Max & Erma’s Restaurants Inc.

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Max & Ermas Restaurants Inc.

4849 Evanswood Drive
Columbus, Ohio 43229
(614) 4315800
Fax: (614) 4314100

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

Headquartered in Columbus, Ohio, Max & Ermas 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. Fridays, Applebees, Olive Garden, and Chilis Grill & Bar. While the chains core concept has long been a hit, Max & Ermas 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 chains 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 familys footwear company, R.G. Barry Corp. However, footwear didnt hold the intrepid entrepreneurs interest for long. In 1972, the 36-year-old purchased a local bar and restaurant from longtime owners Max and Erma Visconik. Located in Columbuss historic German Village, the building had been constructed in 1889 by the Franklin Brewing Company. Known during Prohibition as Kaisers Cafe, the pub had stayed afloat selling near beer and groceries.

Zackss 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 Its Thursday (S-H-I-T) events of the early 1980s, for example, lampooned competitor T.G.I. Fridays salute to the beginning of the weekend. Telephones at each table encouraged patrons to flirt with one another. Max & Ermas 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 & Ermas 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 chains 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.

Criticsamong them members of Max & Ermas own board of directors and executive teamcited poor site selection and an out-of-control menu as key obstacles to profitability. Some thought Barry Zackss 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 & Ermas 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 & Ermas is the most important thing is location, location, location, and the fourth one is location. I made those mistakes with Max & Ermas, and I dont 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 chains difficulties down to a single factor: the founders rambunc-tiousness. In July 1986, CFO William Niegsch told Nations Restaurant News that This company is a textbook case of being started by an entrepreneur and now its 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 founders 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 companys continuing viability in Raffios 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 & Ermas core baby-boomer clientele aged, married, and had children, the chains 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 industrys most-watched growth stocks. Having stabilized the chains 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 Nations 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 & Ermas 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 & Ermas 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 & Ermas. 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 & Ermas 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 & Ermas 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.

Further Reading

Benson, Betsy, Max & Ermas Adds Area Sites, Pittsburgh Business Times, August 28, 1989, pp. 12.

Bradford, J. C. & Co., Max & Ermas, Inc.Company Report, The Investext Group, December 16, 1993.

, Max & Ermas Restaurants, Inc.Company Report, The Investext Group, September 1996.

Casper, Carol, Small Is Beautiful: Max & Ermas Acts Like an Independent, Restaurant Business, September 1, 1996, pp. 9899.

, Staying Power, Restaurant Business, September 1996, pp. 81105.

Casual-Themers Not So Recession-Proof After All, Nations Restaurant News, April 8, 1991, p. 14.

Farkas, David, Disciplining the Menu: How a Process Helped Max & Ermas into the Black, Restaurant Hospitality, August 1990, p. 132.

Festa, Gail, On a Diet, Restaurant Hospitality, April 1988, pp. 12026.

Gindin, Roña, Market Segment Report: Casual Theme, Restaurant Business, November 20, 1992, pp. 16982.

Godfathers, Max & Ermas Write Fun into Job Description, Restaurants & Institutions, August 21, 1989, p. 34.

Harton, Tom, Max & Ermas Agrees to Move into Castletons Defunct Diner, Indianapolis Business Journal, January 8, 1990, p. 4.

Hollifield, Ann, Max & Ermas Founder Launching a New Business, Business First-Columbus, December 29, 1986, p. 8.

Kapner, Suzanne, Max & Ermas Retools Menus, Adopts New Strategy to Boost Profits, Nations Restaurant News, May 20, 1996, p. 7.

Keegan, Peter O., Max & Ermas Philosophy Lets Employee Individuality Shine, Nations Restaurant News, June 25, 1990, pp. 34.

Max and Ermas Cuts Overhead Costs, Boosts Growth and Profits, Nations Restaurant News, June 8, 1987, p. 54.

Max & Ermas Profits Off in 3rd; Outlook Up, Nations Restaurant News, September 25, 1995, p. 10.

Max and Ermas Promotes S-H-I-T, Restaurant Business, January 1, 1983, pp. 16263.

Nash, Bob, Max & Ermas Bounces Back by Correcting Early Mistakes, Business First-Columbus, March 4, 1985, p. 12.

Prewitt, Milford, Itty-Bitty Max & Ermas Gets Big-Time Press Attention, Nations Restaurant News, January 22, 1990, p. 14.

, Restaurant Park Latest Blueprint for Clustering, Nations Restaurant News, December 20, 1993, p. 3.

Raffio, Ralph, Can Max & Ermas Rebuild? Restaurant Business, June 10, 1990, pp. 12733.

Riell, Howard, Dollar Signs for Regional Players, Restaurant Hospitality, July 1992, pp. 6668.

Scuttling a Trusty Formula Can Help Revive Growth, Wall Street Journal, November 27, 1990, p. B2.

South Fits Max & Ermas Goals, Columbus Dispatch, March 16, 1996, p. B1.

Walkup, Carolyn, Max & Ermas Discovers Success in Slow Growth; Chain Achieves Turnaround with Steady Approach, Nations Restaurant News, March 22, 1993, p. 16.

, Max and Ermas Founder Zacks Dies after Cancer Bout,

Nations Restaurant News, August 20, 1990, p. 3.

, Max & Ermas Zacks Drops Management Role, Nations Restaurant News, July 7, 1986, pp. 12.

April Dougal Gasbarre