Potbelly Sandwich Hungers for Growth

The private, Chicago-based snack purveyor will have 195 outlets by yearend. But can it keep expanding without losing that quirky, homemade feel?

Jeremy and Noelle Law will always have Potbelly. As budget-conscious students at Northwestern University, they had their first date at the chain's restaurant in Chicago's Streeterville neighborhood, where they fell in love over bites of hot submarine sandwiches. Potbelly continued to be their place after they became engaged. So when the couple got married last May in Evanston, Ill., they just had to offer Potbelly cookies in addition to wedding cake at their reception.

Today, the newlyweds live in Sacramento and they're hoping Potbelly will follow them. They might not have to wait long. The Chicago-based company is scouting sites in California, with plans for up to 10 restaurants there by 2009.

As if to live up to its name, Potbelly Sandwich Works is one of the fastest-expanding restaurant chains in the U.S. By yearend it expects to have 195 locations in 10 states and Washington, D.C., up from 140 a year earlier. Sales are projected to rise 38%, to $200 million this year, after increasing 47%, to $145 million, in 2006. Now the question is: How much longer can the privately held company keep up this pace without selling stock to the public? And if it does an initial public offering, will Potbelly be forced to give up the eccentricities—its live music at lunchtime or its offbeat signs—that make its customers so loyal?

Investment From Starbucks

Chief Executive Bryant L. Keil says he has toyed with the idea of an IPO but has always shied away. That's because he has been able to raise plenty from private investors, including Starbucks (SBUX) Chairman Howard Schultz, who now sits on Potbelly's board. In five rounds of financing, Potbelly has secured $100 million over the past decade. Still, Keil concedes that, almost inevitably, Potbelly's expansion costs will exceed whatever he can bring in privately. Besides, his backers eventually will want to cash out.

Potbelly and Starbucks are alike in many ways. Both started in 1971 as something else: Starbucks as a store selling coffee machines and beans in Seattle, and Potbelly as a Lincoln Park antique shop, with its namesake potbelly stove and a sideline sandwich business. Both were bought by savvy entrepreneurs who had bigger dreams than their original owners. Potbelly faces bigger challenges, however. When Starbucks went national, upscale coffee shops were new. But Potbelly has competitors everywhere, from Subway to 7-Eleven (SVNDF), Wal-Mart (WMT), and independent delis.

The chain has a quirkiness all its own. Each store has its own layout and hodgepodge of old signs and photos. Typically, over the lunch hour, a guitar-strumming folkie might sit on a mezzanine stage and sing. Lines typically run dozens of people long, many of them regulars who know they're supposed to shout out their sandwich orders to the counter help.

Efficiency Experts Not Welcome

Gerald Gallagher, a general partner at Oak Investment Partners, a Minneapolis venture-capital firm, knows a thing or two about small outfits that want to go big. He invested in Office Depot (ODP) when it had only three stores and Whole Foods Market (WFMI) when it had just four. "It's hard to preserve culture as you expand," he says.

Keil is aware of the trap of the mass market. He's fanatical in his belief that Potbelly's success depends on its unevenness, in not having exact portions of presliced meat or mayo from a squirt gun as "efficiency experts" recommend. "If we imitate everybody else," he says, "we will lose our uniqueness."

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