Schultz, other backers feed Potbelly's new-market expansion

Nation's Restaurant News, March 18, 2002 by Carolyn Walkup

CHICAGO -- Potbelly Sandwich Works, with backing from Starbucks Corp. founder and chairman Howard Schultz and other deep-pocketed investors, expanded its concept of custom-made, value-priced sandwiches from Chicago to its first of several planned-growth markets.

Eleven-unit Potbelly, whose $3.59 signatures are made to order on Italian rolls, launched that first new-market branch in Washington, D.C., as the chain's president, Bryant Keil, continues building out the brand's home market of Chicago. Fueling Potbelly's growth is private equity raised by high-profile backers Schultz and his venture-fund partner Dan Levitan as well as University of Chicago chairman Ned Jannotta.

Schultz and Levitan joined Potbelly's board of directors last October when their Maveron venture capital firm raised $11 million from institutional investors in exchange for a minority stake in the sandwich company.

Of Potbelly's highest-profile investor, Keil said Schultz "is an incredible person with a very deep level of knowledge about this segment and how to roll out a concept effectively. We are pretty excited to have a great group of investors who are supportive of what we are doing."

Tentative plans are to open between five and eight units in Washington, D.C., Maryland and Virginia by the end of this year.

"I thought it made sense to open outside of the Midwest to prove that [Potbelly] travels outside of our core market," said Keil, who did not identify additional potential markets he said the chain is targeting.

The Washington units will not differ from their Chicago predecessors, which have a $1.3 million-per-unit annual sales average, Keil said. While Potbelly stores can vary in size from 600 square feet to 4,000 square feet, all will stick closely to the original concept of "making great sandwiches in a nice environment," he added.

Keil said his chain took in gross revenues of between $15 million and $20 million last year.

Among 11 sandwich choices are turkey breast with swiss cheese, roast beef and provolone; Italian with cappicola, mortadella, pepperoni, salami and provolone; and vegetarian with mushrooms, swiss, provolone and American cheeses. Customers can vary their orders with a wide choice of condiments.

In addition to sandwiches, Potbelly is known for hand-dipped milk shakes, malts, homemade cookies and yogurt smoothies. Most units also offer catering and delivery for a $10 minimum order.

Potbelly restaurants sport a somewhat retro, homey and rustic look dating back to the 1970s, when the chain's founders opened the first Potbelly in the corner of their antiques store on Chicago's then-bohemian North Lincoln Avenue, complete with a decorative potbelly stove. Keil, who is an equity investor in several hotels and other industries, acquired the company in 1996.

He is not projecting a tally of new units the company could open this year, saying that the number will depend on securing the right locations. "We will do deals that make economic sense for the long term and will be extraordinarily disciplined in our location selection," he said.

The number could vary between 10 and 30 more locations this year, he estimated. "We don't have any pressure to open a lot of stores," he said, adding that there are no immediate plans for Potbelly to become a public company.

"We are focusing on executing our concept well," Keil claimed. "We are not talking about changing it. It works. Our speed of service is getting much better."

Most units employ a crew member at peak times to take orders from customers while they still are standing inline. "That's a way to get the order into the oven a little bit faster," Keil said. The same technique also is employed by high-volume Portillo's Hot Dogs, which operates in Chicago and its suburbs.

Lines of customers often extend outside the door of Potbelly units at peak lunch hours in downtown locations.

Having long lines of customers waiting to place orders adds to the excitement generated by Potbelly, said Dennis Lombardi, executive vice president of Chicago-based Technomic, the foodservice consulting firm. Although Potbelly faces the challenge of opening in new markets where the brand is not known, it will catch on fairly quickly if it follows the patterns established in Chicago, Lombardi predicted.

According to statistics generated by Technomic, the time could be right for sandwich concepts other than burgers. The consulting firm's figures indicate that the "other sandwich" category grew 14.3 percent between 1999 and 2000, compared with a 3-percent rate for hamburger operations.

Moreover, Potbelly's $5 check average makes the concept competitive with many national sandwich and burger chains, its backers have said.

Some far larger sandwich chains, such as Elgin, III.-based Jimmy John's Gourmet Sub Shops, which has more than 130 units, are wary that Potbelly eventually could become a major competitor. In fact, Jimmy John's founder, Jimmy John Liautaud, in naming rival brands whose growth he monitors, has ranked Potbelly alongside such leading custom-sandwich players as Denver-based Quizno's Classic Subs and Austin-based Schlotzky's Deli.