The sandwich brand wants to get there in the next eight to 10 years.
Potbelly Sandwich Shop
The past 12 months were a turning point in Potbelly’s 45-year history.
The chain launched a simplified, value-enhancing menu, improving traffic and average check, and upgraded its tech stack with a revamped app, website, digital ordering integration, and Perks loyalty program.
Potbelly also onboarded a new chief marketing officer, chief development officer, and chief people officer, experienced return on investment from its digital marketing initiatives, aligned employee incentives with driving traffic and profit, and maintained cost-saving efforts instituted in 2020.
The accomplishments translated to stellar results throughout the balance sheet. In the fourth quarter, same-store sales lifted 33.8 percent year-over-year, and 14.1 percent on a two-year basis, and for the full year, comps increased 30.3 percent, and 5.6 percent on a two-year stack. Potbelly reported positive adjusted EBITDA for a third straight quarter at $2.6 million, and positive shop-level profitability for a fourth consecutive quarter at $11.4 million.
CEO Bob Wright said 2021 exceeded expectations, and he predicted 2022, 2023, 2024, and the years beyond will do the same. Potbelly plans to reach 2,000 stores in the U.S. in the next eight to 10 years and become at least an 85 percent franchised system.
The sandwich chain ended 2021 with 443 restaurants, and about 90 percent of that was company-owned.
“As you look at where our white space is, we’ve done the market holding capacity for the entire United States in preparation for this announcement,” Wright said during the chain’s Q4 and 2021 earnings call. “And we looked at all 210 of those designated television markets across the U.S. And we see that holding capacity as really the determinant behind our confidence in the 2,000-unit goal that we’re setting out.”
READ MORE: Potbelly Drives Sales with Upgraded Menu and Tech Stack
In the next three years, Potbelly plans to refranchise about 25 percent of its corporate stores, and each of those agreements will be contingent on the operator developing new restaurants, as well. As part of this process, the chain will also assess existing development agreements, which may have been impacted by COVID.
Potbelly is eyeing at least 10 percent annual unit growth by 2024, including expansion into new and current markets. To support this growth, the chain is opening the entire U.S. to its new franchise sales team.
Once a franchisee partners with the chain on a particular shop development area, the brand will provide targeted trade area mapping to help operators pinpoint locations with the likeliest success based on information from the current portfolio.
“The combination of the [shop development area] agreements, coupled with refranchising, form the basis for multi-unit development deals with franchisees poised to grow with a brand as strong as Potbelly,” Wright said. “The partnership between a powerful brand like Potbelly and the right franchisees is the key to success. We know we have the brand, and our team has the experience to select, welcome, and support franchisees that will help us grow to be strong and successful together. This is an extremely exciting time for Potbelly’s growth.”
A majority will be suburban and drive-thru units, because “that’s where their growth potential is, that’s where the whitespace is, and candidly, that’s where the consumers are,” Wright said. Drive-thru and suburban same-store sales remained positive against 2019 throughout last year.
The company also wants to reach $1.3 million in AUV in three years.
Meanwhile central business district locations declined double digits in 2021 versus pre-pandemic comparisons.
“We will certainly build, and our franchisees will certainly build, [central business district] locations in those markets,” Wright said. “But all you really have to do is kind of look at the largest city markets that we’re currently in, in Washington and Chicago and New York, three of the most difficult CBD markets to penetrate, and we’ve done it and done it successfully. So, the rest of our growth is across the rest of the U.S. as we grow to penetrate the other one. I think that’s where our franchisees are going to gravitate first.”
Wright acknowledged refranchising will be a “complex financial maneuver.” On one hand, Potbelly will give up EBITDA, but the trade is a $40,000 franchisee fee per store and 6 percent royalties. The CEO expects there to be gains, depending on the restaurant and the market. Potbelly will use those proceeds to take care of debt and accelerate the journey toward 2,000.
“I think it’s really important that any franchisees that we’re in discussions with understand that these refranchise deals only happen in partnership with a development agreement,” Wright said. “And those development agreements have development area deposits that go with them, as well. So, you spread that kind of evenly over the three years that we’ve discussed we plan to do this work, there definitely will be cash benefit and earnings benefit that goes with it.”
READ MORE: Potbelly’s Profitability Strategy Hits New Stride
In addition to 10 percent unit expansion, Potbelly is aiming for shop-level margins greater than 16 percent by 2024, fueled by management of supply chain and food costs and discipline around labor and operating expenses. Shop-level margin was 8.5 percent in 2021 and 11.2 percent in the fourth quarter.
The company also wants to reach $1.3 million in AUV in three years, with sales volume growth across all shop types (urban, suburban, airport, drive-thru, etc). Wright believes this can be achieved through an expanding digital business that currently mixes 36 percent, in-shop technology enhancements that increase throughput, high-return marketing investments that drive customer acquisition, and menu innovation.
Potbelly saw an annualized AUV of $1.03 million in Q4, although that dipped to $892,000 in January because of the Omicron variant. Matters have improved in recent months, with annualized AUV inching past $1 million in February and March.
“We’ve already seen almost a quarter of our shops hit that level of AUV, even in this kind of challenging environment,” said CFO Steve Cirulis, about the potential of topping $1.3 million AUV. “So, in addition to all the strategic elements that we have kind of lined up to kind of push the entire system, having a large group of shops that are already there, it gives us that kind of further foundation for pushing it along.”
In 2022, Potbelly projects record AUV, double-digit same-store sales growth, and shop-level margins in the low double digits.
The company earned $380.1 million in revenue in 2021, up from $291.3 million in 2020. Food, beverage, and packaging costs were 27.8 percent as a percentage of sales, down from 28.4 percent in 2020. Labor was 33.7 percent as a percentage of sales, compared to 36.4 percent the year before.
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paper hot cups, take out packaging, ice cream cups and lids
The sandwich brand wants to get there in the next eight to 10 years.