Both restaurants have lost ground to the growing boom of sandwich chains with a tilt towards custom, healthy options
Intense competition for the taste buds of time-pressed American consumers is hurting weaker, less competitive fast-food restaurants this week as sandwich chain Quiznos and pizza-and-pasta group Sbarro both filed for bankruptcy protection.
Neither filing was a surprise, preceded in the case of Quiznos by over three years of struggle with the company’s growing debt load, which weighed in at over $500m at the time of the filing on Friday morning. Sbarro, similarly, had filed for bankruptcy in 2011 and struggled with lower foot traffic and expensive real-estate leases until its second filing this week.
Both Quiznos and Sbarro, their heydays long past, have lost ground to the growing boom of sandwich and fast casual-food chains with strictly defined identities that tilt toward customizable dishes and healthy options: Connecticut-based Subway for fresh sandwiches, Chicago-based Potbelly Sandwich Works for nostalgic comfort food, Illinois-based Jimmy John’s for fast delivery, Chipotle Mexican Grill for inexpensive Mexican food from organically grown ingredients.
Yet while Subway, Chipotle and Potbelly thrive – Potbelly launched a successful initial public offering last year – Quiznos and Sbarro failed to keep up.
“They have both been struggling, lost their way, didn’t have a clear identity, and were not doing anything really substantive to contemporize and revitalize their position,” said Bob Goldin, an executive vice-president with food-industry consulting and research firm Technomic. “It’s a shakeout.
“They have a lot more competition [from other sandwich chains] than five years ago and more and more are coming,” Goldin said.
Quiznos’ 2,100 stores, nearly all of which are franchises owned and operated separately from the company itself, will continue to operate through the bankruptcy, the company said. CEO Stuart Mathis said Quiznos will use the bankruptcy to “reduce our debt, execute a comprehensive plan to further enhance the customer experience, elevate the profile of the brand, and help increase sales and profits for our franchise owners”.
Quiznos has long suffered frictions with its franchise owners, who have complained that the company imposes high costs on them for food and supplies. In a statement, the chain offered those franchise owners an olive branch, promising to reduce food costs, offer rebates and loans for restaurant improvements, increase advertising, provide incentives to new franchise owners, and improve technology in its restaurants.
The larger problem, aside from real estate and financial magic tricks, is that Quiznos and Sbarro had trouble drawing customers in recent years. Quiznos expanded too fast and Sbarro was doomed by its real estate strategy of placing its restaurants in shopping malls, where foot traffic has been declining for years as customers turn to online shopping. Their generic food, resistant to customization, also possibly turned off customers. Sbarro, for instance, never got past a reputation for last-ditch food with a limp, heat-lamp-heated look.
“Customers are looking for value because of high unemployment and the weak economic recovery,” said Mariola Borysiak, an associate director following the restaurant industry for Standard and Poor’s. “But they don’t want to compromise quality. The [chains] that offer high quality will be the winners.”
Although bankruptcy filings for restaurant chains are rare, according to Goldin, the most recent are not surprising to analysts. Quiznos and Sbarros struggled for years with their problems. While some may call that delaying the inevitable, “there’s always hope that they improve operations,” Borysiak said. “It’s probably better to be trying than just giving up and filing for chapter 11.”
While hope may spring eternal on that front, the scale of Quiznos problems could be daunting as competition intensifies from savvier rivals, Goldin said. “Bankuptcy will give them some breathing room, but they’ve fallen behind and can’t catch up.”
Quiznos and Sbarro are also part of a larger trend among lower-end food and retail chains. There has been an apparent contradiction in the economy as discounters and inexpensive food chains have gone under even though they should theoretically have been thriving as cheaper, sensible options in a struggling economy. Loehmann’s, an off-price clothing chain, liquidated and shut down its holdings in January, while JC Penney suffered a very public black eye with its failed strategy of “everyday low prices”. The restaurant industry, especially family dining like Red Lobster and Olive Garden, has suffered from the same perplexing loss of customers.
Borysiak attributed the struggles of lower-end chains to consumers who have become tight with money as economic conditions fail to improve. The national unemployment rate sits at 6.7% with fewer people participating in the labor force than any time since the recession of the late 1970s.
“Especially last year, the payroll tax increase, the government shutdown – all of these hurt consumer confidence,” Borysiak said. “The lower-end customer is still very cautious about discretionary spending.”
There are other chains that have been struggling, including Logan’s Roadhouse, which S&P recently downgraded to a B-rating with a negative outlook. The chain’s traffic has been declining for two years, Borysiak said.
The traditional path in the restaurant industry, however, is a long, slow struggle than an immediate collapse.
“There are a lot of chains that would be better off going bankrupt,” Goldin said. “They’ve been hanging in too long and not doing much.”
