A quarter of its stores have underperforming margins.

At the end of 2023, The ONE Group Hospitality performed an in-depth review of its Kona Grill portfolio. The results didn’t bring back welcomed news.

The company found that about a quarter of the 24 restaurants it acquired years ago have underperforming margins due to challenging real estate. The difference between Kona’s core base and these lower-tiered locations continued in Q1 as the rest of the system saw “significantly healthier” margins, according to CEO Manny Hilario. The plan is to address these locations on a case-by-case basis.

The ONE Group agreed to acquire Kona out of bankruptcy for $25 million in September 2019. At the time, the U.S. footprint stood at 24, down from 40 at year-end 2018.

The unit count is now at 27. Under The ONE Group’s watch, three Kona stores with updated prototypes have opened in Columbus, Ohio; Riverton, Utah; and Phoenix. Hilario said these newer stores have met margin expectations and have a favorable labor model.

The company believes the brand can reach 200 restaurants nationwide. The benchmark for new Kona stores is a $5 million AUV and 17 percent restaurant-level margin.

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To improve restaurant operating profit, The ONE Group is working to better manage menu and product mix, enhance purchasing efficiencies for food and operating supplies, maximize productivity through smart scheduling practices, evaluate all third-party vendor relationships, and reduce travel costs. Hilario said these measures took hold during Q1, which helped the company maintain margins. He’s confident in the momentum continuing for the rest of 2024.

“I would say, in general, the Kona Grill brand, we do have core restaurants, which we kind of refer to from the acquisition around 18 of the restaurants, have an average margin of about 13 percent plus,” Hilario said during the ONE Group’s Q1 earnings call. “And then we have about six Konas in there that frankly, the real estate is not what we would do today. So I think really, the margin fix with Kona Grill is to continue opening those new restaurants. I think the core ones are still in solid margins for the casual sector. And then we got to work out the plan for these other six restaurants and get them to a better place. So that’s really how we’re targeting that.”

Kona’s top line sales are going through a tough stretch too. Same-store sales decreased 9.7 percent in Q1. That was caused by a 14 percent drop in traffic, offset by average check growth of 4.5 percent and pricing up 7 percent.

Although consumers are extremely wary about prices in today’s time, Hilario said Kona isn’t seeing much trade-down.

“I would say that the consumer actually has not traded down as much as I would have expected,” the CEO said. “But the reality of it is they still are gravitating towards, as I mentioned earlier, the $3, $6, $9 price points on the Happy Hour. And then we also now feature $39 Steak Night America at Kona Grill. So, I do think that right now, value is king and that the consumer will gravitate towards that, except as I mentioned earlier, higher-end consumer still is going for the Wagyu and still ordering the premium product. But the other consumers are definitely trading to the value propositions.”

Sister concept STK isn’t doing too much better. Comps for the steakhouse were down 6.8 percent in Q1.

However, growth is still on the horizon for both chains. So far in 2024, The ONE Group has opened one company-owned STK in Washington, D.C. For the rest of the fiscal year, the company plans to open five to seven new venues, consisting of one to three company-owned STKs, two company-owned Konas, and one to two managed or licensed units. Also, following the completed acquisition of Benihana, The ONE Group has eyes on two company-owned Benihana restaurants and one company-owned RA Sushi.

There are four corporate restaurants under construction in the following cities: an STK restaurant in Aventura, Florida at the Aventura Mall; a Salt Water Social, a high-end seafood vibe dining restaurant located in Denver in the Cherry Creek neighborhood; a Kona in Tigard, Oregon at the Bridgeport Village; and a RA Sushi restaurant in Plantation, Florida.

Historically, The ONE Group plans three to six months for permitting, but that’s grown to nine months.

“Generally, new units and unit development, the one thing I will tell you is that when we open new stores, there’s a lot of excitement for new stores,” Hilario said. “So that’s the upside on development right now is when we open great locations like we just did in Washington, D.C., we see an incredible amount of business coming to us because I think the consumer right now, they’re looking for something different and experiential.”

The ONE Group’s consolidated restaurant operating profit was 16.1 percent in Q1 versus 16.4 percent last year. Total revenues were $85 million, increasing 3 percent from $82.6 million for the same quarter last year. The increase was primarily attributable to the opening of six restaurants since July 2023. 

Chain Restaurants, Feature, Finance, Kona Grill, STK