least some stockholders are wondering how high the odds are it truly can separate from the pack.

For now, it's like Quiznos only in that it sells sandwiches, but little else is similar. "Potbelly is fundamentally different from Quiznos because it's mostly company owned," Maze says. Of its roughly 300 stores, less than 10% are franchised. It also has only a small amount of debt outstanding.

If it does ever decide to rapidly increase its franchised makeup, it can remember at least one lesson of Quiznos.

"You've got to make sure your operators are profitable," Maze says. "If your operators are not profitable, eventually it comes home to roost. You'll have angry operators. They won't develop, they won't build new units. Ultimately, you have a hard time attracting new operators."