What do Mortgages, Madoff and Quiznos have in common?We know that brokers and banks sold the idea of risk-free mortgage products that ended up bankrupting America and Madoff sold out his family, friends and community in a modern day Ponzi-Scheme.
These deceptive business practices and a lack of efficient regulatory action have startled the US economy. What you don’t know is that Quiznos is selling the American dream through a six-inch toasted sub that is burning franchisees across the country.
Quiznos makes a great sub, has over 4000 locations worldwide, and is the world’s 2nd largest sub sandwich franchise. However, new store growth and same store sales metrics belies their core fundamentals: (1) over 1,000 locations (~20% of total) have closed in the past 3 years, (2) 40% of stores were not breaking even, and (3) 25% of loans to Quiznos are in default (according to the SBA); none of which is highlighted with prospective franchisees.
They have historically awful relationships with franchisees (no surprise there), making franchisees purchase product and equipment from the Quiznos-owned supply chain at inflated prices (great for Quiznos sales, bad for franchisees profit). Their strong national presence puts it on the short list of franchises to consider opening for first-timers, but it is a pathway to financial distress for middle class Americans.
In each instance – Mortgages, Madoff and Quiznos, regulatory measures should have been put in place to prevent these things from happening. For Madoff, the federal authorities were tipped numerous times, but decided that either Madoff was acting ethically or that the case wasn’t worth investigation. I suppose $250,000 in donations to the federal committees, candidates, and parties since 1991 makes anything ethical. Couple that with the Madoff family history and connections in the Securities Industry and Financial Markets Association (SIFMA) and the picture becomes more clear as to why the Feds didn’t act.
Similarly, the government stood by as Wall Street began repackaging mortgage securities. In fact, President Clinton made changes to the Community Reinvestment Act to make mortgages more obtainable for lower and lower-middle class families. And Federal Reserve Guru Alan Greenspan kept rates low making more enticing for people to borrow. This compelled banks to offer mortgage loans to unqualified borrowers. Wall Street, commercial banks and the Average Joe were “creating worth” so easily, that no one stopped to say if they should. The government, as this country’s lead regulator, saw the signs coming but did nothing to pre-empt the disaster.
This brings us to Quiznos. Hundreds of Americans chasing the “American dream” often turn to franchising to build their visions. Those who buy into brands that operate like Quiznos are too often led astray from the path to profit and find more trouble than they bargained. 25% default rates? Haven’t we learned enough over the past 5 years? Why hasn’t the government stepped in to protect the interests of Average Joe on Mainstreet? Spending too much time investigating steroids in baseball perhaps?
We live in a capitalist society where we are required to take ownership for our decisions and investments. But when a brand like Quiznos time and time again treats their “partners” unfairly and unethically, our leading regulator needs to step in.
The Federal Trade Commission (FTC) should implement more franchise disclosure laws, or at least fortify preexisting laws. Item 19 in the Franchise Disclosure Document (document given to every franchisee outlining the agreement between the franchisor and franchisee) is optional. Item 19, a relatively recent addition to the FDD, gives the option to a franchisor to provide actual or potential performance data of its existing stores. Should we, the consumer, not be able to see the all the data of all the stores?
When buying stock of a Company on the New York Stock Exchange, we are allowed to see all relevant data to make an informed investment decision. Why should franchising be any different? The FTC must make mandatory the inclusion of Item 19 and store by store data for each franchise to protect the consumers interest. The promises made by franchise salespeople cannot and should not be so incongruous to that which is actually delivered.
Let’s use Madoff and the housing crisis as lessons to be learned and not ones to repeat. Consumers have a responsibility to make informed decisions and that the American “dream” isn’t achieved overnight. But the government shouldn’t have organisations like the SEC or FTC if they aren’t enforcing regulations properly. Start by having Quiznos clean up their act. That will set an example for other corporates who are consistently profiting through deceitful actions. Fingers crossed until then.