This is Subway territory, a small waterfront city of 52,000 that's home to the nation's largest restaurant chain, a place where Subway funds...

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MILFORD, Conn. — This is Subway territory, a small waterfront city of 52,000 that’s home to the nation’s largest restaurant chain, a place where Subway funds the arts and schools and sends kids to summer camp.

But just up the road from Subway’s headquarters, a developer recently erected seven white letters over an empty storefront: Quiznos.

“They’re challenging Subway,” observed resident Ernie Judson, gesturing to the newly painted red trim, “putting it right in their back yard.”

Consumers are noticing what restaurant-industry analysts have seen for years. By making toasted sandwiches a hot item, Denver-based Quiznos has become the fastest-growing restaurant chain in the country, trailing only Subway as the nation’s No. 2 sandwich shop — not counting hamburgers.

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After the upstart in the sandwich market hit the $1 billion sales mark last year, Subway took notice and launched is own brand of toasted sandwiches.

But industry analysts say Subway and Quiznos are locked in an unusual competition. Like McDonald’s and Burger King, they compete for the same market. But the sandwich purveyors also share a common goal: luring customers away from the burger joints.

Nowhere is that clearer than on Subway’s monthly sales charts, which frequently are unaffected even after a Quiznos opens nearby, said Fred DeLuca, Subway’s founder and president.

“How can that be?” he said. “Where did all the sandwich customers come from?”

The answer, he said, is that despite the presence of 18,000 Subway restaurants nationwide, the sandwich market remains underserved. Quiznos is bringing new customers to the market, which in turn benefits Subway.

Customer James Gore, who works in New Haven and was dining at a Quiznos recently, said he likes both chains.

“I thought about getting a burger, but I didn’t want to eat heavy and have to go back to work,” Gore said.

DeLuca even credits part of his company’s 11 percent average annual growth over the past three years to Quiznos’ emergence. “If they never existed, our overall growth probably would be slower,” he said.

Subway has more than 23,000 franchises in 82 countries. Its U.S. stores generated $6.27 billion in sales last year. Now marking its 40th year, Subway franchises are designed to run inexpensively with a small staff and can be built into gas stations and convenience stores.

Quiznos offers slightly more expensive food in larger, breezier shops. With nearly 4,000 stores, Quiznos executives say they’re blazing new ground, marketing the company as a higher-quality alternative to fast food that’s not as expensive as eateries known as fast casual restaurants, such as Panera Bread.

But some see the Quiznos’ building blitz as a potential liability and say the company’s niche might not be big enough to support its growth.

Between 2002 and 2004, Quiznos leaped from 1,765 stores to 3,339. That’s an annual growth rate of nearly 45 percent, with company sales climbing 48 percent to $1.27 billion.

“I don’t think you could talk to any analyst in the country who would recommend that fast growth,” said Tom Miner, a restaurant consultant with Technomic.

H.G. Parsa, editor of the Journal of Foodservice Business Research, believes Quiznos offers a better product than Subway but may have hindered its growth by positioning itself between fast food and fast casual.

“They’re afraid to make the choice. If they make the step up, they might get beat,” Parsa said. “Quiznos is stuck. They want to play both games at the same time.”

Nonsense, says Tom Ryan, the vice president in charge of crafting the Quiznos brand. The former McDonald’s executive says the company offers better food than its fast-food rivals at a better price than its fast-casual competitors.

“We don’t think it is a niche. We think it’s positioned us more for where the market is growing than where the market has been,” he said. “There’s a big difference between being niche and being first.”