One of the overarching themes from the restaurant industry toward the end of 2023 was declining traffic driven in part by a consumer fatigued by higher menu prices. Potbelly seems to have missed the memo.
The company provided preliminary results for Q4 and full-year 2023 Monday that includes approximately 6% same-store sales growth driven largely – and once again – by traffic. The company reported continued momentum from Q3 in which it gained traffic share from its fast casual peers every week.
During an interview Monday at the 2024 ICR Conference in Orlando, Fla., CEO Bob Wright outlined what is driving the brand’s recent momentum, including the continued execution of a five-pillar strategy put into place in July 2020 after he came on board.
“With approximately 6% in Q4 and a majority of that coming from traffic, we’re pretty excited. A lot of the drivers of that are similar to what we experienced in Q3 – our five-pillar strategy but more importantly it’s the underpinnings of the strategic initiatives supporting that strategy. Operations initiatives continue to provide benefit to us. The way we’re deploying labor, the turnover rates – we’re still in the top quartile in terms of retention and turnover in the fast casual space,” Wright said. “The lower the turnover, the less re-training, the more stability, the more engagement.”
Additionally, the company is sustaining its 3% investment in marketing and focusing on digital channels, including a heavy lean into its Perks loyalty program. The investment has so far paid off as digital is nearly 40% of the company’s sales mix (versus about 10% per-pandemic). A majority of that digital business comes through its own channels.
“We’re really happy to see that customer affinity for our digital experience outpace the digital experience they can get through other aggregators and third parties while driving that mix,” Wright said, adding that the company experienced a 60% increase year-over-year in Perks member acquisition. “That should feed ongoing growth in the traffic.”
Perks members have meaningfully higher frequency rate than non-Perks members, so the company will continue to focus on getting more people into its program. Potbelly enhanced its loyalty program in 2020 shortly after Wright came on board, but he said it’s “early innings” for its potential, noting incentives like its “Underground Menu” not available anywhere else, including its website.
“The flywheel is starting to move,” Wright said. “Even with as much enthusiasm as you hear from me about our loyalty program and our digital business, we see there’s a lot more than can be done.”
In fact, Wright said it’s “early innings” for the brand as a whole, including its footprint. The company is targeting 2,000 shops in the U.S. from its current 430, with a 10% pace expected in 2024. Agreements are now in place for 192 new franchised shops, compared to 150 at the end of Q3, with more deals in the pipeline.
New-builds in that pipeline will include the Potbelly Digital Kitchen (PDK), first introduced in early 2022 to streamline all orders regardless of where they originate. Wright said the PDK is now in about one-third of the system’s restaurants and the company will maintain a slow rollout pace to be “diligent on the operations and capital side.” That said, combined with what the company calls “Ilot,” or order taking through the line with a tablet during peak hours, the company has improved its operations and is generating more throughput in doing so.
“The choke point in Potbelly’s line is the oven. PDK with Ilot breaks down the barrier of that choke point by giving us a little more advance notice. We’re not the only ones doing this of course, but we get throughput out of it. For us, throughput is one of our traffic drivers, so every tool we can put into place to unlock additional throughout is critical,” Wright said.
To continue supporting this throughput, technology will be an investment priority for the brand in 2024, as will marketing, where Wright said the company is “still underrepresented.” Other investment priorities include the “development engine and talent needs to support that engine.”
“What we see is we’re in early innings – whether for our operations initiatives or marketing or execution against development,” Wright said. “As much as we’ve enjoyed the success we’ve had, we can see into our strategic pipeline that there are more financial benefits ahead.”
Contact Alicia Kelso at [email protected]