Why Breakfast Could Turn Potbelly Into a Champion

Recently, Potbelly (PBPB -2.03%) 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 (PNRA), while McDonald's (MCD -0.05%), 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.

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.

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.