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FDD Talk 2017: What You Need to Know About the Potbelly Sandwich Works Franchise Opportunity (Financial Performance Analysis, Costs and Fees)

by Franchise Chatter on August 16, 2017

in FDD Talk 2017: Food Franchises, Franchise Earnings, Sandwich Franchise, Sub Sandwich Franchise

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In this FDD Talk 2017 post, you’ll learn the following:

  • Section I – Background information on the Potbelly Sandwich Works franchise opportunity, including relevant news updates
  • Section II – Estimated initial investment for a Potbelly Sandwich Works franchise, based on Item 7 of the company’s 2017 FDD
  • Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Potbelly Sandwich Works franchise, based on Items 5 and 6 of the company’s 2017 FDD
  • Section IV – Presentation and analysis of Potbelly Sandwich Works’ financial performance representations, based on Item 19 of the company’s 2017 FDD, including information on the:
  • 2016 average and median weekly gross sales for the 22 franchised Potbelly Sandwich Works shops that were open for the full 12 months in 2016
  • 2016 average and median gross sales, net sales, total cost of sales, gross profit, total labor, other operating expenses, occupancy expenses, and shop profits for the 348 affiliate-owned Potbelly Sandwich Works shops (excluding airport locations) that were open for at least 15 months as of the end of December 2016

Section I – Background Information

14 Things You Need to Know About the Potbelly Sandwich Works Franchise

Investor Pushes for Company’s Sale

1.  Toward the end of June, Cleveland-based investment firm Ancora Advisors, which owns a 4 percent stake in Potbelly, sent the sandwich chain’s board a letter blasting the company for its poor performance since it went public in 2013. According to Ancora’s Chief Executive Fred DiSanto, “Investors have experienced nothing but losses as owners of Potbelly.” DiSanto also notes that shares are down more than 60 percent since Potbelly’s October 2013 IPO.

2.  Although DiSanto pushed for a sale of the company, he also provided a list of improvements that Potbelly could take to save it from a sale. Some of DiSanto’s suggestions include: rolling out kiosks instead of full scale restaurants for new locations to cut costs, and franchising more of its locations to boost profitability as only 43 of Potbelly’s 454 locations are franchised.

3.  DiSanto also wants Potbelly’s board to add a shareholder-appointed director to assist in the search for a new CEO following the announcement that Aylwin Lewis would be leaving the company in August.

Celebrated 40th Birthday

4.  In May, Potbelly Sandwich Works kicked off its 40th birthday celebration with in-shop promotions, new menu items, and several giveaways. On June 1, customers were able to download a special coupon from Potbelly’s Facebook page that offered 40 percent off any Originals sandwich.

5.  In addition to the special offer, Potbelly released two limited-time birthday treats: a Birthday Shake, which featured a birthday cake-flavored hand-dipped shake, blended with Potbelly’s mini butter cookies and festive sprinkles; and a Marshmallow Crispy Bar, a crisp rice treat mixed with marshmallows and topped with birthday frosting and sprinkles.

6.  Potbelly also sold its famous Hot Peppers in commemorative 40th Anniversary jars for a limited time.

7.  The sandwich shop chain held its “$40K in 40 Days” sweepstakes in partnership with Pepsi to give away a variety of prizes. Every purchase made through the new Potbelly app counted as an entry in the sweepstakes, which started on May 22. Weekly winners received an exclusive concert experience of their choice; other weekly and daily prizes included cash giveaways, gift cards, and free Pepsi products.

CEO Steps Down

8.  At the end of May, Potbelly Sandwich Works announced that Aylwin Lewis, Chairman and CEO, would be leaving the company completely on August 8, 2017. Aylwin served as Potbelly’s CEO for nine years.

9.  Peter Bassi, the Lead Director of Potbelly Corporation, said that Lewis is a “world class restaurant leader” and that Potbelly has benefited from his leadership. At the time of the announcement, Potbelly said that it had started the search process for a new CEO. As of this writing, a replacement has not yet been named.

5-Unit Deal in Virginia

10.  In early July, Potbelly Sandwich Works announced that it had signed an agreement to add five more shops to the Richmond and Charlottesville, Virginia areas. David Duke and operating owner Jay Clark, who are the franchisees that own the two existing Potbelly restaurants in Richmond, will continue to grow the brand.

11.  According to Duke, the two Potbelly shops have garnered a large fan following and he and Clark “see an even brighter future for Potbelly in the greater Richmond area.”

Company History

12.  The first Potbelly Sandwich Works was opened in 1977 by Peter Hastings in Chicago, Illinois. The restaurant was originally an antique shop that Hastings owned with his wife, but the couple started serving sandwiches to the antique shop’s customers. The Hastings eventually turned the location into a full-time restaurant that served toasted sandwiches and homemade desserts.

13.  In 1996, entrepreneur Bryant Keil purchased the original Potbelly Sandwich Works location and quickly expanded the store. Keil opened a second store in 1997 and today there are over 450 locations around the world.

Entrepreneur’s Franchise 500

14.  Although Potbelly Sandwich Works has over 450 locations, the shops are primarily company-owned (less than 50 locations are franchised). Since the company does not currently focus on franchising, Potbelly Sandwich Works has not yet appeared on Entrepreneur’s annual Franchise 500 list.

Section II – Estimated Costs

  • Please click here for detailed estimates of Potbelly Sandwich Works franchise costs, based on Item 7 of the company’s 2017 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

  • Please click here for detailed information on Potbelly Sandwich Works’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2017 FDD.

Section IV – Financial Performance Representations (Item 19, 2017 FDD) and Analysis

  • The historical financial performance representation appearing below provides (1) the actual average and median weekly Gross Sales during a specific timeframe for franchised Potbelly Shops and (2) the actual average and median annual Gross Sales, operating expenses, and profits during a specific timeframe for certain Potbelly Shops owned and operated by the franchisor’s affiliates.
  • All of the Shops whose information is included in the averages and medians are substantially similar to one another in terms of products and services offered. They are also substantially similar to the Potbelly Shops the franchisor expects franchisees to operate under Franchise Agreements with it except that, during their start-up phase, franchised Potbelly Shops will not sell the full range of sandwich sizes currently offered and sold by the more mature affiliate-owned Potbelly Shops reflected in this financial performance representation and will not offer delivery services.

Part 1 – Average and Median Gross Sales for Franchised Shops

  • As of the 2017 disclosure document’s issuance date, the company has 30 franchised Potbelly Shops open. Of the 30 franchised Shops, 22 Shops were open for the full 12-period timeframe (a full year) beginning with fiscal Period 1 in 2016 (i.e. January 2016) through fiscal Period 12 in 2016 (i.e. December 2016).

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