Portillo's Wants to Provide Oasis from Fast Food's Soaring Prices

    The classic brand will be "a de-stressor in a world full of stresses,” CEO says.

    Fast Casual | March 11, 2022 | Danny Klein
    Drink, hot dog, and fries from Portillo's.

    Portillo's

    Portillo’s “multi-channel” model insulated it last year, just as it has throughout COVID.

    Michael Osanloo is a student of history. Particularly when it comes to the gospel of Dick Portillo. As the colorful entrepreneur scaled his eponymous hot-dog brand, which began as a stand in Illinois’ Villa Park in 1963 (then called The Dog House), Portillo held to a philosophy: Provide a value-based oasis for guests when everyone else jacks up prices.

    If ever there was a time to pressure-cook that mantra, it’s now. The food-away-from-home index rose 6.8 percent over last year, which marked the largest 12-month hike since December 1981. Limited-service meals skyrocketed 8 percent in February, year-over-year, while full-service prices lifted 7.5 percent. This as inflation nationwide upped 7.2 percent—the steepest figure in four decades.

    Osanloo said Thursday on a conference call the present climate only reinforces Portillo’s backbone. “We’re going to take traffic,” he said, referencing the brand’s tradition. “And that’s exactly the playbook that we’re applying today.”

    He called Portillo’s a “counter-recessionary business,” meaning in past downturns, business only picked up. This inflationary puzzle is coming at Portillo’s from all angles—labor, supply, construction—but it’s not shaking that age-old boiler plate. Osanloo said the brand’s go-forward strategy is to be a “price laggard.” Or to intentionally price below inflation and less aggressively than quick-service peers. “In times of economic certainty, we know people are seeing prices increase all around them,” he said. “We want to be a respite from that; a comforting place where people don’t have to think about that.”

    Portillo’s average per person check today is less than $10, CFO Michelle Hook added. Yet that’s not to say prices have been stagnant. Portillo’s same-store sales increased 10.3 percent in Q4 as revenues upped 17.2 percent, year-over-year, to $138.9 million. The comp comprised of a 0.8 percent bump in transactions and a 9.5 percent increase in average check. The latter broke apart as 6.4 percent higher price and the remainder from mix.

    Portillo’s prices increased 4.4 percent last year. But to Osanloo’s directive, it was less than the broader 6.8 percent nationwide. The company raised prices 3 percent in Q4 and plans to take another 1.5 percent in Q1 2022.

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    Hook said Portillo’s expects 13–15 percent commodity inflation this coming year (beef and chicken, which make up 50 percent of the brand’s basket, are the main forces at work). Labor as a percentage of revenues also increased to 26.2 percent in Q4 from 24.3 percent in the prior-year period, primarily due to a jump in hourly rates, investments made in training, and discretionary bonuses. Portillo’s average hourly rates are about 20 percent higher than they were last year. It also spent $12 million in 2021 on a rewards package that includes shift meals, extra pay on key holidays, flexible scheduling, and a more affordable health care program.

    Portillo’s implemented new training materials, with a blend of hands-on activities and e-learning modules. And then launched a leadership program labeled “Ignite” that helps workers climb the corporate ladder. Portillo’s internal management promotion rate was north of 80 percent last year.

    “While many restaurant brands have had to close doors or rope off tables, because of staffing, our doors have remained open,” Osanloo said.

    Meanwhile, Portillo’s is trying to balance inflation with efficiency so it can become less reliant on price. It rolled a new version of its point-of-sale system that connected drive-thru, in-store, and outside line-busting business (those all previously used different systems for undertaking). Employees now only need to be trained once and can take orders anywhere.

    A host of other changes are also navigating today’s labor reality—the need to pay more for hours with fewer hours available.

    Portillo’s used to have catering boxes that employees taped up. Today, they’re pop and lock, which might sound flippant, Osanloo said, but saves “hundreds of hours.”

    Catering bread started to come in pre-cut. Previously, it was sliced in-house and packaged. Maxwell Street Polish Sausages—the brand’s famed offering born more than 75 years ago—also used to show up and get hand-trimmed by employees. Ends of the sausage were thrown away. Those arrive pre-cut and trimmed now, too.

    “There is another whole raft of ideas like that, that will take wasted hours away from our team members who can then be focused on much more productive actions,” Osanloo said. “And our ops team is aggressively pursuing all of those things. Now, the caveat is it cannot negatively affect the consumer experience. … But there's wasted effort in our restaurants. There's food waste in our restaurants that we are going to be all over.”

    Returning to price, Portillo’s, combined with its 2021 actions, estimates the net price effect in Q1 to be in the range of 7–7.2 percent, slightly below inflation.

    “In times of uncertainty … our belief is, well, others might be shrinking portions, taking prices above inflation—our philosophy is we're going to take traffic,” Osanloo said. “We want to be a great place for consumers. We're very conscious of all the price pressures that consumers face. And our goal is to drive traffic and drive transactions and drive revenue.”

    “We want to be a de-stressor in a world full of stresses,” he added. “And we don't want [customers] to feel like their pocketbooks are being crushed. Right now, with fuel costs where they are, their discretionary income is being challenged, and we philosophically believe that a great value is going to win with consumers in the near term.”

    It’s hard to predict where this goes. Osanloo said Portillo’s will reevaluate pricing as the market recalibrates. Hooked added the company wanted to “keep our options open” as external forces dictated.

    But again, price is going to climb under inflation, and slower than the broader restaurant field, Osanloo said. That’s a concrete point in a landscape devoid of them. “We didn't see this level of inflation six months ago,” he said. “Michelle and I were like, yeah, we we've been pretty careful. But we didn't anticipate a war in Ukraine. We didn't anticipate fuel costs where they are. And so, we're just being as transparent and honest as possible. What will happen in three to six months? I don't know.”

    Portillo’s “multi-channel” model insulated it last year, just as it has throughout COVID (in the 12-month period that ended June 27, stores were generating 4.9 million per unit in drive-thru sales and $850,000 in delivery).

    More recently, Portillo’s began looking at ways to reduce the size of its back-of-house without impacting operations. It’s also implemented a third drive-thru lane to offer added convenience for “the growing numbers of guests” who choose a digital-ordering experience.

    The third lane draws customers to Portillo’s direct ordering channels (website and app), Osanloo said, by offering a rapid pickup option. The dedicated lane first launched in West Madison, Wisconsin, and is also live in Portillo’s Joliet, Illinois, off-premises-only build—a first for the chain called “Portillo’s Pickup.”

    That unit, which opened February 1, is a fraction the size of the typical 7,800-square-foot boxes Portillo’s builds. It sits on a 1-acre pad instead of a 2-plus-acre lot. “It's still serving an unbelievable amount of food for drive-thru, takeout, third-party delivery, and catering,” Osanloo said. “Due to the smaller size and format, this new model has the potential to unlock whole new real estate options for us and help infill existing markets to better serve our guests however and whenever they want to get their Portillo’s.”

    The brand was able to hire more than 100 employees for the store (although, across the fleet, Portillo’s is still about 10 percent understaffed versus 2019) and is producing more than $140,000 per week in sales. “It's exceeding what our ROI modeling was. And so, we think that we might have found something very special here,” he said.

    Portillo’s opened Q4 stores in Indiana and Wisconsin. Plus the Joliet venue, the brand is up to 70 locations, with its second 2022 unit scheduled to open in St. Petersburg, Florida, in early April that already has more than 120 employees signed up. It will then look at five additional restaurants in Q3 and Q4. One headliner will be the company’s first Texas location, which is headed to the 400-acre Grandscape complex in fall. The largest mixed-use real estate, retail, entertainment, and restaurant development in North Texas, Osanloo labeled it “one of the greatest real estate sites I’ve personally ever seen.”

    I'm confident this restaurant will be a home run for us and pave the way for future growth in Texas,” he said.