Max & Erma's feels effects of end of couponing strategy

Nation's Restaurant News, Sept 21, 1998 by Carolyn Walkup

COLUMBUS, Ohio - Although Max & Erma's Restaurants posted a record third quarter in terms of revenue, net income and earnings per share, that good news was tempered somewhat by a drop of 3.2 percent in same-store sales, which the company attributed to a reduction in discounting and couponing.

William Niegsch, chief financial officer at the 49unit chain based here, expects the slide in same-store sales to be temporary, pending customer adjustment to the new strategy. "The focus now is more toward image building and building full price sales," he said. The third quarter historically has been the company's heaviest one for coupon use, he added.

Despite the slip in samestore sales, Max & Erma's posted a 21-percent rise in third-quarter profits, to $758,915, for the quarter ended Aug. 2. Systemwide revenues were up 7 percent, to $23.7 million, while year-to-date net income rose 26 percent, to $2.18 million, vs. the same period last year.

The company decided to discontinue the direct mail coupon program after concluding it was not profitable, Niegsch said. Each coupon redeemed cost the company

For example, instead of spending the full price of about $22, a coupon user might spend about $12. If it cost the company $4 to distribute that coupon, "that left us with $8 in the till. It kept whittling down, and there's not much profit left in that transaction." he said.

"We weren't making any money on it, when you put all the costs together. It might have cost us $100,000 every year," Niegsch said.

"The next step is to spend our marketing money on things that bring full- price customers into our restaurants. We will do more local store marketing, such as sponsoring local community festivals. We will create a local or home-town image," he said.

Once customers get used to paying full price, Niegsch projects that same-store sales will begin building again by achieving either flat or slightly positive levels, perhaps as early as the fourth quarter.

The good news is that margins held steady, partially because of the reduced cost of advertising expenses as well as the cost of goods sold, according to the company. High labor costs continued to plague the chain, in light of an extremely tight labor market.

Formerly high produce prices came down to more normal levels during the quarter, which also contributed to improved margins. Corporate overhead was somewhat higher, though, because of an enlarged corporate staff.

Because a franchising program is just being organized, franchising is not expected to have any significant impact on 1999 earnings. "We expect to have some franchises signed in about a year," Niegsch predicted.

The promotion of veteran regional manager Rob Lindeman during the third quarter to the post of director of franchising signifies a plan to pursue growth through franchising. Performance at two franchised locations in airports in Columbus and Cleveland are exceeding expectations, the company said.

Management expects that the opening of its second concept, Ironwood Cafe, will help its attempts to franchise. The cafe features a more streamlined menu of pastas, wood-fired pizzas, salads and light entrees and a higher check average of about $14, compared with $10 for the more casual Max & Erma's.

The opening cost of about $500,000 is considerably less than the $2 million cost of opening a full-sized Max & Erma's. An Ironwood Cafe, open for dinner only, also offers ease of operation and about one-third the number of employees needed to operate a Max & Erma's.

Leases have been signed for the next two Ironwood Cafes in Cleveland and Columbus, and the company hopes to sign leases shortly for three more. "Initial reaction has been very positive," Niegsch said. "We think five or six is a good sample to get a feel for real expansion potential."

Eight new Max & Erma's are planned for fiscal 1999, mostly in existing markets, where name recognition has been established. "It will be a big year in '99," Niegsch predicted.