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Zoe’s Kitchen

CLIENT REPORT

SONTAG SOLUTIONS

Arash Mahboubi

Nicholas Bougopoulos

Xiaoyin Qu

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Professor Likens' Senior Seminar

Contents

Executive Summary.............................................................................................................3

Company Background.........................................................................................................5

Current Industry Dynamics..................................................................................................7

Understanding Franchising................................................................................................12

Competitive Analysis (Five Forces)..................................................................................17

Internal Rivalry...............................................................................................................17

Buyer Power....................................................................................................................18

Supplier Power................................................................................................................19

Threat of New Entrants...................................................................................................20

Threat of Substitutes.......................................................................................................21

SWOT Analysis.................................................................................................................22

Strengths.........................................................................................................................22

Weaknesses.....................................................................................................................23

Opportunities...................................................................................................................24

Threats.............................................................................................................................25

Financial Analysis..............................................................................................................26

Strategic Recommendations...............................................................................................30

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Executive Summary

Zoe’s Kitchen is fast casual Mediterranean cuisine restaurant. Sontag Solutions sees

promising potential in the expansion process of Zoe’s Kitchen if they are able to

capitalize on the relatively niche Mediterranean cuisine corner that they rest in. As the

first major fast casual Mediterranean chain within the United States, the main products

Zoe’s Kitchen sells include sandwiches, pitas, salads, soups, and kebabs.

Zoe’s Kitchen is a fairly new chain that was founded in 1995 in Homewood, Alabama; it

has expanded to 132 stores across fifteen states.1 It is still in the expansion process and

looking to open up more locations at a torrid pace. The franchise entirely changed

direction in 2007, when Cassimus, the majority owner, sold his majority ownership stake

to Brentwood Associates of Los Angeles. Following the purchase it was revealed that a

massive expansion would be undertaken, with the possibility of opening over 200 new

franchises within 5 years.2 Although following short of such lofty expectations, Zoe’s has

fared quite successfully since its IPO in April 2014.

Sontag Solutions emphasis for Zoe’s Kitchen is to establish a very concrete and well

thought out growth strategy that does not simply focus on growing the number of stores

but rather concentrates on two other methods that are crucial to sustaining Zoe’s

Kitchen’s growth outlook. We suggest harnessing existing geographical experiences and

strengths in the South to strategically identify and enter new markets. With this in mind,

1 http://www.reuters.com/article/2014/03/10/zoeskitchen-ipo-idUSL3N0M74IS20140310 2 Goodman, Sherri C. (November 2, 2007). "Zoe's Kitchen selling big stake Cassimus sees deal as spice for

expansion". The Birmingham News.

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we propose a possible expansion into the Northeast and the West coast. We believe this

move presents a strong market for Zoe’s Kitchen. Secondly, we devise a method of

improving brand reputation in order to keep Zoe’s Kitchen relevant to consumers for

years to come.

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Background

Zoe’s Kitchen was originally incorporated in Jefferson County Probate Court in June

1995 as Zoe's Kitchen, Inc. Founded by John Cassimus, the restaurant takes its name

from the mother of John Cassimus, Zoe Cassimus. Originally the restaurants were not

franchised, with Cassimus retaining a 51 percent ownership stake in all newly opened

locations.

Its first location would open in October 1995 in downtown Homewood. A second

location opened in the Riverchase section of Hoover in 1999 and a third in downtown

Birmingham in March 2001. The restaurant would continue its expansion with the

opening of its first store outside the Birmingham area in Tuscaloosa in May 2001 and its

first out-of-state location in Nashville, Tennessee in the fall of 2001. By 2006, Zoe’s had

expanded to sixteen restaurants, with eight located in Alabama and others located

in Phoenix, Nashville, Memphis, Baton Rouge and Destin.

With 20 stores open by 2007, Cassimus would sell a majority ownership stake

to Brentwood Associates of Los Angeles. Following the purchase, Cassimus announced

that he would remain as chief executive, the company would remain headquartered in

Birmingham and that the menu would not be affected. Additionally it was revealed that

the sale could potentially result in the opening of 200 new franchises over the next five

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years. By spring 2008 GE Capital Solutions loaned the company $10 million to allow for

the development of 50 new stores across the southeast and southwest.3

In November 2008, Cassimus would resign with Greg Dollarhyde taking his place as

CEO.4 Formerly the CEO of Baja Fresh, Dollarhyde announced that he will be looking to

expand the restaurant to new locales with two-thirds remaining company owned and the

remainder being franchised. Kevin Miles, who joined Zoe’s in 2009 after working at

Luby’s, Pollo Campero and Baja Fresh, succeeded Greg Dollarhyde as president in

March 2011.

3 Williams, Roy L. (April 16, 2008). "Finance plan will enable Zoe's to add 50 locations". The Birmingham

News. 4 Williams, Roy L. (December 10, 2008). "Zoe's new CEO wants to grow the eatery's brand". The

Birmingham News.

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Current Industry Dynamics

Restaurant Industry

When trying to understand Zoe’s Kitchen’s place in the restaurant industry, Sontag

Solutions firmly suggests looking at the industry from the demand side. Restaurants are

defined and compete by price range, which is essentially a horizontal look across the

industry. Consumers have the power in this industry, and the restaurants must be

receptive to changes in consumer preference or face bankruptcy. It is more helpful to

label Zoe’s Kitchen by similar types of restaurant types–fast casual dining- as opposed to

taking a vertical look at Mediterranean restaurants.

Customers will pick a restaurant based on a price range when going out. Zoe’s Kitchen

will be closer to Olive Garden and Red Lobster in competition rather than Milos (an

expensive, five-star Mediterranean restaurant). The cross elasticity of demand will be

much higher for a similarly priced fast casual restaurant when compared to Zoe’s Kitchen

than a restaurant that serves similar Mediterranean cuisine, but in a different price range.

Zoe’s Kitchen will need to base the prices of their branches around those of competing

restaurants in the geographic vicinity.

This classification is based upon the demand side. The industry has restaurants competing

in a price band as opposed to a specific food band. The type of food matters as well, as

evidenced by an even greater competition between Burger King and McDonalds (due to

similar food and price range) than Olive Garden and Zoe’s Kitchen. However, a five

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percent drop in all food in the fast casual industry will have a much greater impact on

Zoe’s Kitchen than a five percent drop on the price of Mediterranean cuisine in the fine

dining sector due to a higher cross elasticity of demand on the demand side.5

Understanding Fast Casual

One of the fastest growing concepts of the restaurant industry over the last decade and in

2015 has been the fast casual restaurant.6 Though still a smaller part of the overall market

than both the fast food and casual dining segments, fast casual concepts are exploding

onto the scene and gaining popularity each year. And unlike traditional fast food

restaurants, the market for fast casual is far less saturated, and franchise opportunities

abound for the entrepreneur.

Fast casual restaurants have become extremely popular since they combine the ability to

eat on the run with the much more recent trend towards consumer demand for healthier

options. Food quality and preparation at traditional fast food restaurants has come under

increasing scrutiny in recent years and been shown to have negative health consequences,

coincident with a general change in consumer attitudes towards healthy diet and lifestyle.

5 http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2804646/ 6 http://www.forbes.com/sites/greatspeculations/2014/06/23/how-the-fast-casual-segment-is-gaining-

market-share-in-the-restaurant-industry/

Figure 1. Restaurant Types

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The entrance of fast casual restaurants to the American markets has been a relatively

recent phenomenon. The exact years differ based on exact interpretation of fast casual

dining, but it is generally assumed to have blown up into the American marketplace in the

1990’s. Typically restaurants in this category do not offer full table service, but offer a

higher quality of food and atmosphere than traditional fast food. Customers order at the

counter but typically will get real plates and cutlery, and can often see their order

prepared. Food preparation and the use of high quality ingredients take a higher priority

in fast casual restaurants and are frequently distinguishing characteristics for particular

franchise brands, such as those using only local or organic produce. Healthier options are

more prominently displayed than in traditional fast food franchises as well, and food is

often presented in a fashion to highlight freshness of ingredients and preparation. Another

key difference is the offering of beer and wine at many franchises (similarly to Zoe’s

Kitchen).

These restaurants offer the quality of casual dining combined with the speed of fast food

and have the prices to match this middle ground. Price for a typical meal range from $8 to

$15 dollars, but as the fastest growing segment of the restaurant industry, consumers have

seemed quite willing to pay for quality; customer’s at Zoe’s Kitchen on average pay $10

per visit.

Zoe’s Kitchen fulfills all of these features associated with fast casual dining. Sontag

Solutions stresses that Zoe’s Kitchen understand their position in the industry and market

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their restaurant in such a fashion. Deviating and pretending to be a type of higher end

restaurant or a lower end fast food could severely derail growth.

The Direction of the Fast Casual Sector

The future looks bright for the sector. A look across the sector finds that fast casual

restaurants have been experiencing higher sales and higher traffic over the previous year

for five years straight, and restaurant operators are largely planning to increase capital

expenditures on renovations and new locations.7 This is in contrast to the cheaper and

unhealthier fast food industry, which has seen a decrease in sales and traffic for two

consecutive years.

Improving consumer confidence and spending also will allow these restaurant operators

to finally pass along rising commodity prices. Over the past year of rising prices, owners

and operators have swallowed rising input prices out of fear of losing customer traffic.

But, in a survey taken in 2014 of the executives in many of the top fast casual restaurants,

60% of those surveyed indicated a plan to increase menu prices to improve profit

margins.8 With Zoe’s Kitchen still in the expansive process, now is the time to offer

similar benefits to keep consumer traffic heavy and the customers happy.

Another positive sign for the sector is the increased consumer willingness to try new

types of cuisine. Consumers are more interested than ever before in modern, authentic

7 https://www.technomic.com/Reports_and_Newsletters/Industry_Reports/dyn_PubLoad_v2.php?pID=125 8 https://www.franchisehelp.com/industry-reports/fast-casual-industry-report/

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cuisine that is affordable for the family. Mediterranean food at a reasonable price could

potentially explode in this market. Chipotle rapidly became a national sensation, and

Sontag Solutions envisions Zoe’s Kitchen cornering the fast casual Mediterranean cuisine

market like Chipotle did for Mexican food.

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Understanding Franchising

Due to its early popularity and demand for the expansion of new restaurant locations,

Zoe’s Kitchen started to explore franchising in 2009 when the majority ownership stake

changed hands. Zoe’s Kitchen plans to expand the restaurant to new locales with two-

thirds remaining company owned and the remainder being franchised. With the expressed

intent to potentially open 200 new franchises over the next five years, Sontag Solutions

emphasizes the importance of understanding the ramifications of franchising. Like any

business model, franchising has its benefits and drawbacks. Sontag Solutions recognizes

that franchising offers three major benefits to business owners seeking to expand

operations, which is the aim of Zoe’s Kitchen.

Access to better talent

Franchising is a great way to find talented people to manage Zoe’s Kitchen and give them

an incentive to work hard. The most qualified and hardest working people generally

prefer to invest in running a business in return for profits rather than taking a salary as an

employee. So by franchising, Zoe’s Kitchen can get better talent that will work harder to

build the business than they would by hiring someone to work directly for them. By

looking outside the company and interacting with outside investors who know about the

industry, Zoe’s Kitchen can be exposed to invaluable new ideas of how to enhance their

brand name and financials.

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Quicker access to capital

When looking to expand operations quickly, sometimes the capital is not there.

Franchising allows easier access to expansion capital. Because the franchisees of Zoe’s

Kitchen pay to buy outlets of their chain, Zoe’s Kitchen can grow the number of locations

without tapping much into their own capital or needing to request financing from banks

or investors.

Minimize risk

The third advantage Sontag Solutions sees is minimized growth risk for Zoe’s

Kitchen. With such aggressive expansive tactics currently being deployed by Zoe’s

Kitchen, Sontag Solutions warns of the potential risks that come with it. Franchising can

prove to curtail some of this risk by generating high financial returns for relatively little

risk. Unlike adding company-owned outlets, when Zoe’s Kitchen continues to franchise,

relatively little money is put into adding each location. With a good business model,

Zoe’s Kitchen can earn high royalties from sales at those outlets. The percentage returns

Zoe’s Kitchen can earn can be many times what would have been earned if they opened

and ran the outlets themselves.

However, it must be noted that with these benefits, Sontag Solutions does not fully

endorse franchising too high a percentage of new locations. Somewhat offsetting the

positives are three major disadvantages of the franchising business model.

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Less control

Franchising gives less control over managers. Zoe’s Kitchen can't tell franchisees what to

do the way they can with their employees. Franchisees are independent businesses.

Moreover, franchises typically have different goals from yours, which can easily conflict

and even lead to legal trouble. For example, franchisors make money by collecting a

percentage of sales as a royalty for letting the franchisee use their brand name and

operating system. Franchisees make money from the outlet's profits. Anything that boosts

sales, but not profits will create conflict between Zoe’s Kitchen and the franchisee. If

Zoe’s Kitchen wants to offer customers promotional coupons, franchisees may likely

object due to this conflict of interest. Coupons boost sales, but not always profits,

benefitting the franchisor, but not necessarily the franchisee.

Core community

Sontag Solutions sees a potential for a weaker core community. It's more difficult to get

franchisees as opposed to hired store managers to work together. Franchisees have an

incentive to profit from each other's efforts to generate business. For instance, your

franchisees might try to get out of paying for the advertising needed to attract customers,

figuring they will get the customers anyway if other franchisees buy the advertising. Of

course, if all of them do the same thing, Zoe’s Kitchen will end up with no customers

because you've got no advertising. There are ways of minimizing this franchisee free

riding problem, of course, but those cost money and require enforcing your franchisee

contracts in court.

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Stalled innovation

Finally, Zoe’s Kitchen must understand the possible innovation challenges that can

arise. It's a lot harder to innovate with franchising than if Zoe’s Kitchen owned their own

outlets. With franchising, if Zoe’s Kitchen comes up with a new idea, they would have to

negotiate with the franchisees to get them to accept the new product or whatever

innovation that they might want to introduce, instead of just putting the new idea in place

on their own. The irony is that even with more minds thinking and creating possibly

better ideas, it might be harder to implement them if not everyone agrees on whether or

not they are beneficial.

Concluding statement on franchising

Sontag Solutions acknowledges both the pros and cons behind the recent push for

franchising. Unfortunately franchising isn't a silver bullet for business expansion. But

Sontag Solutions agrees with the current tactics of Zoe’s Kitchen to keep the franchising

percentage at one-third. By franchising this amount Zoe’s Kitchen can pursue their

expansion goals, all while keeping the overall restaurant direction still firmly in the hands

of Zoe’s Kitchen. Sontag Solution urges not to franchise much more than this while still

in the early phases of expansion, otherwise there might not be a strong network amongst

the stores across the nation. When all the major markets have been tapped into, Sontag

Solutions believes that would be the appropriate time to start franchising more stores; at

that point the chain has been established long enough and the image of Zoe’s Kitchen

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will already have been projected onto the American consumer as the way Zoe’s Kitchen

intended.9

9 http://www.entrepreneur.com/article/226489

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Competitive Analysis (Five Forces)

Internal Rivalry- High

Competition among firms is very high in restaurant industry. Zoe’s Kitchen competes

with large, national chains, many of which have a much more expansive reach. Fast

casual dining restaurants such as Olive Garden, Chipotle, and Potbelly’s have captured

much of the market already and are in most urban United States locations. This means

that when Zoe’s Kitchen continues to expand, they will have to compete with already

established and known commodities.

People always need to eat and a lot of them like to do it in restaurants. Therefore, more

and more restaurants are being opened, causing higher competition. As a result, one of

the main aims for each restaurant is to gain a competitive advantage among other

restaurants. Zoe’s Kitchen can gain an edge in several ways: changing prices,

Figure 2. Five Forces

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improving product differentiation or providing special discounts.10 The prices should

be carefully made and not exceed the competitors’ prices. As soon as it is getting clear

that the number of customers has been decreased, the new offers such as product

differentiation or special discounts can be provided in order to get back old customers

and attract new.

Sontag Solutions recognizes Zoe’s Kitchen’s place in a very competitive industry. This

makes the next few years, the aggressive expansion years, extremely crucial for the

long term outlook of Zoe’s Kitchen. Sontag Solution stresses Zoe’s Kitchen utilizes a

very good strategy and clear plan when entering into new markets. Taking advantage

of offering a unique type of cuisine is another key platform.

Buyer Power- High

Within a restaurant industry, the bargaining power of customers is a very essential aspect.

This is because the prices should always be kept not higher than the competitors’ prices.

In this case customer’s power is strong as customer might set the price. As soon as prices

are increased way too much, the clients will leave Zoe’s Kitchen and find another

restaurant in the same competitive market, such as Olive Garden.

Products are virtually homogenous, a unique characteristic in the entire restaurant

industry. Restaurant-goers typically have extremely high buying power, particularly in

the fast casual food sector. Chains compete with each other on brand recognition and

10 https://www.ohiodominican.edu/uploadedFiles/Library/CoursePages/Courses/Bus/Bus498/Application-

PortersFiveForcesModelPaperExample.pdf

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price, which drives up marketing costs and drives down profit margins. However, what

makes this case unique is that Zoe’s Kitchen is not facing a market with competition for

the particular type of food they serve. If someone wanted fast-casual dining at a

Mediterranean style restaurant they would have to dine at Zoe’s Kitchen. Customers do

not have the option jump between McDonalds and Burger King if one of them raised the

prices. This somewhat diminishes the bargaining power of customers; although the

buyers still greatly control the bargaining dynamic. This leaves the bargaining of buyers

quite high.

Supplier Power- Weak

The suppliers of raw materials usually have power over industries. The bargaining power

is in the price for the materials provided. Some industries have a lot of suppliers, but

some do not. Those industries that have only few suppliers can suffer, because suppliers

can charge any price they want.

In case of the restaurant industry, the bargaining power of suppliers is quite weak. This is

because restaurants do not produce their own food, but buy from butchers, farmers, etc.

Most chains have their own suppliers, with prices of inputs not fluctuating much

compared to changes in the price of goods in the open market. Larger casual fast food

chains have an easier time managing input costs because they negotiate multibillion-

dollar contracts with suppliers for many locations. Zoe’s Kitchen is growing to that size

and therefore can similarly keep the prices down.

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There is little supplier power within the restaurant industry. There are a large number of

companies that Zoe’s Kitchen could work with who supply ingredients (food and

beverage) and equipment. Because of the nature of the fast food supply industry, prices

must remain relatively competitive or Zoe’s Kitchen could easily substitute away to

another supplier.

Threat of New Entrants- Low

The threat of new entrants to the fast casual dining industry is low mostly due to the

presence of high barriers to entry. The fixed capital cost to initially build a store is high,

and significant government regulation surrounds food establishments and franchise

licensing, further increasing the barriers. It is not an easy task for a restaurant chain to

expand into many locations; even if successful, it would take years before a new fast

casual restaurant could expand into numerous markets.

The fast casual dining market is already saturated with many companies with

recognizable brand names, making entrance even more difficult. Chains like Potbelly’s,

Chipotle, and Olive Garden have reached many areas of the country, and consumers

already know what they will get at these restaurants. Consumers prefer familiarity when

dining, thus giving an upper hand to already established brand names.

Significant economies of scale benefit large chains and make it difficult for new entrants

to compete on price. Owning many stores allows a company like Zoe’s Kitchen to buy

supplies in bulk and reduce costs.

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Overall, Zoe’s Kitchen needs to worry more about currently existing competition rather

than possible entry of new rivals. Successful chains of fast casual restaurants have well-

known names/products and enjoy economies of scale. Low switching cost makes

entrance more enticing, but Sontag Solutions believes that current competition is a much

bigger threat.

Threat of Substitute Products- Moderate/High

Consumers in the fast casual industry have a high propensity to substitute due to factors

relating to location, food quality and price.11 There are no direct substitutes for the menu

Zoe’s Kitchen offers as it is the only large chain, fast casual Mediterranean style cuisine.

However, competitors like Olive Garden can become substitutes and can take business

from Zoe’s Kitchen if they build new convenient locations or offer more enticing quality

or prices, so it is vital that Zoe’s Kitchen strategically chooses locations to operate and

keeps costs and quality in line with what customers want and expect.

As this report previously mentioned, buyer-switching costs are low, and this serves as the

driving force for the high propensity to substitute. Zoe’s Kitchen must always be aware

of prices compared to those in the same market because if Zoe’s Kitchen prices to high,

they will experience an exodus of customers.

11 https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-

management-12/external-inputs-to-strategy-87/porter-s-five-forces-420-1822/

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SWOT Analysis

Table 1. SWOT Analysis

SWOT Analysis

Strength

1. Market niche

2. High economies of scale due to limited menu offering

3. Expansion of fast casual industry

4. Variety within the limited products offered is high

5. Availability of vegetarian and vegan options

6. Availability of ‘online ordering’ facility

Weakness

1. Geographic position

2. Greek-style menu limiting the target segment

3. Lack of diverse markets

Opportunity

1. Can focus more on extending the products

2. Separate menus for kids can be created to attract more families

3. Create a separate dinner menu to attract more people for dinner

Threats

1. Competition

2. New entrants

3. Economic uncertainty

Strengths

• Quality of food

Sontag Solutions believes Zoe’s Kitchen experience is driven by providing simple, tasty

and fresh Mediterranean food at a compelling value to their customers. High-quality

ingredients serve as the foundation of Zoe’s Kitchen. The unique menu offering of

traditional Mediterranean cuisine places them in a niche market that does not have

another direct competitor in the fast casual Mediterranean style cuisine corner.

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• Diverse revenue stream

The differentiated menu of both hot and cold food enables their customers to utilize our

restaurant for multiple occasions throughout the day. This has led to a balanced day-part

mix of approximately 60% lunch and 40% dinner (excluding catering) split in revenue.

Zoe’s Kitchen’s catering business represented approximately 16% of revenue, in each

case, for 2014.

• Market niche

The restaurant business has seen a trend towards fast casual restaurants the past couple of

decades. These types of restaurants have experienced large growth and an explosion in

the types of options available. Entering this market can be difficult with so many

established brands. However, Zoe’s Kitchen is in a fairly advantageous position. Zoe’s

Kitchen is the only large chain in the fast casual that boasts Mediterranean cuisine. If they

are able to corner this market before any direct competitors enter, they will have an upper

hand when any new entrant might try to emerge.

Weaknesses

• Geographic positioning

Zoe’s Kitchen has highly concentrated geographic operations in the South. Zoe’s Kitchen

only operates in fifteen states even though they own 132 restaurants. This limits their

revenue stream and increases the risk of Zoe’s operations and may put them at a

disadvantage to their other competitors that have more diversified locations. The United

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States population is significantly concentrated along its coasts; however Zoe’s Kitchen

has not taken advantage of either coastal market.

Opportunities

• Expanding geographic reach

The lack of diverse markets in the case of Zoe’s Kitchen actually poses a major

opportunity. Fortunately, for Zoe’s Kitchen, although the coastal markets are saturated

with many types of fast casual dining cuisines, there are no major Mediterranean style

types. This allows a great opportunity for Zoe’s Kitchen to expand operations to the

coastal regions. Sontag Solutions discusses the potential of these markets in a strategy

discussed later.

• Expected growth in fast casual industry

Within the larger trend of restaurant growth is an equally powerful sub-trend favoring

fast casual restaurants.12 This value proposition resonates with many consumers that are

12 http://www.fool.com/investing/high-growth/2014/03/24/fast-casual-continues-to-dominate-restaurant-

growt.aspx

Figure 3. Fast Casual Industry Growth

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looking for a quick meal that is healthier than the fast food brands and less expensive

than casual and fine dining options. Customers are flocking to fast casual restaurants,

which has allowed this subset of the industry to experience explosive growth. With this

expected growth showing no signs of stalling, investors are taking notice and investing in

companies like Zoe’s Kitchen.

Threats

• Competition

Although Zoe’s Kitchen is a specialized restaurant, they face stiff competition from the

rapidly expanding fast casual restaurant industry. Established chains like Panera and

Chipotle are titans of the industry and Zoe’s Kitchen must compete for the same customer

base. It is easier for established chains to keep prices down as they have a lower

percentage of restaurants built each year compared to a rapidly expanding chain such as

Zoe’s Kitchen.

• New entrant

Currently Zoe’s Kitchen does not have to compete with another fast casual Mediterranean

style cuisine restaurant. However, if they do not expand to the coastal markets soon, they

might end up being the second company to try to capture those markets. Being a new

entrant always makes it tougher as that company does not have the advantages of a

known commodity and established infrastructure when going against the competition.

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Sontag Solution urges Zoe’s Kitchen to be wary of a new entrant if they do not expand

their geographic markets sometime in the near future.

• Economic Uncertainty

Revenues in the restaurant industry are highly correlated with the health of the economy.

Thus economic uncertainty poses a constant risk.13 In times of economic hardships,

disposable income is negatively affected and the response tends to be a decrease in

consumption. For restaurants this means that changes to tax and interest rates changes in

labor market growth and increasing gas prices leads to more subdued growth in

household incomes decreasing consumer expenditure on take-out food. More people

choose to eat home-cooked meals instead of going out to eat and when they do go out to

eat; average consumers are more likely to purchase lower-priced items. Zoe’s Kitchen

faces a particularly higher risk because they have a higher price point than restaurants

like McDonald’s that have value menus. Although there is nothing a restaurant can do

about this, Sontag Solutions recommends Zoe’s Kitchen take note of this and not expand

too rapidly.

13 http://www.mbaskool.com/brandguide/food-and-beverages/10727-zoes-kitchen.html

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Financial Analysis

Zoe’s Kitchen had its IPO in April 2014 and it was quite successful. It raised $87.5

million, selling 5.8 million shares at $15 apiece, and the stock rocketed 73% higher in its

debut, rising to $25.90 by midday.

As evidenced by the annual financials, Zoe’s Kitchen is experiencing rapid growth on a

yearly basis. However, during this process they have been experiencing a net income loss

that increases every year. This is not a cause for concern as the upfront cost of

infrastructure building for a new establishment will be recouped in the long run as an

individual Zoe’s Kitchen establishment runs an average profit on a yearly basis at a

Table 3. Stock Price Highs and Lows

Table 2. Annual Financials

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margin just above 3%. The loss an income has not scared investors away as they clearly

see the potential in growth behind this company.

The market cap is at 575.97 million. During the 3Q of last year, total revenue increased

49.5% to $43.6 million. Total assets are $177 million while cash and cash equivalents are

$41 million. This easily covers the company’s total liabilities which is $16 million. Zoe’s

Kitchen does not have a complicated or diverse revenue stream as they only engage in the

fast casual restaurant business. This keeps their financial statements fairly straight

forward and honest.

Becoming Chipotle is the ultimate goal for smaller fast-casual chains. Chipotle is the flag

bearer for financial success for fast casual restaurants, and many investors have been

bullish on the prospects of Zoe’s Kitchen as it is in a niche market that is largely

untapped yet in America (Mediterranean cuisine). Zoe’s plans to double its store count

over the next four years and that pace is impossible for bigger, more mature industry

competition to replicate.

Figure 3. Restaurant Industry

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The stock currently overvalues the current situation of Zoe’s Kitchen; however the

potential of the growth keeps the prices rising. Chipotle has a profit margin of 10%,

which is incredibly high for a restaurant. The profit margin for an establishment of Zoe’s

Kitchen is at 3.1% currently. A big question for Zoe’s Kitchen’s future financial outlook

is whether it could try to become the next Chipotle, or whether it will turn into another

Noodles or Potbelly which both operate at profit margins below 2%.

Zoe’s Kitchen is financially stable and doing quite well as evidenced by their balance

sheet. As an expanding chain that is using lots of capital towards establishing

infrastructure, it is quite expected that they will not be generating lots of profit early on.

Within the three phase model of company growth, Zoe’s Kitchen is barely in phase II,

and some might even argue they are in phase I. They are not new, growing rapidly, but

clearly not fully mature. They are experiencing commercialization and high growth.14

14 http://d1lge852tjjqow.cloudfront.net/CIK-0001594879/7d28da97-7252-4436-a73a-

c05eb113f894.pdf?noexit=true

Table 4. Balance Sheet Data

Table 4. Share Data

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Strategic Recommendations

Build Brand Reputation

Zoe’s Kitchen is in the process of introducing itself to the big stage of the restaurant

industry, needing to prove that they can hang out with the already established titans. To

keep a strong foothold long term, Sontag Solutions stresses the importance of building a

positive brand reputation amongst the targeted audience. To further brand recognition we

suggest a four-prong approach of marketplace positioning, developing a visual presence,

creating advertising and marketing plans, and establishing a sound customer loyalty

program.

Marketplace Positioning

Positioning requires the Zoe’s Kitchen to decide where it is placed in the customer's

mind. Using a combination of four aspects that draw revenue - product, price, place and

promotion - the Zoe’s Kitchen must decide where it sits among the competition and

within the minds of the consumer. Positioning helps direct and narrow brand awareness.

A quick way to put positioning into practice is to identify the target audience by

recognizing the area the restaurant is in. Since Zoe’s Kitchen boasts of a great brand

focused on healthy food options, Sontag Solutions recommends targeting middle class

families and more particularly women of this age group.

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Build Visual Awareness

A consistent visual presence provides a vivid memory for consumers. Burger King,

Wendy's, and McDonalds are perfect examples of visual brand awareness. Each of these

well-known restaurants uses a mascot, a well-designed logo and a tag line to embed

brand awareness in the public's mind. However, mascots and logos are not the only way

to build visual awareness. Signage, color scheme, decor, standardizing staff uniforms and

consistent ways of interacting with customers can reinforce a restaurant concept and build

a brand. It would greatly benefit Zoe’s Kitchen to produce some sort of visual image that

immediately comes up in a consumer’s mind when the name is mentioned.

Remind the Public (Advertising)

Remind the public of the restaurant's menu and atmosphere by staying consistently within

the minds of the target audience through advertising. Consistent advertising and

marketing are opportunities to remind the public of a restaurant location, menu, prices,,

hours, and logo. Local, weekly alternative newspapers or other types of published

material, such as door-to-door flyers, direct mail and coupon books, are great ways to

build brand awareness through print. Favorite local radio stations, television programs or

highly visited local websites are also good places to advertise and raise brand awareness

for Zoe’s Kitchen.

Build Loyalty

Building a loyal community or customer base is the foundation of brand awareness; loyal

customers spread the word about the restaurant brand. Sontag Solutions recommends that

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Zoe’s Kitchen establish a more interactive customer loyalty program to increase customer

engagement. Local sports teams, schools, and business organizations are often loyal

customers to restaurants that buy advertising in programs, sponsor teams or give-away

coupons. Adding extras at the point of purchase, such as a free dessert bar, free meal

choices for children under three or a baker's dozen are ways to further build a local brand.

Taking brand awareness to the web through social media by creating a fan or business

page and conducting a contest among a customer base is also a way to reinforce loyalty.

As the only major restaurant chain in the United States that is in the fast casual

Mediterranean niche, Zoe’s Kitchen has an opportunity to establish a competitive

advantage before any potential direct competitors arrive. There is no battle similar to that

of Pizza Hut and Dominoes, where customers tend to become loyal to one of the chains.

If Zoe’s Kitchen is able to increase foot traffic into restaurants and keep those customers

happy, they then would be very likely to keep those customers even if another

Mediterranean restaurant entered the market. This recommendation is based on what we

have determined to be a strategy that is currently working very well for other restaurants

and one that fits perfectly into Zoe’s Kitchen business model.

Possible Methods to Increase Loyalty

• Reducing customer loss to maintain profit base

• Increasing the amount spent by loyal customers over time

• Increasing profits as customer service costs decrease

• Increase profits as rewards programs induce customers to purchase higher

margin menu items

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• Increase profits through referrals

Continued Focus on Strategic Expansion

Zoe’s Kitchen is currently operating in diverse markets with 132 stores in 13 states.

Given that the United States is positioned first in global markets for weekly fast food

consumption, the marketing strategy we recommend is based on penetrating the market

quickly and efficiently. One of the explicit goals of Zoe’s Kitchen was to add 31-34

stores in 2015, which is at a pace we believe will provide sustainable growth.15 However,

we emphasize that the importance of the location of newly opened restaurants might be

even more crucial than the amount of stores that are opened in 2015. Sontag Solutions

recommends that Zoe’s Kitchen focus its attention on building company-operated shops

and franchised businesses in both new and existing markets by utilizing a strategic site

selection process that works for their business model.

15 http://d1lge852tjjqow.cloudfront.net/CIK-0001594879/7d28da97-7252-4436-a73a-

c05eb113f894.pdf?noexit=true

Figure 4. Geographic Locations

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International expansion might be a little premature at this stage since the chain is not well

known in the United States yet. With this in mind, it would be wise to focus only on

domestic expansion for now. Zoe’s Kitchen is exclusively existent in the southern states

currently, yet the type of customers they cater to suggest that a move expanding out of

the South and into the West coast and Northeast markets could be extremely fruitful. The

current force behind the customer base is middle aged woman, middle class families, and

others who eat healthy while preferring a lighter meal. Restaurants with similar customer

bases have experienced much success in these two markets. Chains such as Potbelly’s,

Olive Garden, P.F. Chang’s, and Panera that expanded into such markets can provide

Zoe’s Kitchen a tried and tested business template that might lead to quicker and higher

returns for the Mediterranean chain.

In addition to these markets, we believe Florida presents a market fueled by health

conscious consumers. Industry reports show that Florida’s restaurants, particularly in

Orlando, are expected to be very busy this year and even busier in the future. Florida's

economy in 2014 is leading the nation in job growth and the overall recovery. Restaurant

Table 5. Store Locations

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attendance is highly correlated to the economy, as people eat out more when the economy

is doing well. The economy boom in Florida is likely to be followed by an increase in

dining outside of the home, which means market penetration here could prove to be

fruitful.

When evaluating the specific markets potential, Sontag Solutions believes several

elements must be considered. To be successful long term, Zoe’s Kitchen must understand

the importance of site selection and real estate development and devote significant

resources to create predictable and successful new restaurant results. We believe

investing in sophisticated analytical tools designed to uncover key demographic and

psychographic characteristics in addition to site specific characteristics, such as visibility,

access, signage and traffic patterns, is a necessary use of capital.

Explore utilizing the multi-unit franchise system

Sontag Solutions believes that the current approach taken by Zoe’s Kitchen towards

franchising is effective, but can be enhanced with slight modification. We do not

encourage a faster pace of franchising at this point in the growth of the company, as it

may interfere with the potential of management to distribute their brand the way they

desire, which is a dangerous proposition when entering new markets. We therefore

suggest that Zoe’s Kitchen should incorporate multi-unit franchising in its franchising

program to cut down on search and sign up costs and take advantage of experienced

successful franchisees.

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As of now, Zoe’s Kitchen’s franchise model within the United States is mainly based on

a single unit model. Sontag Solutions would recommend that Zoe’s Kitchen go through

with implementing a multi-unit franchise system for locations with more than one Zoe’s

Kitchen alongside its single-unit model.16 This would benefit Zoe’s Kitchen because it

can grow more easily through the re-use of existing franchisees. Moreover, multi-unit

franchisees make the system more effective by facilitating efficient system-wide

adaptation because franchisors have to persuade fewer franchisees to implement changes.

One successful and logical choice that Sontag Solutions recommends is Franchise

America Finance.17 They have successfully served as financer’s for well-known brands

like The UPS Store, Carl’s Jr. and Togo’s. They have a strong reputation in the restaurant

industry and a solid track record of success. Under this partnership, Zoe’s Kitchen would

be able to provide its franchisees with the Franchise America Finance promise of fast,

reliable, and specialized loan service. Sontag Solutions believes a marriage between the

two would be beneficial to both partners.

16 http://www.entrepreneur.com/article/226763 17 http://money.cnn.com/2010/04/07/smallbusiness/franchise_lending/