Potbelly slows down Chicago-area expansion
Note: This story has been corrected to reflect that Bolingbrook is one of the suburbs where Potbelly no longer is pursuing a deal. The story previously identified an incorrect suburb.
(Crain's) — Potbelly Sandwich Works is curtailing its rapid expansion in the Chicago area as the economy has more people turning to brown-bag lunches.
In recent months the sandwich chain has walked away from at least two prospective deals in the suburbs, in Hillside and Bolingbrook, and local real estate sources say company executives have told them Potbelly is pulling back its growth plans here.
Potbelly founder Bryant Keil said last year that the chain could double its Chicago-area stores to more than 150, and hired former Sears CEO Aylwin Lewis to spearhead growth nationwide. Mr. Lewis said he wanted to accelerate expansion and at the very least maintain Potbelly's growth rate of about 40 new restaurants a year.
But the dramatic drop in the economy over the last six months has hit even the private Chicago-based company known for its kitschy décor, toasted subs and fresh-baked cookies. Potbelly's costs to build its stores are higher than its rivals', sources say, so the company can't afford too many mistakes in a climate where sales are likely to be slow.
Box o' Sandwiches
"All chains need to look closely at their restaurant expenses, and many are having to focus on survival," says David Epstein, a principal in Rosemont with food investment banking firm J. H. Chapman Group.
A spokesman for Potbelly, which has now more than 200 stores in 12 states, says in an e-mail that the company remains committed to the long-term expansion goals expressed by Messrs. Bryant and Lewis. But he adds, "In light of what is going on in our economy, we are certainly taking a very thoughtful approach to expansion in 2009."
Potbelly has hired a real estate consulting firm to assess its leases and, like other retailers, is seeking rent cuts "to reflect new market conditions," the spokesman says.
Coffee giant Starbucks Corp., whose CEO Howard Schultz is a Potbelly investor, has said it is among retailers seeking rent reductions from increasingly desperate landlords as a way to weather the pullback by consumers.
One of Potbelly's cost-cutting moves at the end of last year was to lay off staff including the head of its real estate department, Edgar Cepuritis. Meanwhile, another key real estate executive moved to the Baltimore area from Chicago — an indication that Potbelly may focus more on expanding in East Coast markets rather than Chicago.
"We continue to focus our growth in core markets like Chicago, Washington, D.C., and Texas," the spokesman says in an e-mail. "We will also continue to enter new markets where we think our customers want us to be."
Potbelly went from just 10 stores in 2002 to 100 in 2005, when Inc. Magazine listed the chain among America's 100 fastest-growing private companies.
Local real estate sources say Potbelly walked away from tentative deals in a proposed strip center development in Bolingbrook and a just-opened Target Corp.-anchored shopping center in west suburban Hillside.
The broker representing the Hillside project's developer says the lease for Potbelly was drawn up and ready to be signed about four to five months ago.
"Potbelly was holding back on signatures until all the ducks were lined up on their side," says Joe Grody, a principal with Chicago-based Sierra Realty Advisors. "And then they started changing their ducks."
Mr. Cepuritis, Potbelly's former real estate head who had been with the company seven years, says the plan for 2009 expansions was "a moving target," and that new CEO Mr. Lewis wanted to evaluate the business and make some changes before forging on with expansion.
"There were some things they wanted to correct before continuing to spend money on development," says Mr. Cepuritis, declining to provide specifics. "I think Aylwin's going to do great things with (Potbelly). But given the state of the world, he's taking a cautious approach."
He says the company will probably continue to add some Chicago-area stores, but notes there's room for more growth in the Washington-Baltimore area, where Potbelly has about 40 stores — roughly half what it has here.
