Why These 3 Once Thriving Franchises Have Fallen on Hard Times
Oh, how the mighty have fallen. A selection of once-thriving franchises has taken a big hit in recent years, facing bankruptcies, store closures, disgruntled franchisees and nightmarish marketing scenarios. We took a look at what went wrong with three companies--and what, if anything, they can do to survive.
Franchising can be a crapshoot. If you're first to market, find the right spokesperson or speed up operations by 10 percent, you might be a success, but even if you have the world's best burger and the happiest employees, you might fail. Still, there are many aspects of franchising that have nothing to do with chance, such as the basics of site selection, brand differentiation and franchisee relations. Gum up any of those, and you can kiss your system goodbye.
That's what happened to several big-name franchises this year. While these brands have been sliding for many years--and for many reasons--their declines can be linked back to violations of basic franchising wisdom. We took a look at the problems plaguing Sbarro, Quiznos and RadioShack--and what they need to do to turn things around.
Slice of Strife
Sbarro, the Melville, N.Y.-based pizzeria that has been serving up slices since 1956, filed for Chapter 11 bankruptcy protection in March. It was the second bankruptcy filing in less than three years for the franchise, which announced plans to shutter 192 of its nearly 800 units.
For pizza watchers, Sbarro's struggles aren't surprising. While its strategy of targeting indoor food courts made it an icon during the mall-rat heyday of the '80s and '90s, Sbarro has been hemorrhaging customers in more recent years, citing in its recent filings an "unprecedented decline in mall traffic." (Sbarro did not respond to requests for comment for this story.)
With some experts predicting that half of U.S. malls could be gone in 10 to 15 years, Sbarro could need a huge pivot to stay afloat. "Because they're so heavily concentrated in shopping centers, Sbarro is just an extension of the story of malls in America," says Mike Sheehan, a franchise consultant and attorney at Focus Ventures and principal at Franalytix in Leesburg, Va. "They need to pull back and reassess their strategy. For them to find success is going to require major surgery."
But it wasn't just the mall-centric real-estate strategy that put Sbarro in its current tight spot. A long stretch without significant innovation in an era when the rest of the pizza sector was rapidly evolving meant that Sbarro's New York-style slices, baking under heat lamps, became an anachronism. In fact, online magazine Slate dubbed the chain "America's least essential restaurant" soon after its first bankruptcy.
"Sbarro's is a pizza that time left behind," says John Gordon, a restaurant analyst with the Pacific Management Consulting Group in San Diego. "Its present 'cafeteria mode' is very '80s or ['90s]. When sales fall off as much as they have, rents for some Sbarro units can be as high as 25 percent of sales. It should be at 6, 7 or 8 percent."
That's not to say Sbarro isn't fighting back. In early June the company emerged from Chapter 11 with plans to relocate its headquarters to Columbus, Ohio, where it has made a small beachhead with its fast-casual concept Pizza Cucinova.
But it will be a long fight if Sbarro is going to survive. With many of its locations still in dying shopping centers, and with a small pool of cash on hand to invest in Pizza Cucinova, Sbarro will need significant financing to move forward.
Timing is also an issue. Darren Tristano, executive vice president of Chicago-based restaurant research and consulting firm Technomic, thinks Sbarro may be too late in making its pivot to fast-casual dining. "They're operating in a mature marketplace with over 63,000 pizza operators," he points out. "There are already over 20 other fast-casual pizza franchises in the marketplace. I don't think focusing on a new concept is the solution for Sbarro. If they are starved for capital they won't be able to invest in the new prototype."
The company's bankruptcy package--which cut 85 percent of outstanding debt (roughly $148 million) and gave controlling equity to lenders--leaves Sbarro in better shape financially than it has been in years. But Tristano believes the company should focus on making current units more operationally successful, rather than on the new concept.
The lesson? "If you look at Sbarro today vs. 10 years ago, you don't see much of a difference. If you don't change while the world changes, you lose relevance," he says. "Look at successful places like McDonald's. They're always continuing to improve their service, interior and menu."
RadioShack, the Fort Worth, Texas-based electronics store with more than 4,000 company-owned and franchise units in the U.S., made a splash in February with a Super Bowl commercial starring a platoon of retro celebrities, including Mary Lou Retton and ALF. The tagline: "The '80s called. They want their store back."
The spot was no doubt entertaining; the problem was that it reinforced Radio-Shack's image as a company that, in an era of near-constant technological innovation, is 30 years passé. In fact, the store reported a $400 million loss in 2013, on top of a $139 million downturn in 2012.
"RadioShack's main issue is irrelevance," says Sheehan at Focus Ventures. "I'm actually amazed they've gotten as far as they have."
In March, still basking in its Super Bowl triumph, the company--which did not respond to requests for comment for this story--announced that it would close 1,100 underperforming stores in an attempt to streamline and reformat the brand. But in early May something interesting happened: The company's lenders nixed the plan, opting to keep the failing stores open. According to reporting by retail analyst Paula Rosenblum of research firm RSR, the lenders are more interested in retaining as many company assets as possible for a future liquidation, rather than revamping stores.
"Ultimately, their lenders are more interested in not losing their entire investment vs. seeing the franchise succeed," Sheehan explains.
Robin Lewis, CEO of retail strategy newsletter The Robin Report and co-author of The New Rules of Retail, says it took decades for RadioShack to get into its current position. "Many years ago, they didn't have the competition they do today. They just kept building and building, and they were just able to hang out, especially because they were convenient," he says. "But since the turn of the century it's been like a retail tsunami, especially with online stores like Amazon taking so much share. RadioShack was never able to differentiate itself. The retailers that are surviving and doing well have carved out a niche. RadioShack never did that, and now they are in a position of no return."
In fact, RadioShack did attempt to become a hub for mobile phones and devices, but with communications giants like AT&T and Verizon opening their own stores, and companies like Apple dominating the retail market, RadioShack has had difficulty competing on price and selection. Instead, it has pinned its hopes on a new store model and layout that it has been testing in several markets. Even so, the brand as a whole has failed to find its niche identity with current consumers.
It's a lesson that Russ Reynolds, CEO of Wisconsin-based franchise Batteries+Bulbs, has taken to heart. "It's always difficult not chasing the bright, shiny object," he says, adding that a streamlined focus on hard-to-find batteries and light bulbs is enough to keep his stores busy. "When we started, franchisees asked all the time, 'Why aren't we selling cell phones?' I like to say, a lot of the game is played in the middle of the field. We like to focus on the edges. Everyone wants to jump into the sexy stuff, but it comes and goes. It attracts the most well-heeled competitors. It's hard to succeed there."
Lewis is pessimistic about Radio-Shack's chances of survival. "I question how long they can hold on before they slip into the abyss," he says. "God knows what they could do to recover. It would take such a huge capital investment, and they don't have enough time or money. The consumers have already left the station. They're not coming back now."
At its high mark, Quiznos had roughly 5,000 U.S. stores. Today that number is down to about 2,100. In March the Denver-based sandwich-maker filed for Chapter 11, hoping to reduce its debt load by $400 million.
Franchise-industry experts weren't surprised. "Relationships with franchisees have been a struggle; there have been issues with leadership, ownership and capital for years," Technomic's Tristano explains. "All of those don't contribute to a success story."
Critics point to Quiznos' supply-chain markup structure as its original sin. Most restaurant franchises negotiate with vendors on behalf of their franchisees, who then buy meat, bread and other commodities directly from the third parties. Quiznos, however, buys commodities from vendors, then sells the food to franchisees at a markup. According to analyst Gordon, a franchisee of Subway or a comparable company typically has food costs of 30 percent, but Quiznos franchisees have been coming out of the gate at 38 or 39 percent, a difference that can easily eat away at profits, especially for a new business owner struggling to get established.
"It's a very unusual franchising structure," Tristano says. "Because of that, a Subway franchisee, for instance, can be more successful at a lower sales volume."
Actually, that markup may have had extreme downstream effects. Because owner-operators have been forced to spend more time working in their businesses, they've resisted adding revenue streams like early breakfast or late-night hours, as well as loss leaders and other special pricing. And because owners typically have struggled to keep their single units profitable, Quiznos has few multi-unit owners, a force that is driving growth within other mainstream franchises. In fact, because of its practices and several lawsuits brought by franchisees, many sophisticated and deep-pocketed multi-unit owners are unwilling to deal with Quiznos.
Another mistake Quiznos made was in attempting to challenge Subway head-on, rather than establishing itself as an alternative or premium brand. Quiznos' greatest differentiator, toasted sandwiches, was essentially neutralized in 2004, when Subway rolled out TurboChef toasting ovens to nearly all of its stores. After that, Quiznos found itself chasing Subway but was unable to compete with the latter brand's healthful image and game-changing "$5 footlongs."
"If you look at the broader picture to see who's been successful, it's companies that have a strong differentiator. Subway has always been fresh and healthy. Jimmy John's came out of nowhere with 'Freaky Fast,'" Sheehan says. "Quiznos just got massacred by Subway. Marketing is incredibly important. Subway has had Jared and lots of sports stars. Quiznos has had failure after failure."
It's true that marketing initiatives have been a weak link. In 2004 Quiznos launched a campaign starring the Spongmonkeys, strange rodent-human hybrids that floated in midair singing out-of-tune songs about the moon and sandwiches. While the ads were a year ahead of YouTube and viral videos, at the time they came across as just plain weird, spooking several demographics of customers (though preteen boys apparently thought they were cool).
In 2009 the company launched a series of ads for its $4 Toasty Torpedo subs--a response to Subway's $5 offerings--that starred a sexually aggressive toaster oven harassing a Quiznos employee. Again, the puerile humor failed to appeal to the mainstream and left media analysts scratching their heads.
Now, facing a renaissance of sandwich chains--including the rapidly expanding Jimmy John's, Jersey Mike's, Erbert & Gerbert's and Capriotti's--Quiznos may have even more difficulty redefining its niche. While executives chose not to comment for this story, Quiznos has indicated that it will likely move out of Chapter 11 by the end of summer. In a statement, the company says the business plan will include "several key elements aimed at supporting our franchisees, including reducing food costs, implementing a franchise owner rebate program, in certain circumstances making loans available to franchisees for restaurant improvements, investing in advertising to improve location awareness and providing new incentives for prospective franchisees."
However Quiznos chooses to address some of its systemic problems, Sheehan believes that letting half its stores close in the past decade has only made things harder. "Consumers are naturally repelled by ailing establishments. Lack of success is a self-fulfilling trend," he says. "Once you start closing shops, it's difficult to recover. Just think: Over the last five years, more people have walked up to a Quiznos [that has] an 'out of business' sign than an 'open' sign. That's not good for business."
(Editor's Note: Quizno’s emerged from bankruptcy protection on June 30.)