Dive Brief:
- Engaged Capital, an activist investor with a 9.9% stake in Portillo’s, thinks the company can improve the cash-on-cash returns at its restaurants by 25% to 50%, according to a source familiar with the matter.
- The source said Engaged wants Portillo’s to shift toward smaller stores and potentially transition away from ownership of its buildings.
- Portillo’s has pursued a number of operational and development changes in recent years, including efforts to improve the chain’s drive-thru speed of service, which still lags behind 2019 levels.
Dive Insight:
Since Michael Osanloo became the chain’s CEO six years ago, Portillo’s has focused on shrinking its new builds, from an 11,000-square-foot unit with a 107-foot makeline built in 2018, to the 7,700-square-foot Kitchen 23 design that debuted last year and which has a 65-foot makeline.
Eventually, the chain will build its Restaurant of the Future models, which are 5,500- to 6,000-square-foot units with a 47-foot makeline, Osanloo said in an interview for a previous article. That design is still much larger than the 2,000-4,000 square feet size range the source familiar with the matter said was common among competitors.
Larger store models result in under-utilized space and cause unnecessary expenses in labor, occupancy, utilities and other facilities costs, which drag down restaurant margins, according to the source. Smaller stores, the source said, would have a better cash-on-cash return.
Moving away from store ownership would result in lower construction and development costs, while yielding a moderate increase in rent costs, the source said, and resembled the strategy employed by other restaurant chains. However, giving up ownership in exchange does not always produce a beneficial result; Red Lobster’s sale-leaseback process left the company with escalating rental costs, for instance.
The source said Portillo’s has been slow to seize on tech that could increase the size of the average check and improve operational efficiency but said the chain’s recent test of in-store kiosks was a sign of positive changes.
According to the form SC 13D filed by Engaged, which announced the investment firm’s purchase of a stake in Portillo’s, Engaged is interested in “optimizing restaurant performance, improving restaurant-level cash on cash returns, enhancing corporate governance (including through potential changes to the composition of the Board) and/or exploring a sale of [Portillo’s].”
The source said Portillo’s and Engaged have been talking about potential changes for months.
In a statement emailed to Restaurant Dive, Portillo’s said it “regularly engages with its shareholders to understand their perspectives and we have spoken with Engaged Capital. Our Board and management team will continue to take actions and make decisions that are in the best interests of our shareholders.”