Potbelly CEO on inflation: We benefit from broad base supply chain

Potbelly released its Q2 earnings on Thursday, missing estimates on top line, although revenue is still up 9.2 percent year-over-year. Potbelly CEO Bob Wright joins Yahoo Finance Live to discuss the report, the state of the fast casual dining industry, consumer spending, inflation, and the potential for company expansion.

Wright says, "We benefit from a really broad base supply chain ... which means our risk is spread. We won't see those violent swings in food costs, input costs at Potbelly."

Video Transcript

- Job sector added 17,000 jobs to the leisure and hospitality space this morning. Employment remains below its February 2020 level in hospitality by about 2.1%. Let's dive into the restaurant industry in particular.

If returning from pandemic levels wasn't already hard enough, restaurants face numerous challenges in this inflationary period, from worker retention, to bringing back customers, to in-house dining. Inflation has also had a significant impact, not just on our wallets but also, of course, on menu prices and operational costs for any restaurant, big, medium, or small. Amidst all of this potbelly dropping its second quarter earnings yesterday, missing estimates on revenue, although that was still up 9.2% year over year, comparable sales growth, 12.9% for Potbelly.

So let's talk about the implications more broadly for the consumer and how restaurants are faring. Joining us now, Potbelly CEO, Bob Wright, as well as Yahoo Finance's Brooke DiPalma to discuss more on all of this. So Bob, just give us big picture here what you are seeing from your consumers. Let's talk the demand side of the equation first of all here. What you're seeing in terms of traffic, in terms of people's willingness to spend, and whether you're seeing any trade down.

BOB WRIGHT: Yeah, thanks. It's great to be with you. We were thrilled this quarter, for the second quarter in a row to have significant sales growth but driven primarily by traffic. The majority of our top line growth has come through traffic the last two quarters.

And as we measure things against the fast casual segment, there's some share stealing that's benefiting Potbelly as well. More broadly though with the consumer, I think one of the great things about the fast casual space is that we enjoy a relationship with a consumer that's at a little higher income. They've got a little more disposable income, and they certainly seem to be resilient even if they have a little pressure.

The other thing that fast casual is that the frequency is not as high as you might find in QSR. And so if you're going to a QSR drive-thru two or three times a week and you're feeling a little pinch in your wallet, you might dial one of those visits back. If you're going once a week or a couple times a month to a fast casual, you won't see a little bit of inflation really affect your patterns of behavior, especially at that income level.

When we look at the internal data, it suggests that that consumer, in particular, is doing really well. And if Potbelly, which we enjoy, they're doing even better. And we're seeing it in our traffic growth numbers. So nothing on the horizon that has us terribly concerned about our ability to maintain this posture.

BROOKE DIPALMA: And let's talk about the back end of things Bob, here. I mean, inflation certainly taking a toll. We're seeing lunch meats as well as flower prepared mixes continue to move higher year over year. What sort of ingredients are you seeing sticky inflation for? And what are you seeing improve in the second half of the year?

BOB WRIGHT: We have a category that we call grocery, which just includes chips and a number of the smaller items that we use in our shops that has continued to see some inflation. Our meats have come back and a lot of that is driven by chicken. We're lapping the bird flu from a year ago and seeing some benefits in the chicken prices.

But I'll tell you at Potbelly in particular, one of the things that we benefit from is a really broad-based supply chain. We have Italian meats, we have beef, we have chicken, turkey, avocados, fresh produce, soups. So a number of different ingredients, which means our risk is spread.

We won't see those violent swings in food cost, input costs at Potbelly like you might see at a chain that's primarily selling hamburgers or chicken wings. So it's really good when times are good, but it can be very tough if you see that market moving in the wrong direction. We've got a little more stability.

BROOKE DIPALMA: And let's talk about the labor front, bring it back to the jobs report out today. I mean, right now, you have a little more than 400 locations. But long-term, you aim to build a 2000 location restaurant chain. That's a whole lot of employees that have to fill the back end of that. How are you recruiting and working with your franchisee operators to bring in, recruit, and maintain that sort of talent?

BOB WRIGHT: You're so right. And by the way, it's the best part of the business. Our employees, our associates at the shop level, they're the reason that we enjoy the success that we do. I can tell you a couple of years ago, I was talking about it being the worst employment environment in my 35-year history. Right now, we're enjoying full staffing in our shops, we've got turnover that's well below the fast casual average. We're enjoying the benefits that go with that stable full workforce in our shops.

And the thing that I think drives that for us in many ways is that there's a uniqueness to the potbelly experience. And we're leaning into that with our recruiting efforts. We don't have late night hours. Yes, we sell breakfast in some of our locations in our CBD or our city centers, but we're not a breakfast brand where you have to be in at 3:00 and 4:00 in the morning to get open and get ready. We don't have fryers.

We have a team that when you enjoy serving customers and you can work shoulder to shoulder across the counter from your customers every day, that's a lot of fun. And we have that engaged experience that benefits our customers but it benefits our associates as well. And what we've done with our recruiting efforts is lean into that. Even with our franchising efforts, this is a big topic of discussion with franchise candidates about when they're adding a brand to a portfolio, if they're entering the restaurant franchising space for the first time, how easy it is or how relatively easy it is to operate as a big deal for them. And we show really well in those spaces.

- And I'd like to know about your investment in technology then. It sounds like your employees are very hands-on, you value that experience and the interaction with the customers. But a lot of places are looking to streamline operations, develop efficiencies, and they invest in technology, artificial intelligence. Anything that you can tell us along those lines here?

BOB WRIGHT: It's really important to us, yes. In fact, when we rolled out our five pillar strategy that we're still operating under today at the end of 2020, the fourth pillar is all about digital. And there's a number of fronts there but our efforts go back to 2021 where we rolled out a new app, a new web technology. We did a completely new integration of all of our digital ordering channels. We also elevated the ability for us to communicate with our customers through those digital channels. Digital advertising is what we do exclusively today, so a ton of investment in there. We're already into our third round of enhancements to those digital channels with more announcements coming.

You've heard us talk about our Potbelly Digital Kitchen, which we're right on track with the implementation of that this year against our goal of about 100 shops this year. We've made it the standard for all new franchise openings. That digitized the back line in Potbelly so that when we receive those digital orders, we're able to process them much more efficiently. And our order ready on time scores, our food quality scores, temperature scores are all improving in the shops where we put Potbelly Digital Kitchen in.

It also includes an order-taking tablet. We call it an IOT, an inline order-taking tablet that allows us to go deeper into the line, start the customer's order sooner, and it's driving throughput in our peak volume periods.

All of that, one very important thing, it's not terribly technological but it's a powerhouse for us at Potbelly, we have two lines in all of our shops. They were originally built with the back line to serve catering. Today, all of our digital business runs off of that back line. There are brands that are installing that second line so that they can keep up with the digital business. We actually opened it back up when my ops team and I got here, and we're using that for all those digital channels. So even that last mile of execution makes digital work really well for the customer.

BROOKE DIPALMA: And speaking of digital, you're really doubling down on your Perks program. I know today is National Cookie Day. So I saw on your website that if you order, you get a free cookie. What sort of foot traffic do these sort of promotions bring in? And ultimately, what's at the end of the day is the check size as a result of these incoming orders

BOB WRIGHT: Yeah, thanks. Perks really is at the heart of that digital effort for us. Our connection with our customer through those Perks loyalty relationships continues to grow. We don't publish the number of members or that penetration into our sales mix, but I can tell you that with 38% of our business coming through our digital channels, it's another record quarter for us in terms of digital sales in Q2. That is being driven primarily by our own digital channels, and Perks is at the heart of it.

What we do with these big promotions like the first day of summer BOGO offer or the cookie promotion that you're talking about, the underground menu that we've returned to Potbelly, all of that's done through the digital channels so that if you're a Perks member, you get those benefits first and foremost. Even when we're doing a system-wide promotion using our digital advertising, we drive people to Perks to say, that's the best version of the deal that you can get.

And we see the download spike whenever we have those promotions, and we see the engagement and the penetration, which is the mix of those Perks orders increase every time we do that. We reach a new plateau when we do it again and do it again and just continue to build the business. We think it's got a lot of runway for us even from here.

BROOKE DIPALMA: Everybody loves a free cookie.

- I guess that drives you to get the offer.

BOB WRIGHT: Best cookies on the planet, I promise.

- All right, all right, we'll have to take you up on that and give them a try. Potbelly CEO, Bob Wright, and our Brooke DiPalma, thank you so much. Appreciate it.