Max & Erma’s Restaurants Inc.

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Max & Erma’s Restaurants Inc.

4849 Evanswood Drive
Columbus, Ohio 43229
U.S.A.
(614) 431–5800
Fax: (614) 431–4100

Public Company
Incorporated: 1972
Employees: 3,221
Sales: $79.9 million (1996)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places

Headquartered in Columbus, Ohio, Max & Erma’s Restaurants Inc. is a 41-unit chain of eponymous eateries located in major metropolises in Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, and Pennsylvania. Most units are company-owned. The company operates within the $40-billion “casual dining” segment of the restaurant industry, a niche distinguished as full service in a relaxed setting with a menu that includes alcoholic beverages. Key competitors include segment leader Red Lobster as well as T.G.I. Friday’s, Applebee’s, Olive Garden, and Chili’s Grill & Bar. While the chain’s core concept has long been a hit, Max & Erma’s early history was marred by unprofitability and a lack of direction. That changed with the 1986 ouster of founder and CEO Barry Zacks. Under more conservative management, the chain’s revenues increased from $15.5 million in 1987 to $79.9 million in 1996, while net earnings grew from $303,000 to $2.2 million.

Founded in the 1970s

The chain was founded by Barry Zacks, a graduate of Cornell who returned to his hometown of Columbus to take a position at his family’s footwear company, R.G. Barry Corp. However, footwear didn’t hold the intrepid entrepreneur’s interest for long. In 1972, the 36-year-old purchased a local bar and restaurant from longtime owners Max and Erma Visconik. Located in Columbus’s historic German Village, the building had been constructed in 1889 by the Franklin Brewing Company. Known during Prohibition as Kaiser’s Cafe, the pub had stayed afloat selling “near beer” and groceries.

Zacks’s revamp of the business targeted the mid-priced segment of the dine-out market with a particular emphasis on singles. He cultivated a fun atmosphere with a now-ubiquitous decor that has been characterized as the “garage-sale look,” featuring moosehead trophies, nostalgic photos, and memorabilia as well as plenty of brass and tiffany-style stained glass. Promotions were usually adult-oriented and sometimes raunchy. The “So Happy It’s Thursday” (S-H-I-T) events of the early 1980s, for example, lampooned competitor T.G.I. Friday’s salute to the beginning of the weekend. Telephones at each table encouraged patrons to flirt with one another. Max & Erma’s also earned a reputation for gigantic servings, a distinction founded on its signature Garbage Burger. This hand-pattied, ten-ounce behemoth with “the works” has been credited as the original gourmet hamburger. Zacks has also been cited as the progenitor of the salad bar and potato skins appetizer. With an average tab of less than $ 10 and a strong emphasis on bar beverages, Max & Erma’s earned a reputation as a gathering place for singles.

New Management in the 1980s

The concept was a hit. By the time the chain went public in 1982, it boasted ten locations in Ohio, Michigan, Indiana, Kansas, Kentucky, and Pennsylvania, and annual revenues of over $12.5 million. However, this growth had masked a number of problems, not least of which was a lack of profitability. In a lengthy 1990 critique of the chain for Restaurant Business, Ralph Raffio asserted that the company had “not once [turned] a profit in its first 15 years of existence.” (It had in fact recorded a $185,000 surplus in 1982, which had been accounted for as a 44-week year.) Raffio blamed flighty management and ill-conceived programs. “Like the time the dinner house chain’s new drive-thru window had to be promptly shuttered because a well-done burger took 13 minutes to cook. Never mind that within two weeks of installing the drive-thru, a customer actually ran out of gas waiting for his order.”

Critics—among them members of Max & Erma’s own board of directors and executive team—cited poor site selection and an out-of-control menu as key obstacles to profitability. Some thought Barry Zacks’s choices for new locations were too dependent on price instead of market and demographic characteristics. The company often entered new markets via the purchase of failed restaurants and converted them to the Max & Erma’s theme, resulting in a hodgepodge of dissimilar storefronts, sometimes in less-than-ideal locations. Zacks would later acknowledge that this was a core shortcoming, telling Business First-Columbus’ s Ann Hollifield that “The one thing I learned from Max & Erma’s is the most important thing is location, location, location, and the fourth one is location. I made those mistakes with Max & Erma’s, and I don’t want to make them again.”

Notwithstanding award-winning menus, a slavish attention to food trends saw the chain adding 20 to 30 new items to the menu each year, giving it a 30-plus page menu by the mid-1980s. The eclectic lineup expanded from all-American burgers and appetizers to include everything from a raw bar to homemade pasta, a variety of ethnic dishes, and exotic sauces. Furthermore, each restaurant tailored its offerings to local tastes, making chainwide procurement next to impossible.

Most of the blame for these difficulties was placed squarely on the shoulders of Barry Zacks. Raffio boiled the chain’s difficulties down to a single factor: the founder’s “rambunc-tiousness.” In July 1986, CFO William Niegsch told Nation’s Restaurant News that “This company is a textbook case of being started by an entrepreneur … and now it’s time for more professional management.” It was one of the most discreet criticisms made of Zacks during this period.

Zacks stepped down that year and was replaced by Todd Barnum, who with three other top executives purchased the founder’s remaining 20-plus percent stake in the chain. Zacks went from Chairman and CEO to “Founder and Independent Businessman” in the 1986 annual report, and remained on board for awhile as a consultant. (He died from cancer four years later at the age of 54.) Barnum had been with the eatery since its inception, advancing to president in 1974. He expressed his confidence in the company’s continuing viability in Raffio’s 1990 article, asserting that “No matter how terrible things got financially for us, there were still a lot of people having a great time at our restaurants. The restaurant concept itself was never the problem. Executing it was.”

Achieving Profitability in the Late 1980s

Team Barnum proved that theory by turning a $300,000 profit in its first full year at the helm. The new CEO used a variety of fairly simple strategies to achieve this heretofore rare outcome, focusing on the menu, marketing, operations, and remodeling. By eliminating low-sale, high-labor dishes, the company simplified its menu from 36 pages to six. It also shrank some of its “enormous portions,” offering the six-ounce Erma burger as an alternative to the Garbage Burger, for example. The company hired a marketing executive to manage promotional campaigns via outdoor, events, direct mail, and television. Market research helped the chain trace key demographic trends. For example, as Max & Erma’s core baby-boomer clientele aged, married, and had children, the chain’s emphasis shifted from singles to a more family-oriented clientele. A $2-million remodeling program updated equipment as well as decor.

These efforts began to bear fruit within months. Sales increased from $16.5 million in 1986 to a record $24.3 million in 1989, while net income increased from a deficit of $318 million to a record $1.2 million. The turnaround won praise from the likes of the Wall Street Journal and Business Week, and this positive press helped the relatively small company become one of the restaurant industry’s most-watched growth stocks. Having stabilized the chain’s finances, Barnum embarked on what he called a “modest, controlled expansion,” concentrating primarily on existing markets.

1990s Bring Growth, Competition

The company adhered to that reasonable plan, adding only two units by the end of 1989 for a total of 13 locations, but enthusiasm took hold in 1990, when the chain added five new restaurants. Although it tested franchising, CFO Niegsch noted in a 1993 Nation’s Restaurant News article that the executives were “indifferent to franchising,” eschewing the cost savings for “tight control.” This growth spurt proved poorly-timed, however, with a national recession bruising the results of even the heretofore recession resistant casual theme segment of the restaurant industry. With net income declining to less than $500,000 in 1991, Max & Erma’s reined in growth to just one unit per year in 1991 and 1992. Net recovered to $1.1 million in the latter year, by which time the company had 20 locations clustered in the Midwest.

Company Perspectives:

“Max & Erma ’s mission is to be the best restaurant in each of the markets we serve by delivering quality food with personable service in a casual, comfortable and fun atmosphere. “

Max & Erma’s pursued healthier expansion in the mid-1990s, increasing revenues and profits to record levels in 1996. The chain achieved this feat through continued reductions in operating costs, a strategic menu revamp, and the introduction of a new restaurant prototype. In 1993, the company abandoned its traditional site selection strategy, which still focused on acquiring existing restaurant buildings and refurbishing them as Max & Erma’s. Instead, the chain developed a stand-alone model that would provide a distinctive atmosphere and lower start-up costs. Participation in “restaurant parks” also proved a viable growth vehicle in some markets. These retail developments, often in suburban areas, combined several different (though mostly casual) restaurants in one destination.

In an effort to increase individual checks from less than $10, the company introduced new, slightly more expensive menu items and began to push its long-neglected bar offerings. Sales grew from $43.5 million in 1993 to $79.9 million in 1996 while net increased from $1.4 million to $2.2 million, capping five consecutive years of growth in both categories. From a well-established presence in Ohio, Michigan, Kentucky and Pennsylvania, the company established itself in major markets of Illinois and North Carolina. By the end of 1996, the company had 40 units throughout the Midwest.

Still led by Todd Barnum in 1997, Max & Erma’s planned to open seven to nine new units each year in the late 1990s. New markets in the South, where balmier weather would allow the restaurants to make good use of their patio tables, were targeted, with units planned for Atlanta, Georgia, and Greenville, South Carolina. However, as Carol Casper of Restaurant Business warned, casual-themed restaurants faced the prospect of becoming “victims of their own success,” as “hundreds of imitators and innovators flooded the market.” Max & Erma’s hoped to differentiate itself from its competitors via an easily recognizable (and consistent) facade, a continuously evolving, value-oriented menu, a highly-trained service staff, and a fun, yet family-oriented atmosphere.