What Potbelly’s Real Estate Approach Can Teach Brands Facing Mass Closures

It is no secret that the restaurant industry is facing some major challenges coming out of COVID-19. We’ve all heard the scary statistics — more than half of all restaurants will be unable to reopen — and now we are starting to see these predictions manifest in the franchising industry.

Restaurant Brands International expects to close hundreds of underperforming units from its three brands, Burger King, Tim Hortons and Popeyes Louisiana Kitchen, as part of a broad look at its store portfolio around the world. McDonald’s, Starbucks and Dunkin’ have all announced plans to close a staggering number of restaurant locations in the U.S. 

Potbelly is another franchisor that has seen major challenges. Due to the COVID pandemic and dining room closures, same-store sales went from an increase of 2.5 percent through January and 4.1 percent through February to a low point of negative 68 percent in late March, according to QSR Magazine. Because of this, Q2 was the toughest period in Potbelly’s 43-year history. 

As the pandemic continued to devastate the industry, Potbelly announced that it was considering the closure of up to 100 underperforming stores. 

Instead of accepting their fate, the Potbelly team created a plan. Through steadily improving same-store sales, constructive discussions with landlords and cuts in expenses, the number of stores that may have closed permanently has started to decrease. The brand also shifted management, with Steven Cirulis being brought on as CFO in April and Bob Wright becoming the new CEO in July. 

According to the company’s Q2 earnings call, “more than $25 million in costs were cut from G&A, workforce, capital expenditures and rent.” With this strategy, Potbelly’s weekly cash burn rate decreased by roughly 75 percent since the early weeks of the pandemic, and the restaurant brand has been cash-positive at store-level since May 31.

“It’s largely due to the fact that we’ve got a business that is responding, and we’ve also had some productive conversations with landlords where we had some shops that were unprofitable,” Cirulis said during the call. “But based on a new lease structure, those shops are profitable to operate.”

In addition, same-store sales improved significantly throughout June, which the company attributed to innovative offerings such as Potbelly Pantry, family meal deals and curbside pickup. 

Like most brands, Potbelly’s sales mix shifted from 70 percent on-premises pre-COVID to 70 percent off-premises during the pandemic. The brand leaned into this by relaunching a simplified Perks loyalty program, which resulted in a 53 percent rise in membership and more than 2 million members for the first time in history. In addition, digital tripled to 46 percent of sales. This comes after many giants in the QSR industry, including Taco Bell and Chiptole, have also revamped their loyalty offerings.

After discussions with landlords, 16 Potbelly stores have permanently closed and 187 leases were renegotiated in Q2. Instead of permanently closing 100 locations, Potbelly has only had to temporarily close 55 shops and has reopened four, and the brand plans to reopen another nine by the end of August, according to QSR. Many of the units are on or near college campuses. 

“The company is expected to save $1.6 million from abatements, $3 million from deferrals and $3.5 million to $4 million from permanent closures,” QSR notes. “Two franchise shops opened in Q2, and another two to four are expected to open by the end of 2020. Potbelly ended Q2 with 424 company-run stores and 44 franchises.” 

Looking toward the future, Wright told QSR that in his first few weeks as the company’s leader, he’s developed a strong sense of what the company does well and where it needs to improve. The CEO explained that he and the team will need another quarter to develop the key components of the next leg of Potbelly’s strategy. 

Potbelly’s comeback is an inspiring example of how hard work and proper management can aid franchisors during the pandemic. Whether it be renegotiating leases, launching new consumer offerings, prioritizing off-premise services or shifting leadership teams, franchisors can learn from Potbelly’s strategy and hopefully emerge from the pandemic in better shape than they thought.