Potbelly seeks to turn around its flagging fortunes

Alexia Elejalde-Ruiz
Chicago Tribune

Chicago — When Alan Johnson took over as CEO of Potbelly 19 months ago, he saw a beloved sandwich chain that had lost its mojo and fallen behind its swelling roster of competitors.

The Chicago-based company had no app. It offered delivery only intermittently. The cozy look of its restaurants hadn’t changed in some 20 years. It hardly advertised, and certainly couldn’t turn on a dime to offer a timely promotion.

“I affectionately say we were in the slow casual business trapped in the fast casual industry,” Johnson said.

General Manager Tim Ross, left, carries a box over his employees, while Javonne Dixon, right, finishes a sandwich for a customer, at the Potbelly on North Canal Street in the Loop on July 31, 2019. (Abel Uribe/Chicago Tribune/TNS)

Now Johnson and the management team he brought on to turn around the fortunes of the 42-year-old sandwich brand are trying to pick up the pace and grow Potbelly without messing with what had gained the brand a strong following.

Among the changes are a new look for the restaurants and a new approach to franchising that will dramatically increase its franchise footprint.

New Potbellys will feature an updated store design meant to save money and improve the somewhat chaotic experience customers currently encounter. Two existing Chicago-area restaurants, in the city’s Logan Square neighborhood and in suburban Park Ridge, in September will debut the new design and serve as test sites. Other stores may be retrofitted with those features during regular renovations.

Rather than follow their sandwich down a line, leaning over a tall counter to shout out whether they want to hold the hot peppers or add mustard, customers will find workers standing at a cash register to take their order, with a menu board on the wall behind them rather than the current scattered display, and signage pointing them to where to pick up their completed sandwich. Workers will make the sandwiches behind a glass counter so customers can still watch the process.

The exposed brick walls and wood paneling that give Potbelly a ’70s basement kind of feel will give way to a cleaner, more modern design, but with colors that keep it feeling warm, executives said.

Also, Potbelly on Thursday announced it had signed franchise agreements with three experienced restaurant operators that will open 38 new Potbelly shops in Las Vegas, Tampa, Fla., and the Carolinas, doubling its total to 80 franchises. The vast majority of Potbelly’s nearly 500 restaurants are company-owned, but it hopes to shift that balance with a new strategy that focuses on large franchise partners who would shoulder the cost of opening new restaurants.

Sandwiches exit the oven at the Potbelly on North Canal Street, Wednesday, July 31, 2019 in Chicago. (Abel Uribe/Chicago Tribune/TNS)

No longer will Potbelly partner with mom-and-pop franchisees who brought passion but tended to require more resources to manage. Now it will recruit franchisees with financial backing, a track record and plans to open at least 10 restaurants in major metropolitan areas. For example, the Las Vegas franchisor already owns several hotels and casinos, while the Tampa franchisor owns 70 locations of a major pizza brand.

“The groups we sold to already will probably open two to three stores a year, whereas mom and pops open one,” said Peter Ortiz, vice president of franchise development, who was hired a year ago from his post leading franchising at Arizona fast casual Mexican chain Uberrito.

The new interior design is 25% less expensive than the traditional restaurants, which is important for attracting the right franchisees because they can make their money back sooner — in three to four years rather than five or six, Johnson said.

The savings come from changes to equipment, décor and systems, including basics like moving the blender to be next to the ice cream freezer and adding screens that transmit customers’ orders to workers on the line so they don’t have to shout to each other.

While the quirky ordering process had character, focus groups revealed that people wanted it to be simpler. Those conversations revealed that customers weren’t enthused about several features that Potbelly’s executives had thought were important to its brand, like its live music performances, which the chain scrapped in January after much handwringing.

“We built the shop from the ground-up based on what customers said they want,” said Jeff Welch, senior vice president of development, who joined the company last year after a career that included a decade as an executive at Krispy Kreme.

Potbelly’s new leadership team has been spending a lot of time trying to figure out what customers want, and is in the midst of soul-searching to nail down what it is about the brand, born in 1977 in an antique shop on Lincoln Avenue, that captures people’s hearts. The brand isn’t top of mind when people think about lunch, and the company continues to struggle to reverse years of traffic declines, said Johnson, a native of Australia and former CEO of BevMo, a California-based liquor emporium.

Its identity crisis is among the factors that have dragged on Potbelly in the years since its high-flying IPO in 2013, when it was a darling of the ascendant fast casual segment.

Since then, the number of places to buy a sandwich has increased 6% to 9% a year, while the population has grown at 1%, causing many restaurant chains to suffer sales pressures. But in addition, Potbelly opened too many stores across too many states in a scattershot fashion, leading to underperformance, and tried to boost sales by raising menu prices at a higher rate than inflation or the competition, prompting fewer people to come into its doors, Johnson said.

Among the changes at Potbelly are a new look for the restaurants and a new approach to franchising that seeks to dramatically increase its franchise footprint.

When Johnson joined Potbelly in December 2017, the company had experienced a 3.8% decline in same-store sales for the year — an important metric of retail health that measures sales in stores open for at least 15 months. He looked forward to the challenge, having been involved in turnarounds at BevMo, the Boston-based movie theater chain Hoyts and Pizza Hut, where Johnson had originally met Welch in the early 1990s when they launched the chain in Eastern Europe after the fall of the Berlin Wall.

Johnson’s first order of business upon taking the reins was to “focus, focus, focus,” which included closing all 15 of the company’s international restaurants and getting back to basics. His first hire was Ryan LaRoche, formerly executive chef of the Park Hyatt, to improve the chain’s culinary chops.

The team expanded delivery with DoorDash, launched an ordering app that now has nearly 1.5 million loyalty members, and installed cubbies in every store for pickups, which is its fastest-growing business. This year Potbelly introduced bundled meals for the first time in the company’s history. Those two meal deals — which let customers pair a half sandwich with a side or add chips and drink for an additional $2.50 — now account for a quarter of orders, Johnson said.

Potbelly reported revenues of $423 million last year and a loss of nearly $8.9 million, its second straight year of losses. Same-store sales growth improved, turning from negative to flat for two quarters as people spent more at the register. A marked dip in sales in the first quarter of this year was attributed to Chicago’s harsh winter and the government shutdown in Washington, D.C., where Potbelly also has a large presence.

Nicole Miller, an analyst with Piper Jaffray who covers the restaurant chain, said it’s too soon to know if Potbelly’s stock, which fell to less than $5 from a year’s high of more than $14, and down from more than $30 at the time of its IPO, will recover.

The company is doing the right thing “going back to that day-to-day blocking and tackling” to shore up core operations, she said.

The quest for the soul of Potbelly rests partly on the shoulders of chief marketing officer Brandon Rhoten, who joined the team last year after a brief tenure at Papa John’s and before that, headed up digital and social media marketing at Wendy’s.

His team has spearheaded some marketing campaigns that have driven customers to Potbelly’s doors — a social media promotion for its ice cream sandwiches increased sales of the dessert to 14,000 for the week, up from a meager 400 on a typical week — but the harder task is identifying what gives people “a starry look in their eye” when they talk about Potbelly.