In this FDD Talk post, you’ll learn the following:
- Section I – Background information on the Potbelly Sandwich Shop franchise opportunity, including relevant news updates
- Section II – Estimated initial investment for a Potbelly Sandwich Shop franchise, based on Item 7 of the company’s 2018 FDD
- Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Potbelly Sandwich Shop franchise, based on Items 5 and 6 of the company’s 2018 FDD
- Section IV – Number of franchised and company-owned Potbelly Sandwich Shop outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD
- Section V – Presentation and analysis of Potbelly Sandwich Shop’s financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:
- 2017 average and median weekly gross sales for the 26 franchised Potbelly Sandwich Shop restaurants (excluding airport locations) that were open for the full 12 months in 2017
- 2017 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 372 affiliate-owned Potbelly Sandwich Shop restaurants (excluding airport locations) that were open for at least 15 months as of the end of December 2017
Section I – Background Information
16 Things You Need to Know About the Potbelly Sandwich Shop Franchise
Plans to Ramp Up Franchising
1. For several decades, Potbelly Sandwich Shop has not really focused on franchising and has mostly opened corporate-owned stores. In late 2017, Potbelly Sandwich Shop announced that it would focus more on franchised unit growth. The company said that this move toward more franchised stores was part of its new strategy to help the struggling chain. In the same press release, it was reported that in the third quarter of 2017, Potbelly reported a loss of $240,000, or 1 cent on a per-share basis.
2. Mike Coyne, chief financial officer and interim CEO of Potbelly at the time, said that Potbelly’s aggressive growth would be slowing down considerably. Coyne added that for 2018, Potbelly’s expansion was expected to be less than half of 2017’s at the company level. At the time of the announcement, Potbelly had plans to open 30 to 35 corporate stores by the end of 2017, and would continue to moderate corporate store openings going forward.
3. Coyne said, “One of the pillars of our strategic framework is to be a great franchisor. However, we have historically taken a more measured approach, working with single-unit operators in secondary markets, and more recently, with small multi-unit operators. As we look out to 2018, we are recommitting ourselves to the franchise business, and we’ll be allocating more resources toward this business.”
4. Potbelly has engaged with franchise industry players to build its “institutional knowledge base.” The company is also using a franchise consultant to assess its current portfolio and develop a game plan to accelerate growth. Additionally, Potbelly said it is looking for a franchise executive to spearhead the strategy and “meaningfully increase the franchise mix of our portfolio going forward.” “We believe there remains a tremendous whitespace opportunity for the Potbelly brand,” Coyne said.
5. Potbelly said that it would also be closing underperforming stores as part of a portfolio optimization. Three locations closed in the third quarter of 2017 and more are coming, with a real estate advisor assisting the brand in its evaluation of potential targets.
Announces Resignation of Chief Financial Officer
6. At the beginning of September 2018, Potbelly Sandwich Shop announced the resignation of its chief financial officer, Michael Coyne, who is leaving Potbelly to accept a senior leadership position with another company. At the time of the press release, Potbelly said that the company had begun its search to identify qualified candidates to fill the CFO position. According to Potbelly, it has a strong financial team in place that will continue to support the company’s strategy during the search process.
7. Alan Johnson, chief executive officer of Potbelly, commented, “Mike has been a great member of the Potbelly team during his tenure as our CFO and as interim CEO prior to my joining Potbelly. Mike has been extremely helpful to me during my transition to leading Potbelly, and I want to personally express my gratitude for his work and contribution. Mike will be assisting as we transition to a new CFO. I wish Mike nothing but the best in his new position.”
Strengthens Leadership Team to Execute Turnaround
8. In early June 2018, Potbelly Sandwich Shop announced the latest in a series of recent key appointments to strengthen its leadership team, with the appointment of Brandon Rhoten as
senior vice president and chief marketing officer. The addition of Rhoten builds on Potbelly’s focused effort to assemble a world-class leadership team as the company executes its turnaround strategy.
9. Rhoten comes to Potbelly from Papa John’s International, Inc., where he served as global chief marketing officer. Prior to Papa John’s, Rhoten was vice president of advertising, media, and digital/social at Wendy’s International, where his team received industry-wide recognition for its highly successful digital/social media campaigns, which helped lead that brand’s turnaround. Rhoten started his career in marketing at the advertising agency Gyro.
10. Rhoten will have oversight of all aspects of Potbelly’s marketing, including brand strategy, digital marketing, social media, research, loyalty, direct marketing, and advertising. He will report directly to Alan Johnson, president and chief executive officer of Potbelly.
11. Johnson said, “The kind of marketer who would have Boyz II Men sing to a cheeseburger and give a year of chicken nuggets to a high schooler for earning the most retweets in history will definitely bring the quirky fun back to Potbelly. Brandon’s experience and approach are perfectly aligned with the direction we are setting to expand our brand presence in a world where social and digital drive the conversation. We look forward to leveraging his many years of creativity, brand strategy, bold and disruptive marketing, and success with other well-known consumer brands. This is an exciting time for Potbelly.”
12. Rhoten is the latest addition to Potbelly’s executive leadership team. Johnson added, “The addition of Brandon is just the most recent action that we have taken to build out the right leadership team required to execute our strategy to turn around the business. Over the past few months, we have added talented and experienced leaders to drive our franchise development, our off-premise business, our menu innovation and now our brand marketing to the next level.”
13. Some of Potbelly’s recent key additions to its leadership team include:
- Jeff Welch, senior vice president of franchise development, brings to Potbelly over 30 years of franchise, real estate, and operations experience across organizations such as Krispy Kreme, Pizza Hut, Taco Bell, and KFC. Welch has full responsibility for franchising, including developing and executing the vision, strategy, and tactical plan to deliver long-term profitable and sustainable growth. His efforts will build a stronger foundation for franchise expansion, allowing for accelerated growth and an increased mix of franchised units.
- Debbie White, vice president of off-premise, joins Potbelly with over 25 years of sales and marketing leadership roles across PepsiCo, Taco Bell, and Domino’s Pizza. White’s primary focus will be to capture the significant growth potential across all day parts in catering, delivery, grab and go, and curbside pickup.
- Chef Ryan LaRoche, vice president of culinary innovation, is a Michelin-starred chef with over 20 years of success in culinary production from fine dining to fast casual. He served as executive chef at Park Hyatt Washington, was executive sous chef to legendary chef Joël Robuchon, and most recently was vice president of culinary operations at Mariano’s. LaRoche brings a chef-inspired perspective to menu design and product innovation.
14. Potbelly Sandwich Shop was founded in 1977 when Peter Hastings and his wife decided to start selling sandwiches in their antique shop located in the Lincoln Park neighborhood of Chicago. Over time, the Hastings’ antique shop turned into a full-time sandwich shop where the Hastings also served desserts. For the next two decades, the Hastings continued to run just this one Potbelly Sandwich Shop before selling it to Bryan Keil in 1996.
15. Keil quickly expanded the original store and opened a second location the following year. Keil continued to expand the Potbelly Sandwich Shop concept mainly through company-owned stores. Franchising started in 2009 and the first two international Potbelly Sandwich Shops opened two years later in Dubai and the United Arab Emirates. Today, Potbelly Sandwich Shop has continued to expand across the United States and internationally through both franchising and corporate-owned locations.
Entrepreneur’s Franchise 500
16. Potbelly Sandwich Shop ranked No. 269 on Entrepreneur’s 2018 Franchise 500 list.
Section II – Estimated Costs
- Please click here for detailed estimates of Potbelly Sandwich Shop franchise costs, based on Item 7 of the company’s 2018 FDD.
Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees
- Please click here for detailed information on Potbelly Sandwich Shop’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.
Section IV – Number of Franchised and Company-Owned Outlets
- Outlets at the Start of the Year: 17
- Outlets at the End of the Year: 24
- Net Change: +7
- Outlets at the Start of the Year: 24
- Outlets at the End of the Year: 30
- Net Change: +6
- Outlets at the Start of the Year: 30
- Outlets at the End of the Year: 39
- Net Change: +9
- Outlets at the Start of the Year: 334
- Outlets at the End of the Year: 372
- Net Change: +38
- Outlets at the Start of the Year: 372
- Outlets at the End of the Year: 411
- Net Change: +39
- Outlets at the Start of the Year: 411
- Outlets at the End of the Year: 437
- Net Change: +26
Section V – Financial Performance Representations (Item 19, 2018 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 2018 disclosure document’s issuance date, the company has 39 franchised Potbelly Shops open. Of the 39 franchised Shops, 26 Shops were open for the full 12-period timeframe (a full year) beginning with fiscal Period 1 in 2017 (i.e. January 2017) through fiscal Period 12 in 2017 (i.e. December 2017).
- This financial performance representation excludes the results of the 10 Shops that were not open for that full 12-period timeframe. Financial information from 3 franchised Potbelly Shops operated at airport locations also is excluded because, given the airport setting, their results sometimes are atypical compared with non-airport location results.