One of Portillo’s biggest weapons against sluggish traffic trends is simple—build more restaurants.
As CEO Michael Osanloo explained, Portillo’s Chicagoland headquarters is based in a negative population state. When people move away, it makes “transaction growth very, very challenging” and causes brands to “have to steal share from other people,” he said. Traffic declined 3.6 percent in Q3.
That’s why Portillo’s is putting a lot more capital into the warmer states—like Texas, Florida, and Arizona—where population growth is significant.
“We are putting ourselves in a position where, just from a transaction standpoint, it’s almost transaction arbitrage,” Oslanoo said during the chain’s Q3 earnings call. “We are repurposing capital to states with transaction tailwind, and we will be a beneficiary of that along with all the other restaurant companies that are in those markets. What we like to think is that in Chicagoland and in the Midwest, we can fight the negative macro trends with the strength of our brand and steal share where appropriate. But in these growth markets where we’re repotting ourselves and putting all of our capital, we can rise with the rest of the tide there. So, that’s the play for us.”
Portillo’s entered 2023 with 72 stores and will exit with 84. Nine of those units are in the Sunbelt—four in Texas, three in Arizona, and two in Florida. The other three are in Illinois. In the third quarter, the chain debuted in Queen Creek, Arizona, and Cicero, Illinois. Fourth quarter openings will be in Arlington, Texas; Fort Worth, Texas; Clermont, Florida; and Rosemont and Algonquin, Illinois.
Class of 2022 restaurants are still outperforming underwriting expectations. Early results from the class of 2023 indicate they’re on the same path. The brand overall pulled in an $8.9 million AUV year-to-date.
The fast casual announced during its Development Day in September that it has room for 920 U.S. restaurants at minimum, up from its previous 600-unit projection. Baked into that expectation are 120 drive-thru-only and urban-based walk-up outlets. Long-term annual unit growth was bumped from 10-plus percent to 12-15 percent. Also, Portillo’s calculated it can do one store per 190,000 residents. Considering approximately 330 million people in the U.S., the brand marked its total addressable market at 1,700-plus restaurants.
The negative traffic performance isn’t specific to Portillo’s. The industry overall suffered from slower visitations in the third quarter. Osanloo attributed this in part to financial periods returning to pre-pandemic seasonality.
“We’re back to what I think is more of a normal rhythm in the restaurant industry going back to 2019 kind of mindset,” he said. “Third quarter’s always a little bit of a sluggish quarter for the restaurant industry and typically we come roaring back in the fourth quarter. So, we’re seeing a much more consistent pattern with the past. So we’re happy about that, and we feel very optimistic for our fourth quarter.”
Portillo’s also felt pressure, particularly in its drive-thru, from quick-service peers adding more promotions throughout the quarter. However, the fast casual won’t respond in kind. Oslanoo told investors that the brand refuses to do a dollar menu or subscribe to shrinkflation.
The chain has spent some advertising dollars on commercials in the Chicago market during sporting events, but the brand-enhancing activities showcase food quality and service, not temporary value deals. Portillo’s way of adding value is spending more on bacon for its burgers.
Then there’s foregoing any price increases for the remainder of 2023 after taking a 2 percent bump in January and a 3 percent bump in May. About 3.4 percent of pricing rolled off in October, meaning Portillo’s will end the year with an effective 5.5 percent higher price year-over-year.
“We are very, very, I guess, astute on monitoring our pricing versus all of our competitors,” Osanloo said. “We look at our typical basket versus everybody else. We compare ourselves to not just fast casual, but [quick service] and sort of the best of [quick service]. And we feel we have a very strong price position, but we’re also a little cautious, and we’re going to play it by ear.”
Operational execution is valuable too.
“One of the things that I don’t think people talk about, because it’s not a short-term fix—it’s a medium and long-term fix—is when you give great experiences to guests every single day,” Osanloo said. “That’s the number one reason why they choose to go back to a restaurant. It’s not because of a coupon or a discount or something, but it’s because when I went there I had a great experience and I want to go back. And so that’s another way that you can differentiate yourself over the medium and long term and drive consistent traffic by just being operationally sound. And that is our mantra internally. We’re going to be the most operationally sound restaurant company we can be and that will drive performance.”
Outside of the drive-thru, Portillo’s is feeling strength in its dining room because of trade down from casual-dining concepts and continued favorability with third-party delivery despite the higher prices in that channel.
Same-store sales grew 3.9 percent, fueled by a 7.4 percent rise in average check. That higher average check came from 9.1 percent pricing, offset by lower product mix.
Third quarter restaurant-level margin was 25.1 percent, increasing 250 basis points year-over-year. Portillo’s is also on track to deliver year-over-year margin expansion for full-year 2023.
“We’re [building margin] even as we add more restaurants in a single year than we ever have throughout our 60-year history,” Osanloo said. “Again, this is a testament to our profitable business model. We generate enough operating cash flow to self-fund all of the development plans we shared with you several weeks ago and few growth companies can say that.”