Why Breakfast Could Turn Potbelly Into a Champion

Potbelly has been criticized for being just another sandwich shop chain that competes with much bigger players like Panera Bread and even McDonald's. Perhaps what Potbelly needs to do is address its breakfast menu because there are several reasons why breakfast could turn Potbelly into a perennial champion.

Mar 29, 2014 at 10:00AM

Recently, Potbelly (NASDAQ:PBPB) revealed its new franchise growth location -- Oklahoma City. The sandwich chain has traditionally followed a strategy of meticulously selecting a big city and expanding around it for 18-24 months before moving on to another hub location.

Nevertheless, Potbelly has faced scrutiny since its 2013 IPO due to competition from the likes of Panera Bread (NASDAQ:PNRA), while McDonald's (NYSE:MCD), Wendy's, and several other global quick service chains continue to expand their own sandwich options. As a result, Potbelly's stock has lost over 40% of its value and it now trades near its all-time lows.

However, breakfast has been shown to be more than just the most important meal of the day, and it could actually provide an opportunity for Potbelly to turn itself into a champion.


Is breakfast the key to Potbelly's long-term future? By Jpogi, via Wikimedia Commons

Potbelly has plenty of room for improvement
Revenue for Potbelly last year rose 1.7% to $74.8 million. However, its adjusted earnings-per-share, or EPS, was cut in half with a drop to $0.06 as same-store sales grew just 0.7%. By comparison, Panera Bread saw its revenue grow 12% to $2.4 billion as its EPS shot up 16% to $6.81 on 2.3% same-store sales growth.

During Potbelly's conference call, the company cited bad weather as the biggest issue that dragged down the fourth quarter, and consequently the year. It is likely, though, that competition from not just Panera Bread, but Subway, Jimmy John's, Firehouse Subs, Jersey Mike's, Quiznos, and several others is the biggest issue for the company and it has prevented Potbelly from differentiating itself in the highly competitive sandwich shop restaurant segment.

Potbelly plans to open 40-48 new shops this year but it still forecast low single-digit same-store sales growth.

Breakfast is now the meal of champions and frequent customers
Potbelly should seriously consider using Oklahoma City as a test site for some new breakfast ideas.

A recent study revealed that in 2013, customers cut back their visits during lunch and dinner hours but they increased their visits during breakfast hours for the fourth-straight year. In fact, the 12.5 billion breakfast visits made to U.S. food service locations last year marked a 3% gain versus 2012. Furthermore, the forecast calls for 7% growth over the next nine years for overall restaurant breakfast visits.

Currently, Potbelly offers breakfast. However, it offers a trivial number of breakfast sandwiches and main entree options in comparison with many popular competitors.


Breakfast Sandwiches and Main Entrée Total




Panera Bread





Note: Data taken from latest menus, respectively. Sides like oatmeal, hash browns, and yogurt not counted. Drinks like coffee and juices not counted.

Breakfast has been one of the major reasons for McDonald's long dominance against rivals like Wendy's. Wendy's is on breakfast attempt three after it failed both in the mid-1980s and between 2006 and 2009. Wendy's currently offers breakfast at fewer than 10% of its stores after its failed attempt in 2013.

Although Quiznos offers over a dozen breakfast sandwiches, it doesn't sell coffee or breakfast juice and it doesn't promote its breakfast menu. Additionally, unlike Potbelly, the company and its franchisees have had systemwide issues over fees, supply and ingredient costs, and high marketing expenses.

This past week, Yum! Brands' Taco Bell  debuted its new breakfast menu. If a chain like Taco Bell that is mostly known for tacos, burritos, and quesadillas can make a move into breakfast, Potbelly sure can, and should.

Tmf Blog Network

The biggest obstacle of all could be turning this into a breakfast sandwich. By André Zahn, via Wikimedia Commons

Two other big reasons why Potbelly needs to act now on breakfast
The real question Potbelly needs to ask itself is what it provides that customers can't make just as easily at home. Pizza, burgers, and even burrito bowls all require significant prep time and a wide variety of ingredients, but for most people making a sandwich requires just a handful of ingredients, at most.

Therefore, convenience is the first reason why Potbelly needs to act now. Customers generally have less energy in the morning for making a meal and going to work. This is why breakfast works and why a fast food chain like McDonald's, which has struggled for several quarters with negative same-store sales, has still been successful during breakfast. This is also a major reason the company is enhancing its breakfast with an improved coffee lineup in 2014.

The second reason is foot traffic. Expanding breakfast will give customers more reasons to visit the store outside of the hours between 11:30am and 2:30pm -- Potbelly recently said that 6% of its business takes place outside of this period.

Bottom line
If Potbelly continues with the status quo and continues to slowly add restaurants which offer the current menu, its competitors will continue to dominate morning sales. If Potbelly takes too long to build a competitive breakfast menu, it may face the same criticism it does now as critics call it just another sandwich shop.

However, if Potbelly can make a respectable attempt to increase its offering at breakfast, the stock has a real chance to turn around and make Potbelly into a champion.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Michael Carter has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Panera Bread. The Motley Fool owns shares of McDonald's and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information