Quiznos and Potbelly: A tale of two sandwich chains

March 18, 2014: 5:00 AM ET

The two restaurant chains offer nearly identical products: toasted subs made fresh. So how have they ended up on opposite ends of the fast-food food chain?

A Potbelly sandwich on the left; one from Quiznos on the right

A Potbelly sandwich on the left; one from Quiznos on the right

FORTUNE -- It's lunch time and you want a hot, melty -- but still fresh -- submarine sandwich. It'll be crunchy, it'll be gooey, it'll be all-around delicious.

There are two restaurants whose sole purpose is to provide you with an oven toasted sandwich -- Quiznos and Potbelly. At these restaurants, you have to tell them to not stick your bread in the oven.

For this lunch, you're craving the kick of an Italian club, and both places offer a concoction of capicola, pepperoni, and salami -- the Quiznos sandwich starts at $5.99; Potbelly's at $5.90 (at least, that's how much they cost in Manhattan).

Which do you choose?

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Stop thinking about it. There's really no contest. You're going to Potbelly because it has those yummy hot peppers, sometimes there's live music playing, and when you order a milkshake, they put a tiny cookie on your straw.

Perhaps it's that consumer logic that has put the two chains on such divergent courses.

On Friday, Quiznos filed for bankruptcy, listing debt of more than $500 million, according to Chapter 11 documents filed in U.S. Bankruptcy Court in Wilmington, Del. Its total network sales declined from an estimated $1.6 billion in 2008 to $716 million in 2013 -- an annualized decline of 15.5%, according to an October 2013 report from IBISWorld. In a statement, the company says it expects to continue operating in the ordinary course of business throughout its restructuring. "The Company will continue working with its franchisees in the U.S. and internationally to strengthen the brand, build momentum, and improve growth and profitability," it said. A Quiznos spokesman said on Monday that the company had no comment beyond its public statements and court filings.

Potbelly (PBPB), meanwhile, went public in October and immediately more than doubled its initial trading price of $14, giving the Chicago-based chain a value of $802.5 million. Potbelly's total revenue rose 9% to $299.7 million in its latest quarterly earnings, and comparative sales rose 1.5%. In 2013, it opened 42 new locations.

The two restaurant chains offer nearly identical products: toasted subs made fresh. So how have they ended up on opposite ends of the fast-food food chain?

Sure, Quiznos is facing plenty of competition, not just from Potbelly but from the likes of Panera (PNRA), Jersey Mike's Subs, Firehouse Subs, and Jimmy John's. But there's demand to match. The sub and sandwich industry in general is thriving, according to IBISWorld. The sector grew 6.8% in 2009 despite shrinking consumer confidence, and it jumped by 2% in 2013.

"In some ways, if you look at what [Quiznos] has done, it's not immediately obvious why they wouldn't have gotten more traction," says Elizabeth Friend, senior food service analyst at Euromonitor International.

But dig a little deeper and part of Quiznos trouble seems to stem from an identity crisis. The Denver, Colo.-based chain initially built a reputation around its unique toasting technique and meatier subs. That worked, until the start of the recession, at which point Quiznos was the second-largest sub sandwich chain in the U.S., behind Subway. But in 2008, Quiznos began to compete with Subway on price, while shouldering the cost of its more expensive food, which sank the chain financially, IBISWorld says.

Then in 2012, Quiznos pulled a 180. In an attempt to capitalize on Americans' healthier eating and with a nod to the competition it was receiving from quick-service restaurants -- where customers order at a counter but then sit down to eat -- it introduced a new menu with artisan breads, all-natural chicken, natural cheeses, and raw vegetables, and it also eliminated its cheaper sandwiches.

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Quiznos' 2012 menu revamp tried to appease customers looking for better quality food, but "they needed a more complete overhaul of the brand," Friend says.

Potbelly, on the other hand, "does a better job of branding themselves," Friend says. "They have live music and interesting touches that make it feel like a neighborhood sandwich place."

Mixed messages on price and quality left Quiznos in fast food no man's land -- it's not cheap enough to compete with Subway's $5 footlong, and it's not as homemade and cozy feeling as quick-service restaurants like Potbelly and Panera.

To make matters worse, Quiznos has long been at odds with its franchisees, which currently account for all but seven of the company's 2,100 restaurants. In 2009, Quiznos paid $95 million to settle a series of class action lawsuits that covered 6,900 franchisees claiming that the company had overcharged them for supplies and failed to provide adequate marketing support. Last year, franchisees sued Quiznos again claiming that the company had treated them unfairly and chased corporate profits at the expense of its individual restaurant owners. (When announcing its Chapter 11 filing, Quiznos CEO Stuart Mathis said that the restructuring plan was aimed at supporting the company's franchisees by doing things like reducing food costs and implementing a franchise owner rebate program.)

Those disputes have put Quiznos at a disadvantage as it competed toe-to-toe with other quick service chains. This particular segment of the fast food industry has grown so fast -- 8% for the 12 months ending in November -- because consumers are willing to pay more in exchange for food of better quality and taste, says Bonnie Riggs, a restaurant industry analyst at The NPD Group. But when a restaurant is heavily franchised, it's harder to get every individual restaurant on the same page, delivering the same, great tasting food, regardless of location. "You can go to one and it delivers on its promise, you go to another and not so much," she says. The challenge becomes even more acute when franchisees have an acrimonious relationship with a parent company.

Quiznos "has definitely stood out" as having more problems with its franchisees, Friend says. "It's hard to remain successful and implement new menu items if you can't keep the franchisees happy," she says. "It speaks to there being something broken with the basic business model."

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