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Potbelly Sees Franchisees Fueling 10% Unit Gains · Choppin’ It Up by Bloomberg Intelligence

• 0:18
  Speaker 1: Welcome to Chopping It Up. I'm your host, Mike Hallon,
• 0:21
  Speaker 1: the senior restaurant and food Service analyst at Bloomberg Intelligence.
• 0:25
  Speaker 1: Today we're recording from the ICR conference in Orlando, Florida.
• 0:29
  Speaker 1: I'm joined by Bob Wright, and CEO of Pop Belly.
• 0:32
  Speaker 1: It's nice to meet you.
• 0:33
  Speaker 2: Bob, Nice to meet you, Mike.
• 0:36
  Speaker 1: Talk to me a little bit about your previous career
• 0:37
  Speaker 1: stops and what attracted you to Pop Belly.
• 0:40
  Speaker 2: Yeah. Sure, I've got what many would describe as a
• 0:45
  Speaker 2: career as an operator in the restaurant space. I started
• 0:47
  Speaker 2: out delivering pizzas when I was nineteen for Dominoes after
• 0:50
  Speaker 2: my freshman year of college, and I've been in the
• 0:54
  Speaker 2: chain franchise restaurant business ever since. A lot of years
• 0:59
  Speaker 2: with domino It was about a dozen years with Domino's,
• 1:02
  Speaker 2: sixteen years with Wendy's over two different stints. In fact,
• 1:06
  Speaker 2: Wendy's was the company I was with before joining Potbelly,
• 1:10
  Speaker 2: and my last role there was COO and I had
• 1:13
  Speaker 2: a lot of great responsibility, wonderful team, but I led
• 1:17
  Speaker 2: operations at international responsibility Development, Restaurant technology, kitchen engineering, and
• 1:23
  Speaker 2: innovation was part of my team. And also the support
• 1:28
  Speaker 2: for what was a brand new customer experience department that
• 1:30
  Speaker 2: we built there. So it's been a wonderful career. When
• 1:33
  Speaker 2: I left Wendy's, I actually wasn't actually looking for what
• 1:38
  Speaker 2: was next. I was actually going to go into the
• 1:40
  Speaker 2: franchising business as a franchise e after all these years.
• 1:43
  Speaker 2: I thought that what a great way to apply that
• 1:46
  Speaker 2: and build a family business with this last cycle. I
• 1:49
  Speaker 2: also wanted to augment that with some board support and leadership.
• 1:53
  Speaker 2: So Potbelly is a brand that I have loved for
• 1:55
  Speaker 2: over twenty years, and it's a brand that I thought
• 1:58
  Speaker 2: maybe I could add some value if I had a
• 2:01
  Speaker 2: chance to be a director on the board, and so
• 2:03
  Speaker 2: I started to formalize that point of view, and it
• 2:06
  Speaker 2: was around that time that there was an outreach to
• 2:09
  Speaker 2: talk to me about something a little more meaningful. And
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  Speaker 2: you know, in the middle of the pandemic, there weren't
• 2:14
  Speaker 2: a lot of great franchise deals that were going through anyway.
• 2:16
  Speaker 2: And so the more I looked at the brand and
• 2:20
  Speaker 2: what the company had in terms of potential, and more
• 2:22
  Speaker 2: excited I got about the role of CEO. Came on
• 2:25
  Speaker 2: board in July of twenty twenty in the middle of
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  Speaker 2: the pandemic. My CFO Steve Serlis was here when I arrived.
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  Speaker 2: He joined earlier that year, and since then we've just
• 2:35
  Speaker 2: built a tremendous team. Really, I would say the best
• 2:39
  Speaker 2: management team the franchise ever had.
• 2:42
  Speaker 1: No, that's great. Yes, some great career experience too, I
• 2:45
  Speaker 1: mean Dominos and when these are fantastic. I've been covering
• 2:48
  Speaker 1: those companies for a long time, so that's great. And
• 2:51
  Speaker 1: so the team is settled now you have everybody in
• 2:53
  Speaker 1: place we do.
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  Speaker 2: You know, you're always expanding, and when you're in growth mode,
• 2:58
  Speaker 2: you know, in fact later next month. We spend time
• 3:01
  Speaker 2: every year talking about our talent organization and invest about
• 3:05
  Speaker 2: a day and a half as a senior team looking
• 3:07
  Speaker 2: to the future. So there's always that, but I'm thrilled
• 3:09
  Speaker 2: with the team at the senior level. We've made significant
• 3:15
  Speaker 2: advancements and talent and skill and really filled out our
• 3:20
  Speaker 2: team at the director level and the VP level as well.
• 3:23
  Speaker 2: The most recent add to our senior team was Lynette McKee.
• 3:26
  Speaker 2: We hired her just a few months ago. She's our
• 3:28
  Speaker 2: senior vice president of franchising and that was really the
• 3:31
  Speaker 2: last big position that needed to be filled and it
• 3:35
  Speaker 2: was the right time, as we announced this morning, you know,
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  Speaker 2: with the acceleration of our deal activity, I wanted somebody
• 3:41
  Speaker 2: of her caliber to be able to lead the franchising efforts.
• 3:44
  Speaker 1: And talk to me a little bit about about that
• 3:47
  Speaker 1: acceleration of the deal activity.
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  Speaker 2: Yeah, we uh, you know, we had always seen I
• 3:52
  Speaker 2: had always seen the power of franchising and growing the brand,
• 3:56
  Speaker 2: but frankly, we had to invest the first couple of
• 3:58
  Speaker 2: years in getting our house in order with our company operations,
• 4:01
  Speaker 2: reaccelerating sales growth and all the work that we did
• 4:04
  Speaker 2: against our five pillar strategy, especially the initiatives that underpinned it,
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  Speaker 2: but all the while keeping an eye on what we
• 4:10
  Speaker 2: would do to start to build more units and do
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  Speaker 2: it with franchise ease that would want to help grow
• 4:15
  Speaker 2: the brand. The efforts towards our market planning and our
• 4:21
  Speaker 2: franchise recruitment and franchise selection criteria and the actual franchise
• 4:25
  Speaker 2: e selection work that we do. That is where Lynette
• 4:29
  Speaker 2: has tremendous experience, and it's where I wanted to have
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  Speaker 2: a senior leader that was focused on that. Other companies
• 4:35
  Speaker 2: you'll find all of the development functions are reporting up
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  Speaker 2: to one development leader. That's not the way we have
• 4:43
  Speaker 2: it structured today because sales are so important and that
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  Speaker 2: franchise e selection is so important. I mean, gosh, I
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  Speaker 2: remember I remember my days with Dominoes and with Wendy's.
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  Speaker 2: You know, you've got founders that were making those decisions
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  Speaker 2: about who they welcomed into the brand, and great franchise
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  Speaker 2: e will make the brand stronger for twenty thirty forty years.
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  Speaker 2: You know. I know franchises in other brands where they're
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  Speaker 2: in their third generation of ownership in the same family,
• 5:08
  Speaker 2: and they're very important parts of that. So we see
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  Speaker 2: that as really important as such. Before even hiring Lynette,
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  Speaker 2: we took all the execution centric elements of our development responsibility,
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  Speaker 2: things like franchise real estate selection and support for them
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  Speaker 2: making those choices, the engineering and architectural work that's necessary,
• 5:31
  Speaker 2: the construction support training, all that falls to our chief
• 5:34
  Speaker 2: operating officer. Now, those are very execution centric responsibilities and
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  Speaker 2: that's what he loves and that's what he's excellent at.
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  Speaker 2: It means that you know, here we are in the
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  Speaker 2: beginning of twenty twenty four, Lynette is focused on sales
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  Speaker 2: that will deliver twenty five, twenty six and beyond units.
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  Speaker 2: Adam Adam Noys, our COO, is responsible for the opening
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  Speaker 2: of the units that we're sold that are going to
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  Speaker 2: get built this year. So that clarity and role clarity,
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  Speaker 2: it's it's something I learned is really important for us
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  Speaker 2: as a team, and we're excited about how that breaks up.
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  Speaker 1: Okay, cool, where's the chain strong geographically and who's your
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  Speaker 1: core customer?
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  Speaker 2: We are. One of the great things about Popelum it
• 6:19
  Speaker 2: was attractive to me when I came on board is
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  Speaker 2: we're in thirty three states and we've got decent penetration
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  Speaker 2: in a lot of those states. We are geographically across
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  Speaker 2: the country. We're literally a nationwide brand from Seattle and
• 6:32
  Speaker 2: Portland all the way to New York City and from
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  Speaker 2: you know, the northern Midwest, the Canadian border, practically all
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  Speaker 2: the way south of San Antonio on your way to
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  Speaker 2: South Texas. So the brand travels well. You'll find a
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  Speaker 2: lot of a lot of chains are size four hundred
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  Speaker 2: and twenty four hundred and fifty five hundred units are
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  Speaker 2: still super regionals attempting to prove that they can grow.
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  Speaker 2: Our strongest penetration is where we started in the Illinois market, Washington,
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  Speaker 2: d C. Baltimore, Maryland, Virginia, you go into Texas, we've
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  Speaker 2: got a very strong presence in Texas. But throughout the
• 7:07
  Speaker 2: Midwest and even throughout the bordering states of the Midwest,
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  Speaker 2: we tend to do really well. We do not have
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  Speaker 2: a strong penetration in the southeast or on the West
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  Speaker 2: coast now, as we've shared with a lot of our
• 7:23
  Speaker 2: development deals here in the last twelve months, we've been
• 7:26
  Speaker 2: signing a lot of development deals in Florida, and we
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  Speaker 2: think that that's really common to begin your southeast development
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  Speaker 2: state of Florida and then grow from there. We don't
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  Speaker 2: have any deals yet in Georgia and some of the
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  Speaker 2: other Gulf Coast states. The behavior of that consumer suggests
• 7:43
  Speaker 2: that we're not worried about that at all. It's just
• 7:45
  Speaker 2: kind of natural. You asked about our consumer. We are
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  Speaker 2: a fast casual, sandwich based restaurant concept, and I often
• 7:54
  Speaker 2: complete that sentence with all due respect to our competitors,
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  Speaker 2: but in a sea of sub shops, so we're not
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  Speaker 2: a subshop. We're a fast casual restaurant option with a
• 8:03
  Speaker 2: sandwich based menu. Some things make our menu very different.
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  Speaker 2: Our sandwiches are handmade and toasted at five hundred degrees,
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  Speaker 2: so this is this is hot food. Our soups complement
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  Speaker 2: our sandwich as well because people are looking for that
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  Speaker 2: more substantial meal but at a great value. So our
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  Speaker 2: core consumer is the fast casual consumer. You find them
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  Speaker 2: trading with Panda Express and with Panera and with Chipotle.
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  Speaker 2: Of course, our consumers use McDonald's and Wendy's in subway,
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  Speaker 2: all consumers use those. Those are quit ubiquitous brands, but
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  Speaker 2: that the occasion that enters your decision making process as
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  Speaker 2: a customer, as one that appeals to somebody looking for
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  Speaker 2: a higher quality experience, willing to pay a fast casual
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  Speaker 2: average check price, but also wanting to have an experience
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  Speaker 2: that they enjoy. One of the great things about pop
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  Speaker 2: Belly is the in shop experience. We talk often publicly
• 9:03
  Speaker 2: about how strong our digital business is, and you know,
• 9:05
  Speaker 2: it's been in the high thirty percent, approaching forty percent there. Strong, yeah,
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  Speaker 2: but well over half of our customers crossed the threshold
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  Speaker 2: to get their food. Some of them take it out
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  Speaker 2: to go, but the dining room experience is a big
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  Speaker 2: part of it, and we protect that. We think that's
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  Speaker 2: a big difference maker when you want to meet your
• 9:24
  Speaker 2: friends for lunch, When you want to, you know, stop
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  Speaker 2: for even if it's a quick, convenient lunch with a
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  Speaker 2: loved one, family or whatever on your way to shopping
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  Speaker 2: trip or something. You don't always just want to run in,
• 9:34
  Speaker 2: grab it and take it somewhere else. And so that balance.
• 9:38
  Speaker 1: Works well for okay, cool. The recovery in the chain
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  Speaker 1: sas sort of sales since you know, since twenty nineteen,
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  Speaker 1: has been really impressive, particularly beginning in the fourth quarter
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  Speaker 1: of twenty two. What fueled that jump?
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  Speaker 2: Yeah, right, I'll take it back to our five pillar
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  Speaker 2: strategy for the top line growth. Those the first four
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  Speaker 2: pillars of the five are rooted in that unifying objective
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  Speaker 2: that we started with back in twenty twenty, which is
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  Speaker 2: traffic driven profitability. It was my firm belief that the
• 10:12
  Speaker 2: business health has to be determined on some really fundamental
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  Speaker 2: and simple things to understand. And we had been losing
• 10:20
  Speaker 2: traffic for years, pricing many of our customers out of position.
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  Speaker 2: And so the work that we did on the menu,
• 10:29
  Speaker 2: where we resized the sandwiches, we introduced the skinny size,
• 10:32
  Speaker 2: we really put a spotlight on our picure pair. The
• 10:36
  Speaker 2: work that we did operationally that was early going with
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  Speaker 2: Adam when he came on board, focused on throughput cleaning
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  Speaker 2: our shops, tightening up our staffing, you know, really exciting
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  Speaker 2: things to operators like me, but kind of boring to
• 10:51
  Speaker 2: those that aren't true restaurant folks. Putting a labor guide
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  Speaker 2: in place. You know, we didn't have an hour's based
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  Speaker 2: labor guide in place pre pandemic, and so you know,
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  Speaker 2: you often think of that as a labor savings tool,
• 11:05
  Speaker 2: which it does have some efficiency advantages, but if you
• 11:09
  Speaker 2: don't guide to the proper staffing and every shift, every day,
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  Speaker 2: what tends to happen is you tend to overstaff when
• 11:15
  Speaker 2: it's more convenient for the manager, and you might find
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  Speaker 2: your understaffed on the weekends and the nights and things
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  Speaker 2: like that. So it's the it's I think the balance
• 11:25
  Speaker 2: of that operations and marketing focus that started to really
• 11:28
  Speaker 2: generate some momentum for us, and we've enjoyed continuing it
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  Speaker 2: through twenty twenty three.
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  Speaker 1: How are you looking to drive SEP store sales growth
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  Speaker 1: this year?
• 11:37
  Speaker 2: It's more the same. You know, we get asked a lot,
• 11:41
  Speaker 2: are you are you still looking at low hanging fruit.
• 11:44
  Speaker 2: We don't really think about it that way, but it's
• 11:45
  Speaker 2: early innings. Still. The work that we did on digital,
• 11:50
  Speaker 2: that's the fourth strategy pillar, and right after we did
• 11:54
  Speaker 2: the new menu, we also rebuild our tech stack completely
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  Speaker 2: new app, new web, new loyalty engine, new payments systems
• 12:01
  Speaker 2: that were put in place, and we've just continued to
• 12:03
  Speaker 2: invest in that. Perks. Our Perks loyalty program has been
• 12:08
  Speaker 2: a major driver of growth for us. We know that
• 12:12
  Speaker 2: our Perks consumers visit us at a meaningfully higher frequency level.
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  Speaker 2: We know that when we get engaged with them, they
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  Speaker 2: really love the Perks engagement. There's a lot of unpolished
• 12:24
  Speaker 2: brand love for pop Belly and some of it is latent.
• 12:27
  Speaker 2: So bringing customers back to the brand that they at
• 12:30
  Speaker 2: least are familiar with or at one point where great
• 12:33
  Speaker 2: users of reminds them just how much it works for them.
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  Speaker 2: And if you go back to my answer to one
• 12:39
  Speaker 2: of your earlier questions, when you begin to think about
• 12:42
  Speaker 2: that fast casual experience that you're looking for, pushing our
• 12:45
  Speaker 2: brand up into your top of mind awareness is where
• 12:49
  Speaker 2: we find the most success. Even our place digital media
• 12:52
  Speaker 2: is mostly awareness driving. It's not called action type of marketing.
• 13:00
  Speaker 2: What we've done with Perks and our ability to continue
• 13:03
  Speaker 2: to lean into our Perks loyalty program is a big
• 13:06
  Speaker 2: driver of that. Catering has continued to grow for us.
• 13:10
  Speaker 2: The way we operate the shops is a big part
• 13:12
  Speaker 2: of our optimism around sales driving. Something a lot of
• 13:16
  Speaker 2: people don't know about Potbelly is we were always built
• 13:18
  Speaker 2: with two lines. There's a front line that you know,
• 13:21
  Speaker 2: if you go through a Potbelly, you're going to go
• 13:23
  Speaker 2: through the line order. We call it the load station
• 13:25
  Speaker 2: because we're loading the oven. That's that first level of engagement.
• 13:29
  Speaker 2: There was always a backline. All popbellies were built with
• 13:31
  Speaker 2: a second line that was designed to be for catering.
• 13:35
  Speaker 2: And you know, if you think about when we started
• 13:38
  Speaker 2: into the digital business, so we've got this back line.
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  Speaker 2: Many cases, unfortunately they'd kind of been mothball. So we've
• 13:44
  Speaker 2: got all that equipment operating and working. Now. All of
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  Speaker 2: our digital business goes through the back line, so we're
• 13:49
  Speaker 2: not facing capacity constraints because we're overburdening what was our
• 13:54
  Speaker 2: production system. We've got a lot more capacity to go
• 13:58
  Speaker 2: using the back line for more digital and it's left
• 14:00
  Speaker 2: the front line open. It also gave us. In addition
• 14:03
  Speaker 2: to that labor guide I told you about, we also
• 14:05
  Speaker 2: re engineered our positioning guidelines. And I don't even know
• 14:08
  Speaker 2: how many people need to be in the shop, we
• 14:09
  Speaker 2: know which line the best put them on so that
• 14:12
  Speaker 2: those customers are getting the best experience. We've recently, in
• 14:17
  Speaker 2: twenty twenty three, began rolling out our pop Belly digital kitchen,
• 14:21
  Speaker 2: So we already have that line, but we've digitized and
• 14:24
  Speaker 2: started to digitize, you know, on a rollout basis, the
• 14:27
  Speaker 2: back line, so all of the orders that come in
• 14:30
  Speaker 2: from all the various channels get fed to the back
• 14:32
  Speaker 2: line in the right way. So there's you know, look
• 14:34
  Speaker 2: a lot of detail there. But throughput operations excellence, additional
• 14:38
  Speaker 2: marketing investment, perks loyalty's that's why you hear confidence in
• 14:43
  Speaker 2: our voice about how we can keep top line traffic
• 14:46
  Speaker 2: growth going. And you know, we watch it. We compare
• 14:50
  Speaker 2: our we subscribe to data sources like everybody does. Black
• 14:54
  Speaker 2: Box is the one that we use and we can Yeah,
• 14:57
  Speaker 2: so we compare our traffic growth compared to the fast
• 15:01
  Speaker 2: casual segment, and for the last year and a half
• 15:04
  Speaker 2: couple of years, fast casual has been a lot closer
• 15:06
  Speaker 2: to flat, not unhealthy. Like QSR. We're post pandemic. They
• 15:11
  Speaker 2: started to lose traffic, but we're growing traffic, so that
• 15:14
  Speaker 2: means we're not just growing our business, we're gaining share
• 15:19
  Speaker 2: and that's really healthy.
• 15:20
  Speaker 1: Yeah, it's impressive. I'd imagine you know, the second make
• 15:25
  Speaker 1: line served Chipotle really well during the pandemic, right, and
• 15:28
  Speaker 1: that's really helped them grow their digital mix. Was that
• 15:31
  Speaker 1: a big driver in the strength of your digital sales.
• 15:35
  Speaker 2: I think it's a big enabler to do it well. Yeah,
• 15:39
  Speaker 2: and I think that it allowed us to keep focus
• 15:42
  Speaker 2: on the front line too, so that we didn't do
• 15:44
  Speaker 2: ourselves harm while we were building the digital business. I'd
• 15:48
  Speaker 2: give the digital assets a lot of credit to the
• 15:50
  Speaker 2: rebuild of the app and the web, smoothing that interface,
• 15:53
  Speaker 2: continuing to invest in it. And all of our promotions
• 15:58
  Speaker 2: have a digital skew in a and a perks loyalty
• 16:03
  Speaker 2: program leaning to them. For example, the underground menu was
• 16:08
  Speaker 2: kind of a pop belly cultural important element for years
• 16:11
  Speaker 2: and years and years. But you would go into a
• 16:13
  Speaker 2: shop and try to order something off the underground menu,
• 16:16
  Speaker 2: and maybe that employee hadn't worked there when they were
• 16:19
  Speaker 2: familiar with it. So we've digitized the underground menu. It's
• 16:24
  Speaker 2: only available in the app, and because it's in the app,
• 16:28
  Speaker 2: we now train for it so we know how to execute.
• 16:30
  Speaker 2: You can still walk in and order Lucky seven, but
• 16:34
  Speaker 2: it really is kind of digital centric, and we also
• 16:40
  Speaker 2: we further enhanced the customer feedback mechanisms that we have
• 16:45
  Speaker 2: in place, so we're watching very closely how those digital
• 16:48
  Speaker 2: customers feel about their experience. We know that on order, ready,
• 16:52
  Speaker 2: on time and accuracy is absolutely critical for them, and
• 16:55
  Speaker 2: it doesn't always break the top five for the in
• 16:58
  Speaker 2: shop customer, so those, you know, those details of how
• 17:01
  Speaker 2: we operate are different.
• 17:04
  Speaker 1: Excuse me, how much inflation do you see this year
• 17:09
  Speaker 1: in your commodity basket and how much price do you
• 17:12
  Speaker 1: intend to take.
• 17:14
  Speaker 2: That's one of the things I'm really proud of on
• 17:15
  Speaker 2: the pricing part of the rebuild of the menu back
• 17:19
  Speaker 2: in twenty twenty that was implemented in the summer of
• 17:21
  Speaker 2: twenty twenty one put us in a great place for
• 17:25
  Speaker 2: you know, what we all saw in the inflation from
• 17:27
  Speaker 2: labor and commodities, and we did take a lot of price.
• 17:31
  Speaker 2: We have been very careful though to take price to
• 17:34
  Speaker 2: offset inflation, and no more. Part of that's rooted in
• 17:38
  Speaker 2: what we discovered when I got here anyway, was we
• 17:41
  Speaker 2: had such a significant value problem with our consumer. I
• 17:44
  Speaker 2: was determined never to create that again. So going forward,
• 17:49
  Speaker 2: we're going to maintain that same strategy. We will take
• 17:51
  Speaker 2: price to offset inflation. We think most of our inflation
• 17:55
  Speaker 2: in twenty twenty four will come from the labor line.
• 17:58
  Speaker 2: And while that's not quite back to our forecast anyways,
• 18:02
  Speaker 2: and it's not quite back to traditional levels, it's getting
• 18:05
  Speaker 2: mighty close, you know, And you're talking load amid single
• 18:09
  Speaker 2: digits and labor inflation. Food inflation, we think for us
• 18:13
  Speaker 2: in particular, has stabilized a great deal and probably be
• 18:17
  Speaker 2: flatish at least for the near term. We've got a
• 18:20
  Speaker 2: market basket that includes every protein, so we spread our
• 18:23
  Speaker 2: wrists that way.
• 18:25
  Speaker 1: Twenty twenty four restaurant level margin guidance sixteen over thirteen
• 18:30
  Speaker 1: point four to thirteen point nine and twenty thirteen, So
• 18:34
  Speaker 1: pretty significant expansion there is that all from sales leverage,
• 18:38
  Speaker 1: price increases in the digital kitchen. Are there other levels
• 18:41
  Speaker 1: levers that you're pulling?
• 18:43
  Speaker 2: It includes those things for sure, And leverage is the
• 18:45
  Speaker 2: healthiest way to get margin expansion. Of course, but I
• 18:48
  Speaker 2: mentioned that labor guide. We've done some work there to
• 18:51
  Speaker 2: find efficiency because we know where we were investing labor.
• 18:55
  Speaker 2: We continue to see that. We have an evergreen initiative
• 19:00
  Speaker 2: called cost If you can imagine in your mind's eye,
• 19:03
  Speaker 2: the s is actually a dollar sign just to keep
• 19:05
  Speaker 2: everybody on their toes, and we set a target for
• 19:07
  Speaker 2: ringing out efficiency in the supply chain and other purchasing
• 19:11
  Speaker 2: that we do, other costs that we have. We cracked
• 19:15
  Speaker 2: open all of our leases during the pandemic, and frankly,
• 19:19
  Speaker 2: we continue to work aggressively with our landlords. We've got
• 19:22
  Speaker 2: a leader at a senior level who's focused on our leases.
• 19:27
  Speaker 2: As the brand's gotten healthier, we see that leverage with landlords.
• 19:31
  Speaker 2: They like us, they like the strength of the brand
• 19:35
  Speaker 2: and the ability to build their portfolio real estate with that.
• 19:38
  Speaker 2: So it's a little bit of all fronts. I think
• 19:41
  Speaker 2: we've got one hundred and fifty two hundred basis points
• 19:43
  Speaker 2: or so to go to get to our sixteen percent
• 19:45
  Speaker 2: number this year, and it will come through those areas, right,
• 19:50
  Speaker 2: So a little more labor leverage, some top line just
• 19:54
  Speaker 2: driven overall leverage and then continued efforts in the occupancy
• 19:58
  Speaker 2: and some other fixed costs.
• 20:00
  Speaker 1: Gret, what's the current split between company owned and franchise
• 20:03
  Speaker 1: locations and where do you think you know the sweet
• 20:06
  Speaker 1: spot is for your chain.
• 20:07
  Speaker 2: We're still more than eighty percent company owned. We did
• 20:10
  Speaker 2: refranchise thirty three units last year, and then you know,
• 20:14
  Speaker 2: we grew a few new units through franchising, but our
• 20:18
  Speaker 2: focus is on franchise growth. That's the fifth pillars, franchise
• 20:21
  Speaker 2: driven growth. We've announced publicly. We think we're a two
• 20:25
  Speaker 2: thousand unit chain in the long term eight to ten years,
• 20:28
  Speaker 2: and almost all of the growth to get there will
• 20:30
  Speaker 2: come through franchise development. We're still willing to refranchise a
• 20:36
  Speaker 2: few more units. We originally said we'd be willing to
• 20:39
  Speaker 2: refranchise up to one hundred, and probably still up to
• 20:42
  Speaker 2: that number, but the pacing it's not important for us
• 20:45
  Speaker 2: to race towards that goal. Will refranchise if it catalyzes
• 20:50
  Speaker 2: a development deal that we get very excited about. So
• 20:53
  Speaker 2: if you finish that story all the way out in
• 20:55
  Speaker 2: the long term, we're eighty five percent franchise and fifteen
• 20:58
  Speaker 2: percent company owned.
• 21:00
  Speaker 1: What do you do with the cash on the refranchising.
• 21:02
  Speaker 2: Well, you know it's not candlely is not that much
• 21:04
  Speaker 2: cash given the units that we sold and where you know,
• 21:10
  Speaker 2: where they may see extra development, but any capital, our
• 21:15
  Speaker 2: capital allocation strategy is to deploy capital for growth. There
• 21:20
  Speaker 2: there's still opportunities for us to lead maybe with some
• 21:23
  Speaker 2: of the the unit level prototype development, we would build
• 21:27
  Speaker 2: one or two of those to prove that path. If
• 21:29
  Speaker 2: there's an opportunity to do some refresh and remodel work,
• 21:32
  Speaker 2: we would use capital for that. You know, the digital
• 21:36
  Speaker 2: work that we've done requires some capital to continue to
• 21:39
  Speaker 2: be invested in that area. But you know that's the
• 21:42
  Speaker 2: beauty of what happens with the you know, the the
• 21:46
  Speaker 2: capital lighte model that we do with franchising is we
• 21:48
  Speaker 2: simply don't need that much, not in the near term.
• 21:51
  Speaker 1: Yeah. So the ten unit growth, and there's a lot
• 21:54
  Speaker 1: of interesting pieces to the story and it seems like
• 21:58
  Speaker 1: it's really moving in a good direction here, But ten
• 22:00
  Speaker 1: percent unit growth in twenty four does seem high considering
• 22:04
  Speaker 1: you haven't really grown for a few years. I'm sure
• 22:07
  Speaker 1: the same source sales growth is definitely motivating franchisees to
• 22:11
  Speaker 1: expand who's going to open the most restaurants this year.
• 22:14
  Speaker 1: Is it the company, is it current franchisease, is it
• 22:17
  Speaker 1: new franchise ease?
• 22:18
  Speaker 2: Oh, it's franchise. I mean, there'll be some current franchisees
• 22:21
  Speaker 2: that build. But it's that's why we've been so transparent
• 22:24
  Speaker 2: about the number of deals that we've done and the
• 22:26
  Speaker 2: number when I say deals, franchise development deals that we've done,
• 22:30
  Speaker 2: and the number of units that are under commitment to
• 22:33
  Speaker 2: be built. And I think you are. Our desire is
• 22:38
  Speaker 2: to have everyone understand that those deals beget units in
• 22:41
  Speaker 2: the units, you know, build out the population of shops.
• 22:45
  Speaker 2: It will be somewhat backloaded in twenty twenty four because
• 22:49
  Speaker 2: our deal traffic was somewhat backloaded in twenty twenty three,
• 22:52
  Speaker 2: and it takes about ten or eleven months to get
• 22:54
  Speaker 2: your first one up and running. We have some really
• 22:58
  Speaker 2: excellent developers that we'll be building multiple units next year.
• 23:03
  Speaker 2: There probably will be you know, maybe a low single
• 23:07
  Speaker 2: digit number of company units that you know that we
• 23:10
  Speaker 2: see could be potential for us to open, but no,
• 23:13
  Speaker 2: it's almost exclusively franchise development. And you're right, ten percent
• 23:17
  Speaker 2: is you know, it's going to be a great year
• 23:20
  Speaker 2: for us. We've been asked a lot throughout twenty twenty three,
• 23:24
  Speaker 2: do we want to adjust that target? You're changing that
• 23:27
  Speaker 2: guidance and we haven't. And we have it for a
• 23:28
  Speaker 2: reason because we can see into that pipeline. I shared
• 23:32
  Speaker 2: with you structurally of a couple of minutes ago about
• 23:35
  Speaker 2: how Lynnett's focused on deal activity and Adam is on
• 23:38
  Speaker 2: the execution side of things. So we can see the
• 23:40
  Speaker 2: real estate activity, We see the engineering work that's being done,
• 23:43
  Speaker 2: and the amount of support that we're providing on all
• 23:46
  Speaker 2: of those all of those elements of development gives us
• 23:49
  Speaker 2: confidence that we won't stub our toe to often. Very
• 23:52
  Speaker 2: simple example, there's a lot of talk out there from
• 23:55
  Speaker 2: some developers about the permitting issues that they're having. We
• 23:58
  Speaker 2: require that you do a side inspection report before the
• 24:02
  Speaker 2: lease is signed so that you uncover things that become
• 24:05
  Speaker 2: permitting issues. And it's a couple thousand bucks to do
• 24:08
  Speaker 2: that every time, but it's a couple thousand dollars that provides,
• 24:12
  Speaker 2: you know, kind of an insurance policy against delays in
• 24:15
  Speaker 2: the future.
• 24:17
  Speaker 1: Okay, great, are you confident in your ability to select
• 24:19
  Speaker 1: good sites?
• 24:20
  Speaker 2: We are, yeah, I mean that one of the great
• 24:23
  Speaker 2: things about having so many company locations. We have all
• 24:25
  Speaker 2: that data and today the mapping software and the technology
• 24:30
  Speaker 2: available to analyze that data, and it's one of the
• 24:33
  Speaker 2: things we provide. Our franchisees say they love that were this,
• 24:37
  Speaker 2: we're this forward thinking and we're this supportive of them.
• 24:40
  Speaker 2: So we provide what's the franchise e signs their development
• 24:44
  Speaker 2: territory agreement. We provide them with a targeted trade area
• 24:47
  Speaker 2: map where those green circles are that they turn their
• 24:51
  Speaker 2: broker network loose to go find sites. The worst version
• 24:55
  Speaker 2: of that in the past was the brokers would sell
• 24:58
  Speaker 2: locations to the franchise and they'd get them excited about
• 25:01
  Speaker 2: a certain location. They usually sell off of inventory and
• 25:05
  Speaker 2: they would push things that looked good to them. We're
• 25:08
  Speaker 2: empowering the franchise e to not only search in the
• 25:11
  Speaker 2: targeted trade areas, but because we do the trade area
• 25:14
  Speaker 2: mapping for the entire development territory, they literally have their
• 25:18
  Speaker 2: broker network searching for all of the sites at the
• 25:20
  Speaker 2: same time. That's why I mentioned a second ago that
• 25:23
  Speaker 2: you know, we know we'll have franchisees build more than
• 25:25
  Speaker 2: one because you don't have to do them in sequence.
• 25:29
  Speaker 2: You you know, if you've got two or three that
• 25:31
  Speaker 2: are starting to fall. Take all the leases and you
• 25:34
  Speaker 2: can develop those. So yeah, we're we're providing an outsized
• 25:39
  Speaker 2: level of support for the development needs. And that's a
• 25:42
  Speaker 2: lot of where our confidence comes from.
• 25:43
  Speaker 1: Great. Yeah, they say bad sites. The gift that keeps
• 25:47
  Speaker 1: on giving, it does.
• 25:48
  Speaker 2: Yeah, in this brand's experience. That Look, we've we've talked
• 25:51
  Speaker 2: to a lot of franchise ees and even analysts and
• 25:54
  Speaker 2: investors about you know, what happened after the company went public,
• 25:58
  Speaker 2: and you know, you can point to real estate as
• 26:00
  Speaker 2: part of that.
• 26:01
  Speaker 1: Yeah, you get that Wall Street money, and Wall Street
• 26:03
  Speaker 1: wants you to ramp up unit growth and yes, often
• 26:07
  Speaker 1: it doesn't go well. All right, cool, How big are
• 26:11
  Speaker 1: the units and how much do they cost to build?
• 26:14
  Speaker 2: Average cost is still about six point fifty that's what
• 26:18
  Speaker 2: it was pre pandemic. We have opened franchise locations in
• 26:22
  Speaker 2: twenty twenty three for less than that franchise ease. That's
• 26:26
  Speaker 2: one of the great things about franchisees too, is they're
• 26:28
  Speaker 2: just as tight with their investment dollars as anybody, and
• 26:31
  Speaker 2: so they actually help us push that down. Now, there's
• 26:35
  Speaker 2: been a lot of talk about the inflationary pressure in
• 26:37
  Speaker 2: the construction world from both contractors, subcontractors, materials and so on.
• 26:42
  Speaker 2: Some of that I think is coming back a little bit.
• 26:44
  Speaker 2: But potbellies were traditionally built twenty five hundred square feet
• 26:49
  Speaker 2: and bigger, and we frankly think that's too big, and
• 26:53
  Speaker 2: so we're targeting a prototypical size more like eighteen hundred feet.
• 26:58
  Speaker 2: And we have some franchise site that have been approved
• 27:00
  Speaker 2: that are smaller than that that we think are going
• 27:02
  Speaker 2: to work really well for us. So we can offset
• 27:06
  Speaker 2: what would have been inflation on that investment costs and
• 27:09
  Speaker 2: push that maybe higher than seven hundred and keep it
• 27:13
  Speaker 2: under wraps and in that two to one sales tom
• 27:16
  Speaker 2: investment ratio, So at a million, three and six fifty,
• 27:19
  Speaker 2: we're still at two to one. Sixteen percent margins that
• 27:23
  Speaker 2: we've talked about this year provide some nice returns for
• 27:25
  Speaker 2: the franchisease. The other thing I'd emphasize is on those
• 27:29
  Speaker 2: margins to our margins at sixteen percent of blended average
• 27:33
  Speaker 2: of the company, but most of our franchise developments in
• 27:36
  Speaker 2: the suburbs now and so the occupancy costs are lower
• 27:40
  Speaker 2: than our blended average, so they see upside in the
• 27:44
  Speaker 2: margin model even beyond what we published publicly.
• 27:47
  Speaker 1: Okay, good stuff. What are you seeing from the consumer
• 27:51
  Speaker 1: right now and what are your biggest concerns move forward?
• 27:56
  Speaker 2: Well, it's you know, my biggest concerns are typically in
• 27:59
  Speaker 2: the consumer, and you know, what are those macro trends?
• 28:02
  Speaker 2: So what are we seeing? It's surprisingly resilient. And I
• 28:06
  Speaker 2: do think that, you know, the promised recession that never
• 28:11
  Speaker 2: came in twenty twenty three is always looming out there
• 28:13
  Speaker 2: at some point, but it's our job to grow and
• 28:16
  Speaker 2: prepare and be as valuable an option as possible. I
• 28:20
  Speaker 2: think there's a reason that Fast Casual continues to grow
• 28:22
  Speaker 2: at the fastest rate in the restaurant segments, and I
• 28:26
  Speaker 2: think our ability to continue to grow faster than that
• 28:28
  Speaker 2: rate is still within sight for us.
• 28:32
  Speaker 1: So what is it? Is it? Value for dollar? Is?
• 28:36
  Speaker 1: What is it that's do you think driving the sub
• 28:39
  Speaker 1: segment in general?
• 28:40
  Speaker 2: Yeah? I think I think Fast Casual in general is
• 28:43
  Speaker 2: still driven by quality and value, and it's not price
• 28:47
  Speaker 2: value necessarily, but it's tell you there's an interesting element
• 28:50
  Speaker 2: to the value equation for fast casual that often gets overlooked.
• 28:54
  Speaker 2: If you look at average check across QSR, fast Casual
• 28:57
  Speaker 2: and casual dining looks like sort of three natural steps
• 29:01
  Speaker 2: if you look at the average eater check. However, in
• 29:04
  Speaker 2: fast casual compared to QSR, the DELA between those two
• 29:08
  Speaker 2: categories only about two dollars. And so what I think
• 29:12
  Speaker 2: that the natural flow towards fast casual of consumers in
• 29:16
  Speaker 2: general is customers are smart and they figure this out
• 29:18
  Speaker 2: and they're like, I get a significantly better feel for
• 29:21
  Speaker 2: the food, better quality, more portions for a couple dollars.
• 29:26
  Speaker 2: And when the fast casual consumer, our core consumer is
• 29:29
  Speaker 2: that fast casual consumer there one hundred thousand dollars household
• 29:32
  Speaker 2: income range, that two dollars is totally palatable. Add to
• 29:38
  Speaker 2: that that that as a segment and US as a brand,
• 29:41
  Speaker 2: we we have lower frequency than you find in QSR
• 29:45
  Speaker 2: as well, so we're not nearly as vulnerable to a
• 29:49
  Speaker 2: little bit of behavioral adjustment by our core consumer that
• 29:53
  Speaker 2: they're simply not going to pull out a Popbelly frequent
• 29:57
  Speaker 2: visit out of their whatever their monthly rotation is. Like
• 30:02
  Speaker 2: a fifty thousand dollars a year consumer who's going to
• 30:05
  Speaker 2: drive through breakfast, you know, twenty times a month, they
• 30:08
  Speaker 2: might pull back two or three of those well, geeze,
• 30:10
  Speaker 2: two of those is ten percent decline in that business,
• 30:13
  Speaker 2: so we're not as vulnerable to those dips. So I
• 30:17
  Speaker 2: think we're in a good spot. I think our consumers
• 30:19
  Speaker 2: in our good spot. I'd like to see I'd like
• 30:21
  Speaker 2: to see this credit card thing kind of level out
• 30:24
  Speaker 2: a little bit after the holidays. See if people can
• 30:27
  Speaker 2: keep the jobs market going and use some of that
• 30:30
  Speaker 2: income to pay off some of that debt, they'll maintain
• 30:33
  Speaker 2: a healthier lifestyle and keep coming to pop Belly.
• 30:36
  Speaker 1: Cool, Let's get to the important stuff. I have not
• 30:40
  Speaker 1: been to a pop Belly, I'm ashamed to say, so
• 30:43
  Speaker 1: I'm gonna have to get there. Maybe then next time
• 30:46
  Speaker 1: I'm in the city or in DC. What should I order?
• 30:49
  Speaker 1: What's your favorite sandwich on the regular menu and what's
• 30:52
  Speaker 1: what's what's the one to get on the underground menu.
• 30:55
  Speaker 2: Well, listen, you've got to start with the Wreck. It's
• 30:58
  Speaker 2: you know, it's it's our number one selling sandwich, and
• 31:01
  Speaker 2: it's number one for a reason, been around for a
• 31:03
  Speaker 2: long time. My personal favorite is the Italian, which is
• 31:06
  Speaker 2: right up there in the top three as well. But
• 31:09
  Speaker 2: I tell you, I've been shopping the menu a lot
• 31:11
  Speaker 2: myself I got on a chicken salad kick here recently.
• 31:14
  Speaker 2: We make our chicken salad and our tunas salad every day.
• 31:17
  Speaker 2: Do not skip the cookie, even if you're trying to
• 31:21
  Speaker 2: be good that day, don't skip the cookie. I promise
• 31:23
  Speaker 2: it's the best sugar cookie on the planet. And our
• 31:26
  Speaker 2: oatmeal chocolate chip is our number one seller. It's it's outstanding.
• 31:30
  Speaker 2: People love our shakes hand dipped ice cream, milkshakes made
• 31:33
  Speaker 2: from scratch. So yeah, you just can't go wrong. Look
• 31:39
  Speaker 2: at the menu and see what kind of grabs your
• 31:41
  Speaker 2: attention and go from there. The underground you asked about
• 31:44
  Speaker 2: that Lucky seven takes the four meats that are on
• 31:48
  Speaker 2: the Italian and the four meats that are on a wreck,
• 31:50
  Speaker 2: and there's only one of those meats that we have
• 31:52
  Speaker 2: in common, which is the ham, and put them together.
• 31:54
  Speaker 2: So you got seven meats on one sandwich. You might
• 31:57
  Speaker 2: want to try skinny size in that. There's a lot
• 31:59
  Speaker 2: of meat.
• 32:00
  Speaker 1: Yeah, delicious, that sounds that sounds fair. All right, you're
• 32:03
  Speaker 1: making me hungry. This is great. Where can the audience
• 32:07
  Speaker 1: go to find a nearby pop bellies? What social media
• 32:11
  Speaker 1: platforms is the brand big on?
• 32:14
  Speaker 2: You'll find us a lot on on the big ones, Facebook, Instagram.
• 32:18
  Speaker 2: We've got some CTV that's that's getting out there and
• 32:21
  Speaker 2: some of our bigger markets, so you'll you know, if
• 32:23
  Speaker 2: you're a YouTube television watcher, you might start to see
• 32:25
  Speaker 2: some of our ads there, but those will be the
• 32:27
  Speaker 2: places where you find us.
• 32:29
  Speaker 1: All right, great, Yeah, thanks again for doing this. This
• 32:32
  Speaker 1: is this is an exciting story. Hopefully you know, once
• 32:35
  Speaker 1: your market cap gets a little bit bigger, maybe it'll
• 32:38
  Speaker 1: be on my radar for for coverage, you know.
• 32:40
  Speaker 2: Yeah, thanks so much. Great to spend time with you.
• 32:42
  Speaker 1: Yeah, it was fantastic met you. Thanks to our friends
• 32:45
  Speaker 1: at I c R for putting this together, and a
• 32:47
  Speaker 1: big thanks to the audience for tuning in. If you
• 32:50
  Speaker 1: liked the episode, please share it with your colleagues. Check
• 32:53
  Speaker 1: back next week for a discussion with John Siwinsky, the
• 32:56
  Speaker 1: CEO of Modern Restaurant Concepts, which includes Too Fast, Cap
• 33:00
  Speaker 1: rul Chains, Modern Market, Eatery, and Qdoba.