September 2, 2017

Potbelly Sandwich Testing Dark Kitchens

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Speculation is swirling about after reports broke last week that Potbelly (NASDAQ:PBPB) has hired J.P. Morgan Securities to investigate “strategic alternatives” for the brand that has faced steady headwinds in a tough restaurant market in 2017. Potbelly shares have slumped significantly since its IPO in 2013, culminating in the resignation of now former CEO, Aylwin Lewis in August.

So what will happen to the 411-unit company? “Everything is up for grabs at this point,” says Stephen Anderson, an analyst at Maxim Group, a New York-based investment bank. “The most likely event that will occur is a refranchising,” or selling of company-owned restaurants to franchisees.

A private-equity firm could also snap up Potbelly, just as Panera was earlier this year when JAB Holdings took the company private in a blockbuster deal worth $7.5 billion.

Potbelly has already attempted to change the economics of high real-estate costs, testing out “dark kitchens” with much success. The term refers to storefronts without seats that serve only take-out, delivery and catering options for their customers. This test has been taking place under a project called “Shop 2020”, a 600-square-foot location inside Lurie Children’s Hospital in Streeterville, Chicago.

According to Michael Coyne, who took over as interim-CEO, the store is “doing phenomenally well, better than even our average revenue at 2,000-square-foot stores,” Coyne said earlier this summer. “We actually have the ability, we think, to go even smaller as long as we have some nearby space for commissary to store some things.” Potbelly executives think the model could work in high-traffic areas including hospitals, office tower lobbies, airports and universities.

Mobile ordering trends continue to rise and are set to eclipse 38 billion dollars of revenue by 2020. More recently, Yum! Brands, the parent company of Taco Bell, KFC, and Pizza Hut, announced that digital ordering now makes up almost 50% of their total delivery and carryout sales in the U.S. With this in mind there are a number of master franchisees that would be interested in taking over a cluster of stores in a given territory. Potbelly is a strong brand, with not too many units. And the food travels well, which is something very important to the success of these dark kitchens that would cater toward take-out. With all options on the table, Potbelly is weighing its options as they move into Q4 of 2017.