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Famous Franchise Failures and Lessons Learned

April 04, 2023
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"Only those who dare to fail greatly can ever achieve greatly." - John F. Kennedy.

Fear of failure is probably the #1 reason why most people never start their own businesses.

And in the franchise world, it's no different.

But the fear of failure shouldn't stop you from owning a franchise or franchising your business.

Instead, you can actually learn from it.


By looking into history's biggest franchise failures from three well-known brands and learning from their mistakes.

We'll break down how these famous brands set themselves up to fail with key takeaway lessons to learn from.

Get ready because it's going to be a blast from the past!

Especially this first franchise that made the fatal mistake of turning down an opportunity from a service we use today when we want entertainment instantly.

Failure To Innovate: Blockbuster

If you grew up to see how the internet would change the world and the rise of online streaming, then you could've seen the demise of Blockbuster from a block away.

The franchise was doing well financially and was at its peak expansion towards the late 90s and early 00s during the dot-com boom, but things would only go downhill from there.

John Antioco was the CEO of Blockbuster from 1997 – 2007. He met with the founders of Netflix, Reed Hastings and Marc Rudolph, in September of 2000.

Money-wise, Netflix was struggling at the time of the dot-com bubble burst.

Blockbuster Franchise Store Closing Down as Brand Failed To Innovate Technologically and Adapt Consumer Behaviors
They wanted to form a partnership to operate the online video rental division while Blockbuster managed the stores. A young Netflix also offered to sell their company for $50 million to Blockbuster.

Antioco heard their pitch and thought it was a huge joke. He said, "The dot-com hysteria is completely overblown!" and struggled not to laugh them out of the room.

Years later, Blockbuster would end up selling off its DVDs for chump change, go bankrupt in 2010, and ironically turn into a canceled 2022 Netflix comedy series based on the franchise.

Takeaway Lesson: Regardless of your industry, technology affects everyone and everything. The market is always changing in response to innovations and consumer behaviors.

Franchise businesses like Blockbuster that fail to adapt, whether due to a lack of flexibility in their thinking or failure to accurately assess market conditions, lose out on lucrative new possibilities.

Companies risk going bankrupt if the disruption is severe enough to make an industry's business model obsolete.

A few other brands that didn't catch up to technological shifts in consumerism were: Kodak and Polaroid films because of digital photography, and Borders bookstore business as online retail (Amazon) and e-readers would cut into the sales of physical books.

Franchises Showing Executives Embracing Innovation and Analyzing Charts With Data About Industry/Consumer Trends
Similar to Blockbuster's fate, Radioshack failed to innovate too. They were the go-to place for electronics, but as tech advanced, they struggled to keep up. Radioshack lost customers to larger retailers and the rise of ecommerce.

And Radioshack refocused its business on mobile phone sales and service but couldn't compete with the big players like Verizon and AT&T. Eventually, the company declared bankruptcy in 2015.

These franchises had a sweet opportunity to tailor their businesses to the changing times. Speaking of sweets, let's talk about a beloved doughnut brand that went from glazed to frazzled: Krispy Kreme.

They once had customers lining up around the block for a taste of their signature doughnuts but ended up with a hole in their finances and a bankruptcy filing.

How did the sugar-coated dream turn into a nightmare? Let's take a closer look.

Expanding Too Fast: Krispy Kreme

Who doesn't love the soft and savory taste of a Krispy Kreme donut!?

Well, the recipe that led to this franchise's disaster (almost extinction) was low-carb diet crazes (e.g., Atkins), fudged accounting numbers, and aggressive overexpansion, among other things.

But before we get there, here's a brief history of the Krispy Kreme doughnuts company.

The business launched in 1937, and a group of franchisees purchased it in 1982. Later they expanded the brand to a household name throughout the 90s and early 00s.

On April 5th, 2000, Krispy Kreme went public and, on that first day of trading, closed at $37 a share, making the company worth roughly $462 million.

From 2000 to 2003, Krispy Kreme operated more than 300 stores in the United States and, at this point, had an international presence.

Krispy Kreme Store Exterior; This Franchise Overexpanded, Saturated the Market, Overstated Financials, and Ignored Obesity Concerns
Things were looking good for the franchise.

Krispy Kreme's doughnut empire was the icing on the cake for entrepreneurs looking to make a profit.

But unfortunately, that financial success would crumble like a stale pastry.

How Krispy Kreme's Empire Almost Fell Apart

Here's how Krispy Kreme almost went out of business.

Diet Trends: In the 00s, it felt like everyone was on a low-carb diet or some kind of weight loss plan.

The Atkins diet craze and those similar had taken over the country. McDonald's, at one point, heavily pushed their salads, and the public, concerned over rising levels of obesity, had demonized sweet and starchy foods.

Obviously, Krispy Kreme doughnuts are the farthest thing from being a healthy food. The franchise blamed "low-carb fads" for profit losses in 2004, which continued to trend downward years later.

Fudged Numbers: 2004 was not Krispy Kreme's year, as their accounting practices were being investigated by the Security Exchange Committee (SEC).

The SEC was concerned that Krispy Kreme had shipped an unsellable amount of inventory to its franchisees at the end of each quarter to inflate its public sales figures and meet earnings targets.

Feeling the pressure, unhappy franchisees had to lower their prices, which cut into their profits. And a lot of products were going to waste, left unsold and rotting in stores.

Various Krispy Kreme Trucks, Doughnut Stands, Exemplifying How Too Many Distribution Channels Hurt Their Bottom Line
Rapid Expansion: One of the main reasons Krispy Kreme almost went extinct was overexpansion—not just location-wise either.

They had too many distribution channels. You could find their doughnuts almost anywhere, like grocery stores, gas stations, kiosks in malls, and wherever else they could stock them.

Selling doughnuts in boxes made it difficult to keep them appetizing, and people lost interest.

In the end, Krispy Kreme deviated from what made them popular in the first place: producing fresh, hot doughnuts and serving them directly to customers in stores.

The franchise stores were also part of the problem.

Krispy Kreme sold them to anyone, no experience necessary, as long as you could fork up the high costs of buying and running their location. Corporate also forced franchisees to buy supplies only from them at highly inflated prices.

But another issue franchisees faced was the cannibalization of sales. New stores would open up near existing ones, and they would compete in the same market.

Older locations and, eventually, new ones began to struggle with declining sales and profitability. Overall, the franchisor failed to maintain consistency in the quality of its products and service across franchises.

Takeaway Lesson: Krispy Kreme's experience teaches you that overexpansion and oversaturation can be a recipe for disaster. Although demand may be high at first, growing too quickly can have your franchisees feeling burnt out and leave your customers with a bad taste in their mouths.

As a franchisor, you should grow tactfully. Take the time to perfect your business model before adding more locations or distribution channels.

You should also consider the impact of expansion on individual franchisees and avoid flooding the market. Krispy Kreme set up too many stores in too small a region, leaving franchisees fighting for customers.

Desk With Charts As Franchisors Analyze Expansion Plans To Avoid Flooding the Market
To avoid this, offer investors an exclusive territory and promise never to introduce a second franchisee into the area.

By following these sweet tips and avoiding the mistakes of Krispy Kreme, you can build a successful franchise brand that's as fresh as a just-baked doughnut.

Let's keep the food-themed franchises going.

This next and final mention is infamous for showing you how franchising is not supposed to be done.

The Sub Standard: Quiznos' Bad Business Blunders to Marketing Mishaps

Quiznos toasted their own business. Between 2007 to 2017, they went from a booming 4,700 locations to 400. Today, there are less than 200 stores.

So how did this happen?

Back in the early 2000s, Quiznos was popular for serving up hot and toasty subs and marketed them at premium prices. They wanted to differentiate themselves from their main competitor Subway.

However, beating Subway at their own game would be the least of Quiznos' worries.

The franchise's business model was unsustainable, disastrous, and perhaps illegal.

Quiznos Storefront, Which Like Many Franchise Locations Collapsed Due to Bad Business Practices and Marketing Fails
As for the brand's marketing… just plain creepy.

Here are the main factors that led to the franchise's decline: a flawed franchising model, tough competition from Subway's $5 footlong, a recession, a leveraged buyout, and poor advertising campaigns.

Quiznos made it difficult for franchisees to turn a profit in a few ways.

Starting with the supply chain, they bought food and paper supplies from vendors and overcharged their franchisees.

Most restaurants have a food cost of around 30%, but Quiznos forced franchisees to buy their supplies at 39%, and they couldn't buy them elsewhere.

This hurt franchisees, and in 2006, about 10,000 franchise owners sued Quiznos with a class action lawsuit.

The franchisees claimed corporate essentially made them "captive customers" by forcing them to buy supplies at grossly inflated prices.

In the end, Quiznos settled and paid out $206 million to their franchises, but more kept coming after that. About 6,900 separate lawsuits from other franchisees, some of which never even opened a store, filed a similar suit; they won $95 million.

Let's switch gears here to mention Quiznos' poor marketing and advertising campaigns/promos that also hurt their franchisees and brand as a whole.

Do you remember the SpongMonkeys? If you do or don't, check out the video below, but be warned, it might be the most uncomfortable thing you'll see today. And it'll have you question the sanity of Quiznos' marketing team.

Business Insider called it one of the worst 10 ad campaigns of all time, and for a good reason.

The 2004 SpongMonkeys ads failed to gain traction and even turned customers away. In fact, the first week they aired, over 30,000 calls were made to corporate complaining. And in 2009, Quiznos decided to launch an ad featuring a sexually suggestive toaster oven, which also did more harm than good.

That same year, the franchise launched a buy-one-get-one-free promo that would end up having customers and franchisees feeling angry. Here's why.

People were outright denied at several Quiznos locations or expected to buy something else in order for the BOGO coupon to work.

Customers weren't too thrilled about that. And neither were the franchisees who had to honor the coupon. They had to eat the cost of the free subs since corporate didn't compensate them for the promotional campaign.

However, the very heart of Quiznos' problem was its poor relationship with its franchisees.

By 2014, Quiznos was $875 million dollars in debt and filed for bankruptcy. In 2016, almost a decade later of having an awful franchisor/franchisee relationship, a new CEO came on board.

Susan Linton Smith tried to make things right. She cut franchisee payments by 40% to save them money and reduce costs and created a new customer loyalty program.

Although these efforts were great, ultimately, they were not enough to save the struggling Quiznos franchise system.

Takeaway Lesson: It's vitally important for franchisors to maintain a healthy relationship with their franchisees, as you learned how Quiznos destroyed theirs with its store owners.

If you're looking for a franchise, you've got to do your due diligence when researching opportunities.

Speak with current or past franchisees to get insight into the operations of the business and a feel for the franchise system's culture. They can share experiences about any challenges they faced, the support the franchisor offers (or lack thereof), and the overall profitability of the franchise.

Franchisors who treat their franchisees like family and not as a number can learn from them and identify areas to improve the franchise as a whole.

Franchisor Fist-Bumping Franchisee, Valuing Their Business Relationship, Knowing Their Customers and Marketing Well
Another lesson is knowing your customer's preferences. Quiznos' advertising initiatives either missed the mark with their target audience or ran promos at the expense of their franchisees and customers.

Franchisors should work with their teams to build marketing campaigns that are informative, relevant, and engaging, but they shouldn't alienate or confuse audiences.

Quiznos' failure was a tough sub to swallow but a reminder that even a hot and toasty sandwich can't save a weak business model and bad marketing decisions.

Franchise Success is Possible: Discover Opportunities With All USA Franchises

Failure is an inevitable part of the business world.

But it doesn't mean you should give up on the idea of owning a franchise or expanding your brand by franchising it.

So whether you're a franchisor or a franchisee, take Quiznos and the other brands mentioned here as a cautionary tale.

Remember the lessons they learned the hard way, so you don't have to.

If you're thinking of franchising your business, don't ignore changing market trends and technological innovations; adapt your business model and spend time on research and development to always make your product or service better to stay ahead of the competition.

Road Signs Pointing to 'Past Lessons' and 'Future Wins' Which Represent Navigating the Franchise Path to Success
Try not to take on too much debt. While it may be necessary to fund franchise expansion, you've got to be careful not to overextend yourself and sacrifice quality for the sake of rapid growth through franchise sales. Focus on maintaining quality standards in all aspects of your business and how you represent your brand's image.

The franchisee/franchisor relationship is a two-way street. So it's important to provide excellent training and offer support to franchisees while also maintaining clear, active, and effective communication with them.

If you're looking into franchise opportunities, we cannot stress enough the importance of doing your due diligence and speaking with franchisees.

Research the franchisor's quality standards, brand reputation, training and support programs, financial stability (debt-to-equity ratio), franchisee turnover rates and satisfaction ratings, legal history, territory restrictions, initial and ongoing costs, etc.

All of these are important factors to consider, so it's extremely wise to get a franchise lawyer who can help you review and vet franchise opportunities.

So let All USA Franchises be your starting point in your franchising journey!

We bring together investors, lawyers, advisors, brokers, franchisees, and franchisors in a single place, making it easy for you to connect and network with each other. We also make it seamless for potential investors and franchisees to find the ideal opportunity and for franchisors to list theirs.

AUF is on a mission to list all the 3000+ franchises in the United States. We are the largest FREE database you'll find anywhere, so start your franchise search today.
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