All right, we're good to go. Hello, everyone. My name is Jim Salera. I cover restaurants at Stephens. With us today is ONE Group Hospitality CEO Manny Hilario and CFO Tyler Loy. Thank you, guys, both for joining us, and thank you, ICR, for putting on this event and for everybody in the room for attending. Manny, I wanted to start off with a quick overview of the business because there's been some changes since the last time we were here at ICR last year. Early last year, you acquired Benihana and RA Sushi, added a significant amount of sales to your business. What have you learned from your ownership of these assets so far, and how do you think about the brand's positioning as we move into 2025?
Thanks. Thanks, everyone. Thanks, ICR, for inviting us to be here this year. We've learned a lot, but probably the thing that we knew was that the brand, meaning Benihana, is super iconic. So we just kind of added another great iconic brand to our portfolio. We've also learned about the potential of the brand. Obviously, Benihana does really well with celebrations, birthdays, anniversaries. I think probably our biggest learning so far since we've picked it up is that some of the promotions and some of the brand product innovation that we've done brings people in. So we think there's a tremendous amount of opportunity to create frequency with the consumer and not only bring people in for their anniversaries and birthdays, but actually make them a Monday through Friday regular consumer with the brand. So I think that's probably our biggest learning from it.
I think also our biggest learning is that there's a tremendous amount of upside. So I think all the things that we're working on with product innovation and just working on the facilities, making it more contemporary and just refreshing a little bit, the brand really works with the consumer. So we feel really good about the future for that Benihana brand.
Great.
Sushi, on the other hand, is another complementary brand to our grill concept. So I think that we will continue promoting and driving that brand forward as well.
How should we think about Benihana fitting in with your well-known experiential dining that comes from STK and the other components of the portfolio? Does it just expand on that? Does it add some capabilities that you were missing before? How should we think about its position in the portfolio?
Yeah, I think a good question. So they are complementary. So when we worked on acquiring the brand, there was no question that the consumer looked at the two brands as number one and two in the entertainment category of upscale dining. So I think there's a really nice fit with the two brands. And for instance, this year, we're rolling out a combined loyalty program for all brands. So we'll take advantage of our synergy and scale in market to have the consumers share with the two brands. So I think there's a tremendous amount of overlap, and particularly when it comes to the vibe dining category, which is great dining with entertainment. I think the two brands, actually all brands, including Kona Grill, RA, everything that we do are very complementary. So I think it will create a tremendous umbrella once we put our loyalty program in place.
If we think about 2024, there were some challenges across the restaurant industry, significant increase in the amount of promotional spending, value-focused marketing. What changes did you notice among your consumer base, and how should we think about the broader restaurant environment as we move into 2025? Do you continue to expect this very value-centric message, or how should we think about the consumer as we go into the new year?
Yeah, I mean, we learned, particularly with STK, that the consumer wants their brand. So if they're an STK brand follower, they want to stay with your brand even when they have less money to spend. What you need to give them is opportunities to enter price points that allow them to still come to your brand. So what we saw was, and you saw that on our fourth quarter results, which we just reported for sales, is that traffic or actually transactions were up, right? So we know that people are coming in. However, when they're in the brand, they will tend to either have a lower price item on the menu or they will maybe trade dinner for happy hour. So there's a little bit of a trade down on the consumer.
So really, the trick in this environment is to keep frequency, keep the customers engaged with your brand. And I think as the economy backdrop gets better in terms of disposable income, I think we'll see a lot of those guests going back to more regular kind of spending habits in a restaurant.
How do we think about, for a portfolio of brands such as yours that really focuses on the experiential component of dining, how do you balance that value-centric offering or still having value while not compromising on premium experience and what guests come to expect from your restaurants?
I mean, I think our trick, or I would say our strategy, more than really a trick, but our strategy is to really have levels of pricing on the menu. So if you look at all our brands, we tend to always have a very favorable entry price point to the brand in terms of, for instance, in steaks, we have a $50 entry price point for great steaks. So a premium steak or Benihana, we have a $39 menu in the bistro. So keeping those prices in a range that is affordable to the consumer keeps them interested in the brands and keeps them away from switching to other brands. Because if you look at the environment today, everybody is promoting really very low-priced items. And so that is out there in the environment. So we have to keep our guests engaged with the brand by making it affordable.
In terms of not compromising the experience, it's really important to work the cost structure, so we spend a tremendous amount of time taking cost out of our business model, and also, one of the things that we got with the Benihana acquisition was a tremendous amount of buying power, so we're able to leverage that into keeping our cost structure in a good place, so we're able to invest those savings from our cost structure into the experience so that we're not compromising what the guest gets. It's very important that during the tougher economic cycles, that you don't start going from butter to margarine because the moment you start doing that, then your guest really knows that you are playing games with them in terms of experience.
It's really important that we keep our brands on track with what they do and challenge ourselves internally to do it for a better cost equation.
We'll touch on the margin side in a minute, but I wanted to go back to something you had mentioned about consumer loyalty and that they stick with the brands, but they shop a little bit differently. If I remember correctly, MYX was a headwind in 2024. How do we think about getting the consumer to revert to a normalized buying behavior if they're still coming to the restaurants, but kind of getting them to spend on that extra appetizer or buy that second drink?
Yeah, I mean, in our case, we are believers in innovation. I think having continuous innovation on your menu and always providing interesting items keeps the consumer engaged with the brand. So I think that would change promotional windows four to five times a year where we get an opportunity to bring in new products. So I think that keeps the guest interested. And I think the secret weapon in the environment is really digital. So if you look at our marketing, keeping everyone engaged with their phones and other platforms is super critical. So always getting out there new messaging on it on digital is super critical and making that messaging interesting. Really, that's the key ingredient on digital is to utilize that digital platform to communicate with the guests and really let them know that you're an innovation-driven company. So we do a lot of that.
And then, by the way, that's been one of the things that we've done with Benihana that's been very successful is updating the digital materials and really telling the story of the brand to be more than just a birthday celebration. So we've been spending a lot of time putting in messaging around the quality of the product and just maybe the more day-to-day opportunities that you have within the brand. So digital is super critical in terms of once the, I would say, the pressures with the economy lift a little bit. I think that that will be critical to get the messaging out there about our great products.
And I think one thing you mentioned earlier that is impressive even with some traffic headwinds, in 2024, you saw restaurant-level margins increase. Is it safe to say that with traffic coming back, presumably in 2025, there's an opportunity to further expand restaurant-level margins? And maybe if you could just kind of walk us through some of the levers that led to the strong results on the margin side.
Yeah, I mean, again, I think that the flexibility with us is that we're not dependent on one single product. So even if you see our menu or STK, we utilize other products to drive enthusiasm of the brand. For instance, pasta has been a really good component of the STK business now for a couple of years, or even utilizing fish and other proteins, which are maybe lower cost than beef at times. So we utilize our PMIX as a good way of keeping the cost structure in line and managing through the ups and downs on the commodity side. So I think that's really critical. The size of the new company has been instrumental in going to some of our suppliers and getting better costs across all brands. Also, distribution costs have come down. So we've worked all that.
Really, having the best people in your supply chain team really helps. We've souped up our supply chain team and make sure that we have some of the better talent in it with history and experience in all the proteins and all the products that we have. Actively working that and then just frankly having a culture internally that we challenge ourselves to have the best cost structure because ultimately we know that having cost advantage and still being able to drive the experience, once we get more traffic, we'll just continue driving through better margins. Obviously, restaurants is a volume business. The more volume you drive through, margins go up. I think that keeping our traffic positions solid and then ultimately people trading up a little bit will significantly improve the margins.
I think our outlook is that we'll continue growing margins for the next two to three years. I think our guidance for the year was around 16.5%-17% margins. We'll definitely be on target with that. I think we'll continue growing the margins from there. Anything on the margin you want to add, Tyler?
No, I think you touched on a lot of it and just leveraging that innovation pipeline to take advantage of the best commodity prices available to us. And then even before the acquisition, we were really focusing kind of about this time last year on initiatives within the base business as well. So looking at a lot of the operating costs, really to Manny's point, just really challenging ourselves too in a tough environment, like how do we get the margin profile to be consistent without taking anything away from the guest experience?
Yeah, I would say another thing that we do that helps margins that's not that obvious to someone looking to the companies, for instance, our beverage partners. We have fantastic relationships with all our partners in the business. And so it may not be price concessions or marketing concessions, but we get a tremendous amount of research and we're tapping into the resources of really big partners. So that keeps our G&A structure in check because we utilize their resources to help us do research. So we do a tremendous amount of consumer research and we utilize our consumer research on things like beverages. And that's one of the reasons our beverage program tends to be super cool is because we leverage them and we challenge them to be partners in that process. So there's a lot of ways to drive efficiency and cost.
And a lot of times it's just piggybacking on the infrastructure of very sophisticated partners. I mean, Diageo and some of these other companies have a tremendous amount of resources that we get to work for us. And just having great relationships with them really pays off on your cost structure.
If I think about you guys both mentioned commodity prices, and if I think about that component of the cost structure, obviously more scale, you get benefits and procurement on the commodity side. What are you just thinking about commodity inflation for the next 12 months? And is there enough opportunity to get better procurement costs that you don't need to look at pricing or would you consider pricing if commodity inflation is kind of at or above whatever? Any comments on that dynamic?
Yeah, so more recently we've seen low single-digit commodity inflation. I think we anticipate moderate, pretty moderate commodity inflation going forward. In terms of pricing, I mean, because we've seen low inflation, we've taken enough pricing already in our last pricing action to be able to offset what we anticipate here for 2025. So regarding specific commodities for STK, we've negotiated beef. We've negotiated contracts for beef. For Benihana, we're actually at market on beef, which we feel fine about. And then relative to seafood, we've negotiated pricing for across the entire portfolio. So I think in general, we feel pretty comfortable with the outlook for commodities. But obviously, we'll play it by ear as we go also.
Yeah, I think the big advantage for us this year is that frozen seafood, for instance, is a big category for all the brands that we have. So we've been able to parlay larger purchases on those commodities to much better pricing. So although there'll be some inflation, I think just the scale of the supply chain will help us realize significant savings in a lot of our commodities right now.
Maybe shifting gears to the development pipeline. How should we think about the unit growth potential at the various brands within your portfolio? And you've talked about particularly with Benihana franchise opportunity. How should we think about the mix moving forward between company-owned and franchise stores?
Yeah, I mean, I think actually one of the things you started off this dialogue today was about what we've learned with the acquisition of Benihana. I think one of the things that's been really interesting is that having, we already were very liked tenants by our landlords and partners. Adding another powerful iconic brand like Benihana really made us very attractive, even more attractive tenants to some of the landlords. So the quality of the real estate that we're now looking at and just the economic terms of our real estate deals, they already were very powerful and good. They're actually getting better now because we have a pretty wide range of brands that we can put in real estate. So our deals have become really good. In terms of the potential for the brands, we think Benihana, we're very early on the growth there.
We think we can have a 400-unit brand with Benihana, and then STK, as we've always said, we're at the 200 number for STK. And STK has become a pretty significant brand with 30 units now and really high AUVs. It's becoming a significant player in the steakhouse. We're on track with that story, and then now we're looking at the grills as an opportunistic place. I think there's, based on the quality of the real estate, there'll be select opportunities for Kona Grill and RA depending on the circumstances there. I would say the primary growth vehicle for us is STK. I think you probably would appreciate that our model delivers ROIs of 50%-60%. It's probably the best ROI profile of any growth concept in restaurants.
So anytime that we're able to skew resources towards STK, that's our primary choice on growth and development. Now with Benihana, that gives us a number two play, particularly in the mall space. I think there's a good opportunity where we get some really high-quality real estate that now we think of that as being a Benihana opportunity. In terms of the ownership mix, one of the things that we're working heavily on right now is franchising for Benihana. I have found out that franchisees really want that, and particularly franchisees who have exposure to QSR brands want to have a more diversified portfolio on occasion and consumers. So they look at Benihana as a very attractive potential to put on their franchisee portfolio. So we've souped up our franchisee capabilities or franchising capabilities. We're working on a tremendous amount of development deals right now.
So we'll do a lot of those franchising deals for Benihana. In terms of STK, licensing in airports has become huge. You've seen a pickup in demand for concepts in airports. There's a lot of airports redoing their food offerings, O'Hare, LAX. There's just a tremendous amount of work in that area. So we're getting a lot of demand for both STKs and actually Benihana Expresses in airports. So that business will be a big business for us over time. And then obviously hotels, we're starting to see a lot of the hotel operators as they've gotten away from the COVID days. Now they're looking at their food offerings in the properties again, and they're wanting to redo their restaurant portfolio. So you'll see a lot more activity in that hotel space coming up. And then interestingly enough, the other thing is casinos.
Casinos are always looking for interesting food opportunities, so we've seen a tremendous amount of demand coming out for people wanting to do restaurants in casinos. We have a Benihana in one casino. We have STK in a different casino, so we're definitely seeing people asking us about expanding the casino business. And then last but not least, we have the retail opportunity with grocery and other areas for Benihana, so we are fine-tuning our retail opportunities there as well. And maybe not gigantic on the short term, but I think a long-term opportunity is stadiums. I think that having a presence in stadiums is good for branding and driving brand awareness, so we'll continue expanding our business model in sports arenas.
Great. And if I think about all those different venues, obviously different size and formats for the units that would go into those various venues, as you look at the footprint of Benihana, are there any investments or changes that you could make to the legacy restaurants that you think would better engage with the guests, whether it's driving mix, driving better frequency, just anything that you can think about now that you've had some time to look over the store base that you think there's opportunity to invest or change in the stores or the restaurants?
Yeah, so let me finish the answer to the other question. You actually asked me what the mix of company-owned and franchise, and I never really answered that part of the question. But I think probably if you look long term, the ONE Group will be skewing more towards franchise and license and management opportunities. We grew our company-owned base in the short term because of the acquisition and the fact that we just got these tremendous real estate deals in cities that we probably would never get again because of COVID, so there was a good turnover point, so it gave us a great opportunity to grow our lease space, so that's kind of more franchise, more license, less company-owned restaurants as we look out. So maybe a 60/40 split where we'll be 40 company-owned and 60% franchise or license, so an asset-like model.
In terms of the Benihana development opportunity, the brand has been around for 60 years. Clearly there's an opportunity here for us to bring in on the new prototypes a little bit more of the contemporary look and feel of the restaurants. We're definitely going to put emphasis in building the bar. The bars at Benihana currently are kind of a secondary part of the business model. We're going to elevate the bar presence. Then the other thing that we're going to work on is the bistros, refreshing the bistro area in the restaurants to make it more appealing for the consumers and drive more footprint for business on Fridays and Saturdays when we have a lot of demand. For the brand, having an area in the restaurant that allows for faster table turns will really work.
And then the look and feel, we think that there's an opportunity for new art. So you'll start to see some of the art in the restaurants changing a little bit. And then clearly there would not be a ONE Group property if we didn't improve music and sound in the restaurants. So we already are actively retrofitting some of the restaurants in the bigger cities with some of our music formats to try to elevate the bar business a bit. So stay tuned on that. Not any different from what we've done with Kona Grill. Kona Grill, if you look at our new prototypes that we've opened up, we bring in a little bit more of a design environment that makes the environments an escape for the consumers. So you'll see us using some of the same techniques and look and feel to elevate those restaurants.
And last but not least, I think that doing more non-traditional restaurants with Benihana like in casinos and some bigger forms will allow us to play a little bit more with the upscale look and feel of the brand. And last but not least, patios. We like patios in outdoor spaces. So you'll see us taking more time developing the outdoor spaces of Benihana, whereas today the patios are not really important to the brand, but we think that we probably can utilize the patio space to drive some enthusiasm, particularly in the warmer climate markets and stuff like that. So lots of little things. None of it is, none of it will be a reinvention of the brand, but more of just a refresh and a repositioning of the brand to be more contemporary.
Great. I think that's a great stopping point. Manny, Tyler, appreciate your thoughts. ICR, appreciate you guys having us, and thank you everybody for listening in.
Thank you. Thanks, Jim.
Thanks.