January 20 2008: 11:19 AM EST
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Quiznos serves up a turnaround sandwich

Corporate rescue artist Greg Brenneman took over Quiznos sub a year ago and seems to have boosted profits and morale.

By Matthew Boyle, writer

Greg Brenneman appears to be turning the troubled Quiznos chain around.

NEW YORK (Fortune) -- Greg Brenneman, the man who brought Continental Airlines (CAL, Fortune 500) and Burger King (BKC) back from the brink, has big plans for Quiznos, the beleaguered sandwich chain he took over last year. But even if he's successful once again, will he stick around?

Brenneman, 46, took the helm of privately held Quiznos last January after his Houston private equity firm, TurnWorks, took an undisclosed stake in the company. (A unit of JP Morgan (JPM, Fortune 500) also has a sizable stake.) Brenneman says he studied about 100 franchise concepts and settled on Quiznos, which was founded in Denver in 1981 and now has over 5,000 locations.

Why Quiznos? Among other reasons, "my teenage sons love it," he told Fortune in a meeting in New York earlier this week. Brenneman, too, is a fan, particularly of the Prime Rib sandwich.

Upon his arrival, Brenneman pledged to ramp up profits, launch new products and improve relations with franchisees, which had deteriorated to the point where several lawsuits had been filed, alleging overly onerous operating requirements. After years of growth, average sales per store were flat in 2006 and many franchisees have sought to sell their units.

Making things tougher on Brenneman is a deteriorating economy that has forced many Americans to cut back on restaurant meals, as well as rising commodity costs. So far casual dining chains like Applebee's have been hit hardest, but economic slowdown may also be trickling down to "fast-casual" formats like Quiznos. The stock of Panera Bread Company (PNRA), a high-end sandwich chain that competes with Quiznos, plummeted 36 percent last year. (Fast-casual restaurants bridge the gap between fast food and casual dining and generated $11 billion in sales in 2006, up 13 percent, according to restaurant consultancy Technomic.)

On the profit side, Brenneman made some quick moves that came right out of his dog-eared turnaround playbook. He slashed discounting, simplified the menu down from 29 to 21 sandwiches and found new suppliers for everything from meat to cookies. The moves harkened back to his days in the mid-'90s at Continental, where he cut dozens of money-losing flights. "Too many promotions were hurting profits," Brenneman says. "We had trained customers to only come in during discounts."

On the R&D side, the company's signature new product is the $2 Sammie, a small flatbread wrap that Brenneman hopes will draw in customers who heretofore have avoided Quiznos due to its relatively high prices. (When Brenneman arrived, the average customer paid about $10 for lunch at Quiznos, while a meal at Subway, by far the largest sandwich chain with over 28,000 locations, costs roughly half that amount.)

Three months into the launch, Sammie sales have been brisk, Brenneman claims, with some locations seeing low double-digit increases in customer traffic upon introducing the item, which now comes in six different varieties, including two new lower-calorie options. Sammies are also cheaper to make than Quiznos' other sandwiches, which helps the bottom line.

"Sammies are a good option for them" says Darren Tristano, executive vice-president at Technomic, as they appeal to price-conscious consumers who now gravitate towards the dollar menus offered by burger chains like McDonald's (MCD, Fortune 500).

To assuage disgruntled franchisees, Brenneman drew from his considerable reservoir of Midwestern charm (he hails from rural Kansas), hosting dinners across the country, delivering weekly voice mails and answering e-mails well into the wee hours. The lawsuit threat has somewhat subsided: In November, a federal judge in Wisconsin dismissed a federal lawsuit brought by twelve franchisees. A similar lawsuit was voluntarily dismissed by plaintiffs and others are pending.

One recent move by Brenneman that has franchisees buzzing is his decision to get Quiznos into the catering and delivery business. By handling big orders online - thanks to new computers installed in every location - Brenneman thinks he can increase sales per unit substantially. "This could be the brand changer for us," he told Fortune. Only 1,200 locations accept online orders right now, but Brenneman wants to boost that to as many as 3,000 by the end of the year.

Glenn Kee, a Quiznos franchisee in Lincoln, Neb., says that nearly 25 percent of his sales now come from online orders to about 200 local businesses. And despite having to hire an extra delivery person, those orders have boosted profits, since corporate clients are much less price sensitive.

"They are somewhat ahead of the curve on online ordering, which is more prevalent in pizza," says Tristano. "They will have some logistics to work through, but whoever gets in earlier has an advantage." Indeed, Quiznos is still getting the kinks out of the system - a delivery of Sammie sandwiches to Fortune got held up in the mail room for hours. (While no longer warm, the Sammies were still tasty.)

One topic that the chatty Brenneman would not address is whether he will stick around to enjoy the fruits of his labor. He said he will sit on the board and maintain his ownership stake for the long-term, but as for his tenure as CEO, Brenneman said cryptically, "We'll see."

It's possible that Brenneman has already focused his takeover appetite elsewhere.  To top of page

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