The restaurants have a bigger management pipeline and training teams in place to speed up the new store opening process.
After diligent preparation, The ONE Group Hospitality's pipeline is finally primed to launch an opening every four to six weeks for the foreseeable future, CEO Manny Hilario said.
The performance of recent debuts bodes well for the upcoming pipeline. In January, Kona Grill opened in Columbus, Ohio, marking its first opening since The ONE Group acquired it out of bankruptcy in 2019. That restaurant is earning roughly $100,000 per week, which equates to $5.2 million in annualized AUV. This particular Kona is a redesign of a restaurant that closed in 2019. The upgraded layout—with a smaller kitchen, less space for the sushi bar, enhanced back-of-house technology, a new menu, and a more energetic environment—has experienced more than 30 percent better volume and more favorable margins than the previous iteration.
The second Kona opening came in July in Riverton, Utah. That site is overachieving as well.
"We've done the right things in terms of what we're doing with the brand," Hilario said during the brand's Q2 earnings call. "In terms of Riverton, it's obviously very early. But I would tell you that we opened up the project frankly, with no real marketing. We just opened the doors and we're already at/above system average on the weekly volume for that restaurant."
Also, recently opened STK Steakhouse restaurants are earning $250,000 per week on average, or $13 million in AUV. That's well above its new store sales target of $154,000 per week. Systemwide, STK's AUV is over $16 million.
The ONE Group is scheduled to open eight to 12 restaurants this year. Five have already debuted: The Kona stores in Columbus and Riverton; two REEF Kitchen units; and an STK in Scottsdale, Arizona. One to two Konas are expected to open in Phoenix and Tigard, Oregon. For STK, three to four more stores are expected for Charlotte, North Carolina; Washington, D.C.; Salt Lake City; and Boston. Another managed or licensed STK is also anticipated before the end of 2023. Over the long term, The ONE Group views its addressable market as 200 STK restaurants globally and 200 Kona Grills domestically with ROIs of between 40 percent and 50 percent.
Looking in the years ahead, Hilario said the company has 18 signed leases, and 12 of those are under some level of design and construction.
"Everything that we see right now is that the new restaurant volumes have been consistently positive and above model," Hilario said. "Again, you always have to knock on wood when you talk about those things, but we've been above model in the locations that we have opened. So you can't always anticipate that will go forever because that's not a reasonable expectation. But if you look at the quality of the pipeline, these are all super high-quality sites."
CFO Tyler Loy acknowledged that The ONE Group is moving forward with its quicker restaurant opening cadence with a tough permitting environment. He noted there's "a lot of competition with lots of big projects in every big city" and that permitting/licensing groups don't appear to be organized. Because of this, some of The ONE Group's stores have been in permitting for nine months. In some cases, they are approaching a year in the process.
But there's a strategy in place to overcome these obstacles.
"Obviously, our restaurants are big, have a lot of mechanical [things], a lot of complexity in the build-out," Loy said. "So it does take a little bit of time to clear it out to the governmental agencies. But I would say right now, the process here is that we have a tremendous amount of real estate that we signed on, and it's a little bit like priming a pump. We've kind of timed it up with locations where that permitting time is no longer an issue, if you will, because we have a lot of backlog now in terms of available real estate to build."
With the permitting box checked, the next chess piece is getting training teams in and out of new stores in a timely fashion. So as part of its new growth strategy, the ONE Group wants to open new restaurants with a minimum of two managers who've already been in the system. That's why the company bolstered its leadership pipeline with 15-25 extra managers who will train in existing stores until they're ready to open a new location. The company also put together a training team of 25-30 people, comprising its best employees.
CFO Tyler Loy cited the headwind of training new managers and refilling spots left open by top-notch employees—especially since fine dining requires a high level of execution—but he added that guest satisfaction hasn't wavered in the past few months.
"The quality of operations and our feedback from consumers was extremely positive," CFO Tyler Loy said. "And so we know that we're doing the growth and getting ready for that growth and we're still creating great experiences in the existing restaurants. So frankly, that's really good for the long term when you're able to work on experience and get yourself ready for the growth."
These labor investments, while necessary, have impacted store-level margins, which are 15.7 percent year-to-date.
In terms of top-line growth, both chains were challenged by comparisons to last year's post-Omicron boom and greater-than-anticipated macroeconomic pressures. Kona's same-store sales dropped 1.5 percent while STK's decreased 6.8 percent. Still, the concepts remain in better shape than their fine-dining peers. On a consolidated basis, comps grew 46.5 percent in the second quarter compared to four years ago. Same-store sales accelerated throughout Q2 and into the back half of 2023.
To deliver positive same-store sales and increased margins, The ONE Group will focus on driving the in-restaurant experience by upselling premium menu items and high-margin add-ons; investing in digital marketing by promoting value offers; continuing to invest in off-premises, which continues to grow on a dollar and percentage basis; adding more price increases to catch up to the industry; committing to its new development pace; and rightsizing labor and other operating costs. Additionally, the company has launched initiatives to reduce costs that don't impact sales, like optimization of paper supplies, credit card processing fees, and various outside services.
Through these strategies, The ONE Group anticipates the margin to finish 2023 in the 17 percent range.
There are 25 STK restaurants in the U.S., Europe and the Middle East and 26 Konas domestically.