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Dog days: With plans for an aggressive expansion and an activist investor onboard, can Portillo’s grow while staying true to its roots?

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Dog days: With plans for an aggressive expansion and an activist investor onboard, can Portillo’s grow while staying true to its roots?

Ten years ago, Dick Portillo decided it was time to sell his hot dog empire.

He quickly had two dozen suitors on his hands as well as some skeptics, including Eric VanderSchaaf. A Downers Grove native then in his 20s, VanderSchaaf believed so strongly that ownership of the beloved chain should stay in the area that he launched an online crowdfunding campaign to “Keep Portillo’s Locally Owned!”

Portillo put the kibosh on VanderSchaaf’s plan and sold his namesake chain for a reported nearly $1 billion to Boston-based private equity firm Berkshire Partners. He wanted large-scale, national growth for his company, and Portillo saw that future with Berkshire. The private equity firm took the reins from Portillo in 2014, and in 2021 took the company public.

Ten years after that private equity sale, Portillo’s stands 88 restaurants strong, with an ambitious plan to expand far beyond its Chicagoland home base. Over the next two decades, Portillo’s hopes to grow nearly 1,000% to more than 900 outposts nationwide, taking Italian beef and Chicago-style hot dogs to, it hopes, every U.S. state.

“This isn’t a Midwestern food phenomenon,” CEO Michael Osanloo said at an investor conference in September. “This is a real thing that people love everywhere.”

Over the last year, fans have pleaded for the chain to come to their markets on Kentucky radio and in the University of Iowa’s student newspaper.  In July, Thrillist named Portillo’s one of its “15 Midwestern Fast Food Chains the Entire Country Needs.”

But as it continues an aggressive expansion from beloved homegrown hot dog joint to national restaurant chain — while balancing the expectations of its devoted local fan base —  Portillo’s has found itself at a crossroads.

Its stock has tumbled around 65% since its IPO three years ago and 13% over the last year alone, attracting the attention of an activist investor that has acquired a 10% stake and hopes to whip the company into shape. The investor, Engaged Capital, wants Portillo’s to make key changes to its business as it grows, building smaller restaurants and more intentionally building brand awareness outside Chicago. If Portillo’s takes its advice, people familiar with Engaged’s plans said, the investor thinks the company can succeed.

Investor activism isn’t the only challenge Portillo’s is facing. The company has taken heat from the National Labor Relations Board, which accused the chain this summer of violations of federal labor law.

And some once-loyal diners complain that the food hasn’t been the same since the private equity takeover and IPO.

VanderSchaaf, reached by the Tribune by phone last month, said that what he feared has started to come to pass: Portillo’s is still pretty good, he thinks, but not quite as good.

VanderSchaaf decamped to Texas with his family in 2016, “right after the Cubs won the World Series.” He hasn’t eaten at a Texan Portillo’s; there isn’t a location yet where he lives in Austin. But whenever he’s back in Chicago, he makes a pilgrimage.

Customers dine at Portillo’s in River North on Sept. 24, 2024. (Brian Cassella/Chicago Tribune)

On a recent trip to the city for a Cubs game, VanderSchaaf took his son to his childhood Portillo’s on Butterfield Road in Downers Grove. The chocolate cake shake he ordered was solid. But he didn’t think his bacon cheeseburger was quite the same: The bacon was “more like a bacon you get at a fast-food restaurant,” stringy instead of thick and crispy.

“Anecdotally, everybody that I’ve spoken with in the Chicagoland area has noticed or mentioned some decrement in the quality of Portillo’s food,” VanderSchaaf said.

Last month, Susan and Derrick Wafford, on vacation from Richmond, Virginia, found themselves at the River North Portillo’s on their first day in town, right after stopping by The Bean. Susan had a Chicago-style hot dog and Derrick had Italian beef. Derrick got his sandwich with sweet peppers. (“It was soggy, so it must’ve been dipped,” he told the Tribune when pressed.)

The Waffords were impressed. The price was right, they said, and the food was good. They’d be happy to stop by a Portillo’s if the company opened up in Virginia, they said.

But Plainfield native Jim Williams said he’d come to the Portillo’s at Clark and Ontario for lunch only because he works nearby.

“It was good,” Williams said, “when Dick owned it.”

‘I don’t have to sell’

In the late 1980’s, when asked why he didn’t want to get mixed up with franchises, Dick Portillo told the Tribune that “sometimes you get too big.”

But eventually, the time came. Ten years ago, Portillo said it was time for him to slow down. He wouldn’t sell to just anyone, though. “If I don’t feel that the culture would be carried on, I don’t have to sell,” Portillo told the Tribune at the time. “Business is good.”

Berkshire, though, shared Portillo’s vision for national growth.

Portillo's founder Dick Portillo, who sold the restaurant chain, in the Portillo's restaurant in Downers Grove on May 20, 2015.

Terrence Antonio James / Chicago Tribune

Portillo’s founder Dick Portillo, who sold the restaurant chain, in the Portillo’s restaurant in Downers Grove on May 20, 2015.

Last year, nearly a decade after the Berkshire sale, Portillo’s was ranked by food service research firm Technomic as the 83rd-largest restaurant brand in the country by total sales, right behind White Castle, Habit Burger and MOD Pizza. The growth the company hopes to achieve would give it the kind of reach currently held by brands like 31st-ranked Culver’s, which started as a regional chain in Wisconsin but has spawned close to 1,000 locations as far west as Idaho and east as Florida.

“We love our Chicago business, but the Midwest is not where people are building for growth,” Osanloo said at the investor conference. Outside the Midwest, Portillo’s already has locations in California, Arizona, Texas and Florida and has recently focused on opening restaurants in the Sun Belt. It hopes to grow its number of restaurants by 12% to 15% every year.

The company hopes to go farther West next, perhaps to Denver or Las Vegas, Osanloo told the Tribune. The company declined to make the executive available for an interview, but Osanloo pledged, in written responses, to bring “the same Portillo’s experience that Chicagoans know and love to communities across the country.”

In general, Portillo’s customers are still quite happy with the chain. In a survey by market research firm Datassential, 76% of Portillo’s customers said their last visit to a Portillo’s restaurant was “excellent” or “very good,” a percentage that research manager Huy Do described as “fairly high.” In comparison, Subway came in just short of 60%.

Katherine, Elliot and Amy Davies sit down for lunch at Portillo's on Tuesday, Sept. 24, 2024, in River North. (Brian Cassella/Chicago Tribune)
Katherine, Elliot and Amy Davies sit down for lunch at Portillo’s in River North on Sept. 24, 2024. (Brian Cassella/Chicago Tribune)

In a written response to a Tribune question about the chain’s service and quality, Osanloo said Portillo’s has introduced new items such as made-to-order salads. And he said Portillo’s was “keeping our classics the same.”

“It’s kind of hard to quantify whether the sandwiches taste better or worse post-private equity,” said Justin Flores of the Private Equity Stakeholder Project, a nonprofit watchdog critical of the private equity industry. “Typically, it’s very difficult to quickly increase profits without risking quality.”

Steven Kaplan, an economist at the University of Chicago’s Booth School of Business, described the idea that private equity degrades quality as “completely silly.”

“Their incentive is to grow the business and make it better,” Kaplan said. “And the things you read about where they didn’t do that are mistakes.”

While bacon quality might be subjective, the company’s stock price isn’t. It’s fallen significantly since Berkshire took the company public three years ago, from $29 to around $13 a share.

Earlier this summer, Engaged Capital announced it had taken a nearly 10% stake in the company. Before taking on Portillo’s, Engaged took on an activist campaign at Shake Shack, where shares are up nearly 60% since the company settled with the investor.

In Securities and Exchange Commission filings, Engaged said changes to Portillo’s board of directors are on the table, as is the potential sale of the company.

But people familiar with the investors’ plans said the tenor of Engaged’s conversations with Portillo’s ownership had been productive.

The investor has urged Portillo’s to open smaller stores and to move away from its traditional practice of owning the buildings its restaurants are housed in, the people said. The activist wants the company to increase its brand awareness outside of the Chicago area, perhaps by opening up restaurants in high-visibility locations like airports.

Portillo’s seems to be listening to the activists. They ought to, said Harry Kraemer, of Northwestern’s Kellogg School of Management: “If you’re the CEO, and the stock’s going down, and activists own 10% of your stock, you’ve got a lot to be concerned about,” he said. “They can change their mind on you anytime, because you’re not performing.”

Customers order with kiosks at Portillo's on Tuesday, Sept. 24, 2024, in River North. (Brian Cassella/Chicago Tribune)
Customers order with kiosks at Portillo’s in River North on Sept. 24, 2024. (Brian Cassella/Chicago Tribune)

Last month, Osanloo said the company planned to roll out kiosks at all of its stores within the year; Engaged had previously recommended the company use kiosks, people familiar said. The company also plans to test a store model 40% smaller than a typical Portillo’s that will be expected to deliver the same sales volumes.

Osanloo is aware of the gulf between Portillo’s restaurants in the Chicago area and elsewhere: In Chicago, the company’s average sales per restaurant are around $11.3 million, sky-high numbers that are industry outliers and, the CEO has said, “frankly not replicable.”

Still, the company said it’s found a hearty appetite in its new markets. “We joke all the time,” Chief Financial Officer Michelle Hook said in September, “that it doesn’t surprise us that Texans love beef and bread.”

The chain’s total revenue was up to nearly $182 million last quarter, 7.5% over the same time last year, though most of that growth came from new restaurant openings. On a store-by-store basis, sales were down by just over half a percent.

“Anytime you’re trying to expand in a market that is not growing, of course it’s harder,” said David Henkes, senior principal at Technomic. Still, he thinks Portillo’s big plans are “certainly possible.”

Union votes

Right now, Portillo’s, which boasts that it has never had to close a restaurant, employs about 8,500 people across its restaurants, food preparation facilities and Oak Brook headquarters. The company wouldn’t say exactly how much it expects to increase its headcount to staff its national expansion.

A year and a half ago, workers at one of the company’s food-preparation facilities in suburban Addison, just a few miles north of the company’s ancestral home in Villa Park, voted to unionize with the International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers Union. The food prep employees, who work preparing the Italian beef and sweet peppers sold by local Portillo’s restaurants, had become frustrated during the COVID-19 pandemic, when they said understaffing doubled their workloads without additional pay.

They were the first Portillo’s workers, as far as their union representatives were aware, to ever unionize.

An employee prepares Italian beef sandwiches at Portillo's on Tuesday, Sept. 24, 2024, in River North. (Brian Cassella/Chicago Tribune)
An employee prepares Italian beef sandwiches at Portillo’s in River North on Sept. 24, 2024. (Brian Cassella/Chicago Tribune)

The workers voted 28-20 to join the Iron Workers last year, but Portillo’s quickly appealed the results, accusing union organizers of telling workers they could qualify for green cards or citizenship in exchange for “yes” votes. Over the last year and a half, the case has wound its way through the NLRB’s case system, the agency upholding the election results three separate times.

Earlier this spring, workers at a second food-preparation facility in Aurora also voted to unionize; the company appealed those results too, again claiming the union illegally promised immigration benefits to workers. In August, the NLRB upheld the results of that election, recommending Portillo’s objections “be overruled in their entirety”; Portillo’s appealed that decision too.

And earlier this summer, the labor board alleged Portillo’s had illegally threatened workers for their union activity in Addison, including by saying they could lose their jobs.

The hot dog chain responded, in legal filings, by denying the allegations and arguing that the structure of the agency itself — the enforcement body for labor law in the U.S. — is unconstitutional. In doing so Portillo’s joined a growing list of companies making similar arguments, including SpaceX and Amazon; experts position the constitutional challenges within a broader and growing universe of right-wing legal threats to the administrative state as a whole.

Portillo’s said, in a statement, that it would “consider all relevant legal defenses available” to it, “including those related to the scope of authority exercised by regulatory agencies.”

“These appeals are not tremendously costly,” Charlotte Garden, a professor of labor and constitutional law at the University of Minnesota’s law school, said of Portillo’s repeated attempts to get the union election results tossed out. Many employers make the calculated decision to pay their lawyers rather than bargain with a union, Garden said, particularly when they have many locations.

“They are afraid of the demonstration effect,” she said: If workers in one location bargain a contract and improve their wages or working conditions, at a greater cost to the company, what’s to stop the staff at another from doing the same?

Osanloo didn’t directly respond to questions about the chain’s labor practices or his belief in the constitutionality of the NLRB, instead saying the company was increasing wages, offering competitive compensation and developing “programs that set employees up for success and teach them how to be leaders and take charge of their careers.”

Portillo’s, the CEO said, has high retention rates because of how it supports its staff with benefits like flexible scheduling and mental health support. Eight or nine out of every 10 Portillo’s general managers came up through the company, he said.

When crowdfunder Eric VanderSchaaf was last back in Chicago, he and a friend opted for family-owned Buona Beef instead of Portillo’s after church on Sunday. “I got the Chicago dog with everything on it, and it was dynamite,” VanderSchaaf said.

VanderSchaaf has always wanted to have Portillo’s wherever he’s lived, and he said he’s not opposed to the company expanding.

But if expansion means the Portillo’s he loves keeps changing, he said, he wouldn’t mind not being able to walk down the street in Austin for a bacon cheeseburger.

“I would prefer to just have to go back to Chicago,” he said.

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