Wright, who joined Potbelly less than two many years ago, is turning to franchising in hopes of restoring revenues to pre-pandemic concentrations and lifting a base line that has been underwater considering that 2017. The formidable growth would quintuple Potbelly’s dimension, incorporating hundreds of shops for every 12 months. It would also entrust the potential of the sub sandwich chain identified for its distinctive, kitschy vibe to 3rd-social gathering operators.
It’s not a novel method for restaurant chains generally or Potbelly in particular. McDonald’s, for example, transferred most of its enterprise-owned stores to franchisees, who now operate extra than 93% of the chain’s shops. Former Potbelly CEOs Aylwin Lewis and Alan Johnson also looked to franchising for growth, albeit much less aggressively than Wright. Franchisees now operate just 46 Potbelly shops.
Accomplished perfectly, franchising can boost a chain’s revenues swiftly without a commensurate enhance in overhead expenses, which are borne by franchisees. It also generates upfront funds in the sort of franchise costs.
That seems like a promising prescription for Potbelly, which has struggled to deliver regular gross sales expansion and income since likely community in 2013.
Income rebounded to $380 million past 12 months, up 30.6% from 2020 benefits hammered by pandemic lockdowns, but down 7.2% from 2019. Potbelly misplaced $23.6 million in 2021, much less than 2020’s $65.7 million reduction but about on par with 2019. Profits at retailers open up at the very least a yr, a vital evaluate of retail performance, declined each and every yr from 2017 by way of 2020, ahead of climbing previous year on the snapback from lockdowns.
Traders have dropped self confidence in Potbelly as the turnaround options of successive CEOs sputtered out. The inventory closed April 12 at $6.35, down 79.4% from its closing rate of $30.77 on its very first working day of trading.
Wright is betting that a franchising marketing campaign supported by a simplified menu and new electronic purchasing abilities will produce far better final results. But his plan hinges on attracting franchisees with the means and acumen to deliver consistent high quality and support though functioning multiple outlets. Opposition for all those operators is scorching, claims Mike Mazzeo, a professor of tactic at Northwestern University’s Kellogg Faculty of Small business.
“It would acquire having a lot of points proper to be able to pull it off,” Mazzeo claims, noting that Potbelly’s menu is somewhat complicated, which will make franchising more challenging.
Wright has practical experience with large-scale franchising. He joined Potbelly from Wendy’s, wherever he moved 1,100 organization-owned suppliers to franchisees, a course of action named “refranchising.”
He acknowledged through the company’s earnings connect with in early March that the 2,000-retail outlet purpose is bold and known as refranchising “a intricate economical maneuver.” He programs to use the proceeds from refranchising to pay down debt—the business may have to have to repay a $10 million Paycheck Defense Method loan—and pace the opening of new outlets.
“A big vast majority of those people are going to be suburban and push-via locations—that’s where by the development likely is, which is wherever the white space is,” he claims. “And candidly, that is exactly where the individuals are.”
It is a excellent time to franchise, says Tom Bailey, senior purchaser foodstuff analyst at Rabobank. Franchises outperformed other places to eat in the course of the pandemic due to the fact of the adaptability of their product. Franchises accounted for 40% of U.S. foods service sales in 2021, up from about 33% in 2019.
“It’s a product that has demonstrated by itself really effective to development and growth, if you have a fantastic recipe and operationally replicable product,” he says.
The franchise-helpful ecosystem could modify, nonetheless, if interest rates tick upward and operators grow to be fewer inclined to choose out big financial loans. It’s also high priced to run a restaurant now, with enhanced labor and food items prices. For now, competition continues to be limited for excellent franchisees, and Potbelly could be at a downside.
Potbelly’s merchants averaged a bit extra than $1 million in product sales final year. That’s on par with franchised sandwich institutions, but other restaurant concepts produce significantly better profits, and Potbelly will be competing from all franchises for operators.
Prospective franchisees may well be additional interested if Potbelly can hit its intention of $1.3 million in yearly profits for every keep, specialists say. But many others say the organization will want to sweeten the deal to entice franchisees, who have to spend Potbelly an initial $40,000 franchise charge and 6% in royalties and foot the bill for retailer building, which can charge involving $665,000 and $942,000 for a push-through site.
Morningstar analyst Sean Dunlop calculates it could choose much more than 6 a long time for a franchisee to generate back again that first financial commitment. That compares with three a long time for a common McDonald’s or Domino’s Pizza franchise, and 2 1/2 several years for a Starbucks franchise.
“There are added benefits. The trouble is, how do you convince another person to indicator on?” he states. “The math doesn’t appear excellent.”