Operations

Portillo's rides out traffic declines with 'transaction arbitrage'

Moves into high-population-growth states are driving revenue growth that company officials say will help the Chicago-based chain manage through ebbs and flows of consumer behavior.
Portillo's
Transactions declined 3.5% during the quarter, but picked up again in October. | Photo: Shutterstock

Sluggish transactions dampened Portillo’s sales growth in the third quarter, but company officials said the performance of new restaurants in the Sunbelt is exceeding expectations.

Same-store sales were up 3.9% for the Sept. 24-ended quarter, but that reflected a 7.4% increase in average check that was offset by a 3.5% decrease in transactions—though CEO Michael Osanloo said transactions turned positive again in the fourth quarter so far.

That higher check during the third quarter was the result of menu prices that were 9.1% higher than a year ago, from menu price increases taken in January and May this year, offset by product mix.

Osanloo said the company is considering more menu price increases, while cautiously watching consumer behavior.

About 3.5% in pricing rolled off in October, bringing the price increase to 5.5% for the fourth quarter. The chain will roll off another 2% in pricing in January, and “we’re still evaluating whether we do anything there,” he said.

He blamed the decline in transactions during the third quarter in part on more typical consumer behavior. The third quarter is typically a slower time, he said, indicating that consumers are returning to more normal pre-pandemic seasonality.

“We’re back to what I think is more of a normal rhythm in the restaurant industry, going back to a 2019 kind of mindset,” Osanloo said. “The third quarter is 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.”

But Osanloo also blamed the transaction miss on the lack of population growth across the Midwest, where declining headcounts have forced the brand into “transaction arbitrage.”

In the Midwest, because the population is shrinking, the brand is forced to steal market share to continue growth, Osanloo said. And that’s why Portillo’s is moving into higher-population-growth states, like Texas, Arizona and Florida, where restaurant performance is exceeding expectations and the brand can “rise with the tide,” he said.

The next new markets: Atlanta, Denver and Las Vegas.

Portillo’s opened two new restaurants in Texas and Arizona during the third quarter for a total of 78. Another six are scheduled to open during the fourth quarter.

The seven opened over the past 12 months contributed $11 million to the 10.4% increase in revenue to $166.8 million for the quarter.  

“In Q3, we can already see the impact of new restaurant development as a counter cyclical factor,” he said. “Revenue contribution from our newly opened restaurants meaningfully drove year-over-year growth.”

Earlier this year, Osanloo also outlined Portillo’s plan for growth, with the goal of reaching 800 units. That plan includes development of “restaurants of the future” that are smaller, have a more efficient kitchen and better support off-premise business.

One of the newest units, which opened in Allen, Texas, in August, for example, is 7,700-square feet, much smaller than legacy units, which are about 11,300-square feet.

“We’re very happy with Allen,” said Osanloo, noting that the chain will have five restaurants in the Dallas-metro market within 12 months. “We’re super excited about Texas.”

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