Big Sandwiches Equal Big Profits at Potbelly's Sandwich Works
Potbelly Sandwich Works has created some major buzz lately in the uber competitive fast casual restaurant industry. With so many options for consumers to chose from, it's tough to come out a winner especially with the high level of brand loyalty in the sector. After witnessing the long lines outside of the 303 W. Madison St location in Chicago nearly 10 years ago (in the dead of winter!), we knew Bryant Keil was on to something.
The Potbelly’s train is firing on all cylinders and has successfully penetrated the uber-competitive fast casual sandwich sector. Potbelly sells a basic sub (PBJ, Pizza, etc) with relevant options (health, supremes) and offers an awesome dining experience. Their main target demographic is the lunch market, and their lunch lines are often out the door. Their menu includes soups, shakes and salads in addition to subs and the old-wood decor and live music make for a warm, neighborhood feel. Atmosphere is only the beginning though. Their products are well-crafted and satisfying. The quality of their ingredients is a cut above, yet price remains similar to that of their competition.
Potbelly Franchise - Key Details
|Initial Franchise Fee||$40k |
|Royalties/Advertising||6% up to $1.0mm in sales, 7% thereafter|
|Net Worth Requirement||NA|
Potbelly Franchise Application and Opening Process:
Potbelly’s is privy to a strong management team. They offer a level of assistance to franchisees that is higher than most of their competitors. However, management seems all too aware of how good a concept they have on their hands -- so much so that their discussions with prospective franchisees feel similar to an interview with Goldman Sachs (an esteemed Investment Bank on Wall Street).
The process to join the “Potbelly Nation” is long and seems to have been installed as a means of preserving exclusivity within the brand.
- Fill out a “Get Started Form”
- Complete a “Detail Information Form”
- Participate in a telephone interview
- Complete a background and credit check consent form
- Complete a 50 question online franchise survey
- Attend a 6-day in store experience
- Sign the preliminary Potbelly Franchise agreement
- Work with a designated real estate company to find a location
- Complete design and construction training
- Sign a final franchise agreement
- Attend an 8 week training course
- Build the store
- Hire store staff
- Open for business
Another issue that one might find off-putting is that certain locations appear
to be reserved exclusively for corporate operation. Cities in the Northeast,
like Boston, would be ideal for a concept like Potbelly’s to see great
success. The brand knows this and is keeping such locations for in-company
operators. Honestly, who could blame them though? There isn’t much risk
involved in starting up in locations like these, so it makes sense to hold on
to them and profit directly.
From a financial standpoint, it should be noted that Potbelly’s makes a lot of money because stores can generate $1mm in sales and nearly 20% pre-tax margins. Some locations in Chicago generate upwards of $50k in sales per week. Rent and labor, though, are comparatively higher than Potbellys’ competitors (due to larger real estate needs) while advertising and royalties costs are about average. See financial statement at bottom.
Potbelly’s has a lot going for it as a franchise. The product is one that you can stand behind and the high cash flow doesn’t hurt either. The franchising process is long and cumbersome and there is a strong possibility of micro- managing from the brand. However, that’s most likely a method to weed out sub- par operators. If you don’t mind a brand that is cautious about the people they do business with (and has policies which demonstrate such caution), get in on Potbelly’s and snag a location with a hungry lunch crowd.
Potbelly’s 1-Store Potential Income Statement
Here's a theoretical look at a possible income statement for a single Potbelly's location:
|Amount||% of Sales|
|Average Store Sales||$935,000|
|Royalties & Advertising||$93,500||10.0%|
|Cost of Food & Packaging||$266,475||28.5%|
|Owner Operated Cash Flow before Interest and Taxes||$168,300||18.0%|
What is an Area Representative?
The reason why anyone would choose being an Area Representative is that they are paid a certain portion of the initial franchise fee of each new franchisee they solicit as compensation. Aside from the sales commission the area representative may get paid by the franchisor a portion of the royalties received for servicing franchisees. In some cases, franchisors will pay the area representatives a portion of the fee received from new franchisees in the reps’ territory even though the area representative may have had nothing to do with the screening or recommending that particular franchisee. However, all these and other contingencies- such as compensation for furnishing many of the pre-opening and on-going services to the franchisee- should be covered in the area representation agreement.
Franchise Disclosure Document for Dummies – Part 4
One key aspect of Item 12 is establishing how franchisees’ territories will be defined. This may be by zip code, population, population with certain demographics, or geographic or political markers (i.e. streets or county lines). For franchises with population-based territories, a franchisee in a busy downtown urban area may have a territory of only a few blocks, while a rural franchisee’s territory could reach for miles.
Breaking Down an FDD
Once you've found a franchise (or multiple franchises) that you are interested, the real research and diligence process begins. You need to figure out whether the franchise you are looking at really makes sense for you from a financial and lifestyle perspective. Your best source of information for all of this is the Franchise Disclosure Document, or FDD.