VALUE: After Hours (S07 E31): Portillo’s: Everyday Value Done Right

During their recent episode, Taylor, Carlisle, and Stephen Farrington discussed Portillo’s: Everyday Value Done Right. Here’s an excerpt from the episode:

Tobias: Well, let’s talk about Portillo’s first. We’ll come back to Crocs, since we’ve started along that line.

Jake: Toby, have you ever eaten at a Portillo’s?

Tobias: I have not. No. Is that an East Coast thing? On the West Coast?

Jake: Chicago, originally. Yeah.

Stephen: It’s a Chicago native restaurant. Yeah, so, a Chicago native. They even have a special called The Leo for the new pope, who’s from Chicago and enjoys Portillo’s. So, Portillo’s is a fast-food chain. Their market niche is interesting. So, they’re going for everyday value. So, while McDonald’s was trying to sell $9 cheeseburgers, Portillo’s, they’re trying to capture the everyday value market to make sure that their food is high-quality and affordable.

It’s where to start, where to untangle this thing, because it’s such an amazing business. I remember before I had ever looked at a restaurant, I had just seen the statistic that Chick-fil-A crushes all the competition, because they do $7.5 million of revenue per location. Well, Chipotle does $5 million revenue per location. McDonald’s does $3.5 million of volume per location. A restaurant like Crystals do a million dollars. Something like not a Dunkin’ Donuts, but like a Baskin-Robbins or a Crystals is doing a million dollars of revenue a year per location.

Jake: Yeah. Or, Subway is like way down.

Stephen: Yup, Subway’s way down there too. Subway, they now have the problem that got bought up by private equity, who now wants to sell a $13 sandwich and the quality hasn’t improved.

Jake: $13 foot long?

Stephen: $13 for a Subway sandwich.

Jake: Doesn’t sound as good, does it?

Stephen: Well, I was at a conference with my wife and it was on the beach. I thought, oh, well, maybe this is just beach pricing. I talked to the staff. They were like, “No, no. All Subways are like this now.” So, $13 a sandwich everywhere. I’m like, “What are you doing? [crosstalk]

Jake: Thanks, Jerome. [laughs]

Tobias: You can’t charge more than a dollar an inch. That should be put in the Constitution.

Stephen: [laughs]

Jake: I’m going to leave that one alone.

Stephen: [laughs] Oh. So, Portillo’s is going for the everyday value market. When the founder of the company sold it, so he sold it to a private equity firm, he didn’t sell it to the highest bidder. He sold it to someone who promised, “We’re going to maintain this culture, we’re going to maintain this value. It’s going to be an everyday value business. We’re not going to jack up the prices.” And the founder of the company sold it. They only had 50 restaurants at the time. Sold it for a billion dollars to private equity, who took it public and has been trying to grow it aggressively.

Now, where to start? So, I told you, Chick-Fil-A does about $7.5 million per location. A Portillo’s in the Chicago area does about $10 million a year in revenue per location. And Chick-Fil-A has an average ticket size of about $15 a person, Portillo’s has an average ticket size of $11 a person. So, think of Chick-Fil-A on a Saturday and how busy it is, and then think that Portillo’s is going to have about 40% more people than that. It’s just enormous, massive amounts of volume.

In restaurants, the bigger the menu, the more likely you have waste or spoilage. They have an enormous menu, but they’re able to keep it moving with that much volume. Portillo’s location will do $600,000 a year in salads. I think Sweet Beans has only done about $2 million in salads. It’s just doesn’t have something for everyone. Their signature item is the hot Italian beef sandwich. But they have milkshakes. Of course, they’ve got Chicago hot dogs. They’ve got hamburgers, they’ve got a nice selection of salads and they serve beer.

So, it’s fast food. There’s no tipping. It’s adamantly no tipping. It doesn’t ask you for a tip. It’ll never ask you for a tip, because they want to be everyday value. But the inside is decorated like an Applebee’s or a Chili’s. So, it’s like a sit-down restaurant, but you bus yourself and there’s no tipping and then they serve beer.

So, for me, it has this fantastic market niche I think is very attractive. At the same time, the customers get absolutely hooked on it. So, there’s a concept in marketing for brands called Net Promoter Score, which is how likely you are to recommend this business to a friend. And Portillo’s crushes all competition on Net Promoter Score.

I lived this firsthand, because I hadn’t heard about the company. It was a former professor and one of my students, his girlfriend was doing a master’s degree in Chicago. This student of mine, he texts me out of the blue. I swapped phone numbers with about four or five excellent students. If I was smarter, I would have done that with 100 students. But I was only smart enough to swap phone numbers of about four or five excellent students that were really going somewhere and making things happen. He texts me out of the blue and says, “You have to try Portillo’s.”

This is a student. So, he graduated in two years. He was the most ambitious student I’ve ever met in my entire life. We had never had a conversation about anything other than business. There’s no non-business. I asked them like, “Has your account been hacked? What is going on? Texting me out of the blue talking about the Portillo’s.”

Jake: Hot dogs, what are we talking?

Stephen: The Net Promoter Score of this company crushes everyone. If you have this simple one question survey, are you going to recommend this company to a friend? The answer is yes. And in a world where Google just takes all the profits in ad revenue, in a world where marketing, it’s just so hard to reach people, having that word of mouth that is real and effective, I think does matter.

It does take some time for these restaurants to become more established. But one of the big criticisms against Portillo’s and I think the bearish take on it is this can’t work outside of Chicago. And to me, that’s shocking. Because Chicago has always been one of the choicest test markets of the country, because their demographics are so diverse. If it can work in Chicago, it can work everywhere, because they have black, they have Hispanic, they have white, they have everything thing. It’s always been Chicago is the test market. And now, there’s this weird narrative on Portillo’s that it could work if–

They don’t know if it can work outside of Chicago. But they did expand to Arizona. They’ve got four restaurants in Arizona about 10 years ago, and those are doing the same volumes as Chicago. But recently, they’ve expanded to Texas, they’ve had a bit of a hiccup. So, their chief marketing officer got poached. Their chief marketing officer got poached to be the CEO of Giordano’s Pizza.

So, on this big rollout, they’re doing this huge rollout without a chief marketing officer. And so, they’ve had some near-term stumbles and the market’s not believing it. I think that’s all short-term noise. This is one of the most amazing companies I want to own a piece of. They opened their first location in Texas, in Dallas. It was in the same shopping plaza as Warren Buffett’s Nebraska Furniture Mart. That first location in Dallas in its first year, keep in mind, your average Chick-Fil-A, that’s so packed on Saturdays and has the line outside that’s shutting down traffic, because it’s leaking onto the highway, that is $7.5 million of revenue a year. The first location in Dallas did $17 million in revenue its first year.

Jake: Wow.

Stephen: The management on the earnings call said it almost broke the store. This is ridiculous. So, they did a hub and spoke. They opened five more locations to try to siphon the traffic away from this location next to the Nebraska Furniture Mart. It did siphon the traffic away, which it was supposed to. But now, in their data, you look at the 2023 cohort and people say, “Well, why did traffic fall in the 2023 cohort?” Well, because it was intentional, because they had to siphon some traffic off of. You can’t have one fast food location do $17 million of revenue a year. It just breaks the whole system. It’s just nuts.

But there’s so much I like about the company. They’ve got a great management team. They’re iterating quickly. They’re experimenting to try and figure out what works. So, they’re just launching breakfast options now in Chicago. So, you’re already doing $10 million of revenue a year. They could start including breakfast on top of that. I mean, that’s just absolutely amazing.

So, they’re going to see, does it work? Does the market like it? I think when you have a new chief marketing officer in there to handle the store launches a little bit more appropriately– Oh, and in March of this year, they just launched a membership rewards program to get people to sign up and download the app. They got in the first six months of this membership program, 1.9 million reward members. They only have 86 locations. They have 86 locations and they have 1.9 million rewards members. That’s over 20,000 rewards members per location. Chipotle only has 5,000 rewards members per location.

The customer base of this company is so fanatic that on my write up on Substack, every paragraph I interspersed, how can you tell if somebody eats at Portillo’s? I was like “Don’t worry, they’ll tell you.” So, I did– [crosstalk]

Jake: [chuckles] It’s like going to Harvard and Portillo’s.

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VALUE: After Hours (S07 E31): Portillo’s: Everyday Value Done Right

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