Inflation: ‘We purposefully invested in the consumer,’ Portillo’s CEO says

Portillo’s CEO Michael Osanloo joins Yahoo Finance Live to discuss company earnings, navigating commodity inflation, the state of the labor market, and the outlook for profit growth.

Video transcript

BRAD SMITH: Portillo's closes out its first full year as a publicly traded company with mixed fourth quarter results, all while navigating commodity inflation and higher labor expenses. Here to discuss Portillo's sales, trends, and path for growth, we've got the CEO, Michael Osanloo, who is joining us, along with Yahoo Finance's Brooke DiPalma.

Great to have you here with us back again. Last time we spoke, we were enjoying some very good chocolate cake, which I'm still not sure that we've discovered the secret ingredient of. But we will leave that for another discussion. Walk us through the catalyst for this most recent quarter here and take us into where, going forward from here, you're kind of prioritizing some more growth there.

MICHAEL OSANLOO: Yeah, well, first, thanks for having me, and I will not tell you the secret of our cake. But the catalyst is-- the catalyst for us is that we really do stick to keeping it simple, which is we try to provide amazing quality and value for our guests. We take good care of our frontline team members. They can satisfy our guests. And we create this virtuous cycle where great, happy guests, great, happy team members result in great, happy investors. So we keep it simple-- great food at a great price.

BROOKE DIPALMA: Good morning, Michael. We've heard from so many executives this past quarter who have taken price increases. That includes Dine Brands CEO. And I jusr want to take a listen of what he had to say.

JOHN PEYTON: When you look at how our franchisees raised prices last year, they raised them 7% or so, Applebee's, 10% at IHOP. So we like what they did strategically and that they took about half the cost of inflation in terms of price.

BROOKE DIPALMA: Michael, break down for us what sort of price increases Portillo's has taken to offset inflation, and are you seeing any consumer pushback there?

MICHAEL OSANLOO: Yeah, so we've talked about this publicly. We believe in a price laggard strategy, which is we let everybody else price however they see fit. We price a little bit slowly. We price behind the curve. So we actually price for most of the year below 8%. We were lagging all the inflation metrics. And we purposely invested in the consumer to make sure that the value proposition for a Portillo's meal was outstanding.

That said, we still have to price-- we have a financial responsibility to hit targets, et cetera. So but we just price a little bit more slowly. And that's how we'll continue to do it. I think that this price laggard strategy for us has paid off. As I mentioned in our earnings call yesterday, we're positive traffic, positive sandwich count for 2023 so far. I think that says the consumers are voting with their feet and that great value proposition in a recessionary-like climate really works well.

JULIE HYMAN: Are you seeing people trade down to less expensive menu items at all?

MICHAEL OSANLOO: No, fortunately, we haven't seen a lot of that. We're seeing a little-- just a tiny bit of mixed change. So if-- people might not be attaching things quite as frequently. If they used to get a large fry, they might be getting a small fry. But that's a very, very minor dynamic for us. And as I think you all know, our average ticket is $10 or less. So we're very affordable for the quality of what you're getting.

BROOKE DIPALMA: I know that when I get a chance, I definitely need to add on those cheese fries. I've been eyeing them for quite some time. But earlier this year, Portillo's did face shortages in fries, as well as onions. What sort of shortages are you seeing now? And where do those onion and fry supplies stand now?

MICHAEL OSANLOO: God, I hope you didn't just jinx us, but right now, things look fine. I think we have sufficient capacity of fries and onion rings. Now the cost has gone up significantly, as I'm sure you guys are aware. But right now, knock on wood, we've got plenty of fries and onion rings to satisfy our guests.

BRAD SMITH: In terms--

MICHAEL OSANLOO: And in fact, I'm not [INAUDIBLE] shortages anywhere else in the supply chain. The supply chain has, I think, caught up with from a shortage standpoint. Some prices are inflated, some are coming down. But we discussed this. We expect to see mid-single digit commodity inflation for '23.

BRAD SMITH: You were mentioning some of the sandwiches just a moment ago, Michael. I'm wondering here, in where customers are continuing to buy specific menu items, in the sandwich category, what is perhaps the most recession resilient sandwich that you've seen customers flock to?

MICHAEL OSANLOO: I'll tell you, I think our top three things that we sell-- Italian beef sandwiches are number one. Hot dogs are number two. And French fries are number three. It's consistent across the board. And it's funny. We just opened a restaurant on January 18 in the Colony in outside Dallas, Texas. 70% of the sandwiches sold were Italian beef. I think people were surprised by that. People were wondering, is that sort of a very quirky menu item that only sells in Chicago? But the fine people of Texas seem to like beef and bread.

JULIE HYMAN: Huh, imagine that. That obscure beef and bread combo--

MICHAEL OSANLOO: Yeah, go figure.

JULIE HYMAN: --right? Michael, you talked a little bit about on the call in the statement about commodity inflation still rising in the mid-single digits. You know there's this big disinflation theme, right? So what kind of color can you give us from along the whole cost input chain there as to where you're seeing more pressure, decreasing pressure, et cetera?

MICHAEL OSANLOO: I think, look, inflation, we did not get to the inflationary levels in one quarter, one period. We're not going to deflate in one period and one quarter. So third quarter of '22, we saw 15% inflation. It was 14% inflation in the fourth quarter. It is tapering down. It's not going to be like a light switch goes off. It's more like a dimmer. And there's year over year numbers. We hit-- we saw commodities go up at different periods last year.

So you can imagine to get to mid-single digits, you're going to start relatively high at the beginning of the year, and you're going to slowly come down. And that's assuming that the underlying drivers of inflation don't change a whole lot, which there's labor inflation drives a big chunk of the inflation pressure on the cost of sales. There's also labor shortages. So we kind of need those things to taper off or improve over the course of this year to get back to a more normal inflation number.

BROOKE DIPALMA: And labor is at the forefront, especially at that new Colony opening. People waited an hour and a half for one of your beef dogs and those beef steak sandwiches. Break down for us how exactly you hope to invest in labor to open more stores and what you learned quickly from that store opening.

MICHAEL OSANLOO: So, and just to be-- I'm not trying to be a nit-natter, but they might have waited an hour and a half to order. But when they ordered their food, they typically got their food in 6 to 8 minutes, and it was hot, fresh, and delicious. So that's the feedback we've gotten from our customers at the Colony. It's doing volumes that the restaurant is not meant to do. It's pushing $17 million annualized number for sales. It's not going to-- where it's going to end up. It's going to come back down. It's-- the restaurant simply is not designed to do that much in sales.

So that's a little bit of what happens when we open up with as much buzz as we did. It's super exciting. It's fun, et cetera. But over time, we get to a much more steady routine, and the business performs. At the Colony, we've been blessed. We hired, within two weeks, 120 fantastic people. We hire based on values.

I'm not hiring you because you spent 20 years in the restaurant industry. We hire you because you want to act like you're a family member. You believe in being great. You act with urgency. You want to have fun. And so we hire based on our values. And I think that lets us be true to who we are, but also appeal to people that care about a values-based organization.

JULIE HYMAN: Mm-hmm, and maybe also attract people in what is a very tough labor market, too. Michael, great to catch up with you. Thank you for being here, as well as thanks to our Brooke DiPalma. Portillo's CEO Michael Osanloo, good to catch up with you. Have a great weekend.

MICHAEL OSANLOO: Thank you very much.