Kona Grill's Comeback Starts at the Bar

Can a new owner revitalize the polished chain?

November 2019 Danny Klein

As Kona Grill spiraled into bankruptcy, there was a seldom-mentioned reality taking place behind the curtain. The polished chain was operating, in many ways, as two distinct portfolios of restaurants. About half were profitable. The other crop dragged Kona Grill quickly into Chapter 11 in May, when it declared assets of $53.6 million and debts of $74 million, and had just $1.2 million cash on hand.

Those 24 “high-performing domestic restaurants,” are what The One Group got in early October for $25 million in cash and the assumption of working capital liabilities of about $11 million.

During Kona Grill’s restructuring, the unprofitable locations shuttered. Manny Hilario, president and chief executive officer of The One Group, said his company was left with something that doesn’t quite match the typical reclamation-project narrative.

“We don't have a location that I would say is a problem location right now in the portfolio,” he said. “So, I think that's part of what happens in the bankruptcy process—we do get an opportunity to clean up the portfolio to where you want it to be. We have, frankly, the portfolio that we wanted …”

The One Group is known for high-end steakhouse chain STK, which is red-hot from a performance perspective. It generated domestic same-store sales gains of 9.3 percent in the third quarter that ended September 30, year-over-year. Company revenue jumped 10.5 percent to $22.1 million from $20 million and adjusted EBITDA increased 30 percent to $2.6 million versus $2 million in 2018.

The One Group also expects STK’s U.S. comps to grow 6–8 percent for the remainder of the fiscal calendar, even with a robust Q4 2018 result of 15 percent to lap. Six to eight openings are on deck for 2020, including five to six STKs and one to two F&B venues. Five locations are expected to open before February.

Hilario said STK’s success is something that will benefit Kona Grill, and the two brands complement one another from a real estate angle. Kona Grill is located mostly in small and middle markets that would not fit STK’s urban-centric approach.

“Differentiations have been very effective for STK within the upscale dining segment, resulting in STK's sustained same-store sales out-performance. We see a similar opportunity for Kona Grill with polished casual,” he said.

There are a couple of ways the company pictures this unfolding. One is to create a more upbeat ambiance at Kona Grill with new music and “other touchpoints that will foster greater vitality within the restaurants,” Hilario said. That’s something STK and its “Vibe Dining” element excel at.

The second is to elevate Kona Grill’s bar experience to a high-quality, high-energy happy hour by revamping its beverage program. The ultimate goal being to extend visits into the dinner occasion. Like STK, this will stem from an enhanced menu, product innovation, and signature items.

The One Group

STK's high-end steakhouse is all about social gatherings, with a disc jockey at every location.

“These efforts will create more brand buzz, more satisfied and loyal guests, and should ultimately yield even higher sales volume,” Hilario said. “We will be communicating these enhancements with consistent messaging through an influencer based social media strategy that sells the new Kona Grill story.”

Influencer-driven marketing is another staple of STK’s success, often considered a celebrity hotpot in its eight markets (Atlanta, Chicago, Las Vegas, LA, Nashville, NYC, San Diego, and Orlando). The concept melds a modern steakhouse with a chic lounge experience. It emphasizes the social experience and features a disc jockey at every location, “destined to encourage guests to interact and mingle,” the company’s website notes.

Kona Grill unveiled a more robust happy hour experience last November, extending hours from 2 to 7 p.m. during the week, and 9 p.m. to close on Saturdays. The deals ran all day Sunday, too. Kona Grill introduced 20 craft cocktails and wine (for $5) and brought back margaritas.

It wasn’t so much a pivot down a new path as it was a refresher course on how Kona Grill rose to prominence. The chain doubled in size from 23 restaurants in 2012 to 46 by 2017. From 2012–2015, with Berke Bakay at the helm, Kona Grill’s stock more than quadrupled.

But by the time the brand neared bankruptcy, its same-store sales had dropped 12.3 percent in 2018 after declining 5.9 percent in 2017. This after six consecutive years of comparable increases.

Revenue fell 12.4 percent in the fiscal year that ended December 31, year-over-year. The company also swung a net loss of $31.698 million in 2018 compared to $23.432 million in the previous year. Average-unit volumes decreased to $3.492 million from $4.119 million and EBITDA was negative $15.9 million.

It was a precipitous drop and sent leadership searching for Kona Grill’s core equities. Happy hour sat atop that target.

Last fall, the company said it was set on becoming “America’s best happy hour,” and wanted to reignite its former standing as a lively, patio-centric experience that carried traffic from happy hour into multiple occasions—just as Hilario referenced.

“… the board’s directive is to revitalize the Kona Grill brand with what has made us successful over the years,” then-CEO Marcus Jundt said. “These areas include becoming once again America’s best happy hour with items that provide a great value proposition without significantly impacting gross margin.”

The early goal—another STK wheelhouse trait—elevate its menu so that every plate or cocktail is “Instagram level.”

“Really now, it’s just taking that happy hour and taking those customers who are in the restaurant between 6 and 7 [p.m.] and get them to stay another two hours to go through dinner.” — Manny Hilario, The One Group CEO.

Hilario said Kona Grill’s efforts worked, albeit to inconsistent results. Again, though, that was tied more to under-performing stores than to an overall directional issue. The problem for Kona Grill, however, was that it wasn’t a few stores here and there missing the mark—it was half the system.

“The bar has always been a strength of the brand. And I think that's one of the areas where we can really make a big difference,” Hilario said. “I do think that happy-hour program that was launched late last year has really taken hold. I think happy-hour business is back in the brand.”

Now, it comes down to converting happy-hour momentum into dining-room transactions, and a more loyal, repeat customer that seeks the brand instead of deals.

Kona Grill recently launched a “Margarita Heaven” program that features a full line of different flavored options. The One Group brought in a skinny margarita and watermelon offering. “You'll continue to see us putting a lot of emphasis behind that part of the program, really bringing excitement to the bar,” he said.

How much runway is there, exactly? Right now, Kona Grill mixes about 30 percent of its sales from the bar. Hilario said they can get to 35 percent. “We’re excited about that because, as you know, that’s a very profitable business,” he said. “And not only will help the revenue line, but will significantly enhance the margins by driving the revenues in the bar.”

Kona Grill

Kona Grill can still groom some of its menu presentation to become a bit more elevated.

At STK, the strategy has been to develop a drink program that complements its happy hour, and to have a core menu that brings in seasonal offerings two to three times a year. The idea there is to introduce guests to premium drinks, which, in turn, brings them back for “vibe dining” across dayparts and creates multiple tiers of the customer experience.

Hilario added dinner is really the critical component of Kona Grill’s business model where The One Group “needs to win the battle.” He thinks the product is already there, they just need to “groom some of the menu and some of the presentations to make it a little bit more elevated.” Kona Grill rolled out a massive 25-item menu revamp last year.

“Really now, it’s just taking that happy hour and taking those customers who are in the restaurant between 6 and 7 [p.m.] and get them to stay another two hours to go through dinner,” Hilario said.

To make the conversion work, Kona Grill can adjust happy-hour offerings, everything from portion size to pricing, Hilario said, to ensure it’s helping that customer along. Look at happy hour more as a transitional piece than an end-all result.

On the back-end, The One Group expects to improve restaurant margins by leveraging higher sales volumes in profitable stores and apply its operating strength to cost-saving initiatives, like labor optimization and food preparation scheduling.

Hilario added the company would lower employee turnover to “ensure a better and consistent guest experience” and secure more favorable service contracts by combining Kona Grill and STK’s purchasing power.

In just the past few weeks, The One Group completed the integration of back-office systems, accounting, payroll, and HR, so that Kona Grill could run on its IT platforms.

However, the chain shouldn’t be fully integrated until fall 2020 or so.

Hilario also noted that The One Group has no intentions to open any Kona Grills in the near-term but could look post-integration at the brand as a long-term growth vehicle “through disciplined developments, complementing STK.”

The One Group expects Kona Grill to contributed about $23 million–$24 million in revenue in Q4 and roughly $100 million in annualized food and beverage sales next year.