Crunchy Spicy Tuna Roll at Kona Grill.

Kona Grill

Despite the negative sales, Kona Grill improved its profitability this past quarter.

Kona Grill's Goal: Become America's Best Happy Hour

Sales slid double digits in the third quarter. But a new leadership team plans to return the polished brand to past success.

Kona Grill wants to become “America’s best happy hour." Getting there is going to take some heavy lifting. The polished 44-unit chain witnessed a same-store sales drop of 14.1 percent in the third quarter, driven primarily by a double-digit decrease in customer traffic. Stacked on the prior-year quarter’s 7.2 percent fall, Kona Grill is riding a 20-plus percent two-year decline of comparable results.

But the brand, which closed two restaurants in the quarter, has a new leadership team set on reigniting the brand’s former standing as a lively, patio-centric experience that carried traffic from happy hour into multiple occasions.

The company’s board of directors announced November 8 that Marcus Jundt and Steven Schussler are taking over as co-CEOs. Jim Kuhn, who was promoted to the role from his COO post in August, said in a statement: “I thoroughly enjoyed my time at Kona Grill working with the team and wish the Company all the best in the future.”

Jundt is one of the founders of Kona Grill, and previously served as CEO from 2006–2009. Schussler founded several recognizable brands, including Rainforest Café, T-Rex Café, Yak & Yet, and The Boathouse. Jundt and Schussler are current directors of Kona Grill.

The turnaround plan at Kona Grill is a straightforward one: “… the board’s directive is to revitalize the Kona Grill brand with what has made us successful over the years,” 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.” Kona Grill debuted 1998 and is headquartered in Scottsdale, Arizona.

Jundt said Kona Grill would look to elevate its menu so that every plate or cocktail is “Instagram level.”

“We will also return some of the recipes for long time favorite items back to the recipe that our guests know and love,” he said. “These items are pillars of what made Kona Grill successful in the past and what we believe are the necessary elements to get guests return to us over and over again.”

In June, Kona Grill overhauled its menu to the tune of more than 25 new items. “We were stuck in a sea of sameness and weren’t leading with ideas. It was time to make a change,” Kuhn told FSR at the time. Kona Grill wanted to take the menu more global, and elevate the offerings—new and old.

Kona Grill rolled out another menu refresh October 24 that Jundt said, “expanded the global appeal of our brand with unique items from our scratch kitchen. We believe that constant innovation with our menu will help drive guest trial and frequency.”

The introduction also added some old favorites to the happy hour menu. Christi Hing, Kona Grill’s CFO, said the brand would continue updating its happy hour offerings to further boost the value proposition.

Some current happy hours menu selections include various sushi rolls, like a California Roll and Fiery Shrimp Roll under the “Delights” section, and “Essentials,” such as fish tacos, margherita flatbread, chicken satay, and avocado egg rolls. There’s also a “Fresh Favorites” category that features higher-end items such as the Kona Steakhouse Roll, Hawaiian Tuna Crunch Roll, and Kona Calamari. There’s also a wide selection of cocktails, sake, beer, and wines by the glass.

To become “America’s best happy hour,” Jundt said Kona Grill would take significant price reductions, and reprint its menu. “The presentation of the food will be different, too, with the idea of making it more of a wild impact when the customer sees it,” he said.

Jundt added that Kona Grill was historically known as a starter bar, where guests came to get their night going. “In fact, if you look at some of the units when they had fabulous numbers, you almost had a spillover from the patio and the Happy Hour areas of the restaurant into the dining. So as Happy Hours declined, I think, it’s also affected the dining experience. I think if we can rejuvenate the Happy Hour there will be a positive spillover for some of the dining,” he said.

Despite the negative sales, Kona Grill improved its profitability. For the first nine months of 2018, adjusted EBITDA increased 66 percent compared to the same period last year. It improved by $2.3 million to $5.7 million.

This has mainly come from cost-cutting directives. Cost of goods sold were 25.9 percent in the quarter, a 120-basis-point improvement from Q3 2017. Year-to-date, Kona Grill’s cost of goods sold as a percentage of revenues decreased 190 basis points to 25.6 percent compared to 27.5 percent last year. “The decrease is attributed to streamlining recipes and processes to enable better consistency in execution of our menu,” Hing said. “Also a favorable commodity environment and less promotional activity contributed to the year-over-year improvement.”

There are other initiatives working as well. In July, the chain launched its Konavore Rewards Program—a comprehensive platform that rewards users for more frequents visits, and should result in increased loyalty, Jundt said. Additionally, the brand rolled out a mobile app in conjunction with the loyalty program to make it easier to track rewards and redeem points.

“We implemented various marketing efforts, including advertising and media relations support, as well as targeted email and mobile marketing,” Jundt said. “We also launched our new website with a more contemporary design to align with our creative food and drink offerings. We also increased functionality to make it easier to navigate and use on a variety of devices better optimize for search functionality.”