The announced departure of Portillo’s CEO Michael Osanloo this week was not a surprise to some.
The fast-casual chain has been pressured in recent months by activist investor Engaged Capital, which had reportedly been pushing for improvements in restaurant-level performance, as well as unit modernization and stronger national marketing.
At the heart of the challenge for Portillo’s, however, was a growth strategy that was heavily dependent on the success of an effort to shrink restaurants to reduce the cost to build them.
That effort was happening at Portillo’s. But, some say, it just wasn’t happening fast enough.
Osanloo, who has been at the helm for eight years, was shepherding the fast-casual brand through a bold experiment.
First, there was the initial public offering in 2021 when the then-58-year-old chain owned by private-equity firm Berkshire Partners LLC had only 67 units.
Then there was the plan to spread Portillo’s beloved beef sandwiches, hot dogs and rich, chocolate cake across the U.S. At the time of the IPO, only a handful of Portillo’s units were outside Chicagoland, but the company aspired to reach up to 600 across the U.S., all company owned, and then to expand globally.
Those who know Portillo’s in Chicago will likely picture large, tchotchke-filled restaurants, around 8,000-square-feet, generating average unit volumes of about $10 million or more. A typical Portillo’s might require 80 to 120 staffers in Chicago, with 20 to 30 people working at one time, mostly in the kitchen, churning out a fairly complex menu.
Outside the Midwest, however, Osanloo’s plan was to shrink the Portillo’s restaurant box with new formats.
His goal was to move where the population is growing into the American Sun Belt, from Florida, Georgia, Texas and Arizona to Colorado (not really the Sun Belt, but that’s where Portillo’s is headed).
And, initially, the brand appeared to hit big in some of those markets, particularly Texas, where a new unit opening in The Colony near Dallas quickly became a top performer, selling more Italian beef sandwiches than the system average, and fanning the flames of the company’s ambitious growth plan.
This year, however, Portillo’s—and much of the industry—was met with significant macroeconomic challenges, with sales and traffic slowing. The once-exuberant sales in Texas turned flattish.
In a preliminary release of third-quarter results the company announced a strategic reset, slowing growth to focus on driving traffic and improving restaurant performance. The chain also killed its test of breakfast.
Same-store sales for the Sept. 28-ended quarter are expected to decline between 2% to 2.5% and expectations for the year were downgraded.
Portillo’s is expecting to finish fiscal 2025 with same-store sales down 1% to 1.5%. Earlier this year, the company had projected an increase between 1% to 3% for the year.
Portillo’s average unit volume for the first half of 2025 was $8.7 million, a decline from the $9 million during the first half the prior year.
Amid those headwinds, Engaged Capital had successfully brought two restaurant-industry veterans to the board: Chipotle president Jack Hartung and former Darden CEO Gene Lee.
Board chair Michael Miles Jr. is serving as interim CEO while the company seeks a successor.
At an analyst presentation at the Piper Sandler Growth Frontiers Conference earlier this month, a few weeks before his resignation, Osanloo said he spoke with Hartung and Lee weekly.
“It’s making me better,” he said. “It’s making the company better. They’ve been incredibly helpful on this whole reset process, and their fingerprints are all over it.”
Osanloo and CFO Michelle Hook at the conference blamed Portillo’s sales decline on the larger macroeconomic climate, but also the heavy discounting among quick-service competitors, a trend the Portillo’s executives said is only expected to get worse.
In Chicago, half of Portillo’s business comes through the drive-thru, which means the brand is competing with quick-service chains offering value meal deals. Portillo’s, he said, hopes to compete by offering quality, with one-third-pound burgers and beef tallow fries (they’ve always been fried in beef tallow, he noted).
The chain recently hired a new marketing chief, Denise Lauer, to get that message of quality across. Lauer, who was most recently CMO of Marco’s Pizza, started the job this week.
Wall Street analyst Sharon Zackfia of William Blair wrote in a report this week that, in hindsight, Portillo’s could have moved faster to shrink its box and move more deliberately into new markets.
The 10 restaurants open in 2024 are averaging unit volumes of more than $4 million, Hook said at the Piper Sandler conference. But they also cost about $6.8 million to build on average.
The eight locations that were scheduled to open in 2025, meanwhile, are in the range of $5.2 million to $5.5 million to build, she said. And next year the cost is expected to decline further to less than $5 million, which would enable Portillo’s to reach its goal of becoming cash-flow positive in 2026.
Portillo’s also built its first in-line location this year, near Orlando, which Osanloo said cost less than $4 million to build, potentially opening up formats for airports, college campuses and dense urban areas.
Fundamentally, it’s the cost of building Portillo’s units that has caused the anxiety about growth in markets like Texas, he noted.
“If the restaurants that we had built cost less than $5 million, we’d feel much more relaxed about the trajectory, and let the restaurants grow their way to success and be amazing,” Osanloo said. “So it’s a little bit of short-term pain because there’s just a lot of capital associated with it.”
Portillo’s is working on raising brand awareness in Texas. The company has established dedicated field marketing teams in Houston and Dallas. Portillo’s food truck will park at Texas high school football games, and will host fundraisers. The brand is also investing in digital, outdoor and some TV marketing.
The same strategy is being used in Atlanta, where Portillo’s is also opening this year with another two coming by 2027. The chain is working with Atlanta-based Coca-Cola on activations there to make sure demand can keep up with supply, Osanloo said.
Zackfia, in her report, said she expects Portillo’s to stay the course on its growth strategy while the company searches for a permanent CEO.
Who should they look for?
“We expect the search to largely focus on external candidates, and hope for two main focal points: a proven ability to scale a brand outside its home markets, and a strategy to right-size the box to achieve superior cash-on-cash returns,” Zackfia wrote.
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