Potbelly Corp. indicated this week in a securities filing that planned expansion from its current 286 locations would occur mostly through company-owned restaurants and “disciplined” franchising, a move one industry expert describes as well suited to the brand, even in a competitive segment dominated by franchise growth.

Chicago-based Potbelly, operator and franchisor of Potbelly Sandwich Shop, filed a registration document Thursday with the Securities and Exchange Commission for a $75 million initial public offering.

According to the filing, Potbelly plans to increase the number of locations by at least 10 percent annually over the long term. However, the company gave no indication that the rate of franchise development would accelerate meaningfully from current levels. Potbelly granted its first franchise agreements in Texas and Ohio in late 2010, and franchisees currently operate six locations in the United States. The chain’s 12 international restaurants in the Middle East are also franchised, operated by Alshaya Trading Company, a major franchisee of several Western brands.

“As we develop our franchise program, we intend to expand the number of franchise shops on a disciplined basis. … We expect to have opened between seven and 10 new franchisee-operated shops in 2013,” Potbelly said in its filing. “Although we do not expect franchise activities to result in significant revenue in the near term, we see the selective expansion of our franchising efforts to be a valuable potential growth opportunity over time.”

Thus far, Potbelly’s franchising program includes opportunities for Indiana, Kentucky, Minnesota and Missouri, in addition to Texas and Ohio.

Concentrating on company-owned restaurant growth, in a model like Chipotle Mexican Grill, may serve Potbelly well, according to Darren Tristano, executive vice president of Chicago-based foodservice research firm Technomic Inc. Other brands in the competitive limited-service sandwich segment, including Subway, Jersey Mike’s and Firehouse Subs, have helped drive the segment’s growth primarily by franchising.

“Given the history [of Potbelly] and mentality of current management, they likely believe meaningful revenue would come from existing stores and that they could grow faster with company stores,” Tristano said. “Those company stores return that 20 percent to the bottom line, versus a 5-percent or 6-percent royalty from franchise stores.”

For the past three fiscal years and through the first 26 weeks of fiscal 2013, Potbelly recorded unit-level profit margins above 20 percent and cash-on-cash returns for new company-operated restaurants above 25 percent after two full years of operation, according to the company’s filing. The average investment in opening a Potbelly is about $600,000, and the brand’s average unit volume is “in excess of $1 million,” according to the S-1 document.

In the past two and a half years, the chain has opened nearly 70 locations and expanded into New York; Seattle; Boston; Phoenix; Cleveland; Kansas City, Mo.; and Portland, Ore. Potbelly expects to open between 32 and 35 company-operated units in 2013.

“To support our shop operators, we invest in systems and technology that can meaningfully improve shop-level execution,” the company said, citing a handheld order-taking tablet system for peak throughput now in place at 44 percent of restaurants. “In addition, we are expanding our backline businesses, including catering, delivery and online ordering, which we view as additional growth drivers.”

According to the Nation’s Restaurant News Top 200 census of the largest foodservice brands, Potbelly booked estimated U.S. systemwide sales of about $261 million for the year ended in December 2012, placing it at No. 127.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN