For One Restaurant Chain, Fewer Calories Equals A Bigger Profit

When Mike Repole, co-founder of Glaceau's Vitaminwater, invested more than $1 million in Energy Kitchen a year and a half ago, he fine-tuned the restaurant chain's image as an everyday health-centric spot to one with a sharper message: no items on the menu have more than 500 calories.

Source: Energy Kitchen

To get the word out, he quadrupled the company's yearly advertising budget to around $1 million and hired a franchise director. Now, he and Energy Kitchen founder Anthony Leone are expanding their reach beyond the New York City area where they are currently concentrated. With more than 300 interested franchisors, they plan to expand from nine to 1,000 locations in 10 years.

"I think 1,000 stores in 10 years is conservative," Repole said. "It's not only doable, it's pretty simple."

Since the pair remodeled the menu and expanded its target beyond gym-going males, Energy Kitchen's same-store sales have rebounded from a near 10 percent drop in 2008 to a 13 percent rise in 2009.

So far this year, same-store sales at the fast-casual eatery are up 30 percent. This comes despite one of the harshest winters to hit the New York City area in years.

And because each franchisor is required to open a minimum of three stores, there's a good chance the chain will have 20 locations open by year's end, with another 75 in place for 2011 and 2012, Repole said.

"We want to especially open up in tough times," Leone said. "When times are bad, people need to eat right."

Of the 13 locations set to open within the next six months, all will be placed in influential markets — one will be on New York's Upper West Side, while three franchise locations will open in Washington, DC; Stamford, Conn.; Miami; and Boston.

This is a similar approach to the one used by Vitaminwater, which developed a following in New York City before increasing its stamp across the US.

"If you can get a place going in New York [or] LA, there isn't a place in the country where it isn't going to catch," Repole said.

But simply growing isn't enough for Repole, who, with his partner, sold Vitaminwater to Coca-Cola for $4.1 billion in 2007. He said his "Type-A personality" leads him to believe same-store sales should be up 100 percent at every location, even in a period of strained consumer spending.

One way the restaurant chain has worked to overcome a weak consumer was by lowering its prices about 12 percent this year, and by offering monthly specials, such as March's $5 burger deal. Leone said these price reductions have successfully increased volume and the average check value — as lower prices made people more willing to spend on extras such as beverages.

But the company still faces a number of headwinds.

Source: Energy Kitchen

Overall, restaurant traffic has been down, but Energy Kitchen competes in the fast-casual segment, which has fared better than other industry segments during the economic downturn, said Darren Tristano, executive vice president at food industry consulting group Technomic.

Fast-casual restaurant sales grew between 5 and 7.5 percent in 2009, according to preliminary figures by Technomic. Comparatively, the fast-food segment stayed about flat, while full-service restaurant sales declined between 5 and 8 percent, Technomic said.

However, as consumers loosen up their spending, it's a tough category to compete in, according to Tristano. The meals aren't quite as cheap as fast food, and they don't offer a full-service sit-down experience.

What's more, he said it may be hard to sell flavor-driven Americans on a concept that doesn't offer higher-calorie options on its menu.

"From some of the consumer research we've seen, many people just don't care (about calories)," Tristano said.

However, this type of concept is a "standout" for what Tristano estimates is about 15 percent of the population that is extremely health-driven.

And it appears these customers are loyal. In December, Energy Kitchen broke a New York City record on group-buying Web site, selling 4,552 $20 gift cards at half price. Only one deal has since outperformed the discount — $3 for $6 credit at Maoz vegetarian restaurant.

According to Repole, it comes down to taste.

"If you can provide healthy products that consumers want that taste great, why do you need high-calorie options? It makes no sense."

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