Agent of change Featured

9:18am EDT April 25, 2005
Todd Barnum lives by one simple axiom -- experience is everything.

Barnum is co-founder, president and CEO of Max & Erma's. And after years of trying a wide range of strategies designed to stay ahead of the competition, he's come to a humbling conclusion.

"You are only as good as your last meal," he says.

As consumers eat fewer meals at home and more at restaurants, there's been a surge in the number of options available to them.

"There are no shortages of casual dining restaurants out there," says Barnum, referring to the category in which Max & Erma's competes. "There are some very big players with high growth plans that leave and new entrants [with whom you're] continually fighting for customers."

That, Barnum says, means it's more important than ever before to ensure that each customer has a great experience at Max & Erma's and wants to return for more. It's a far cry from his previous strategy -- offering discounts and specials on products -- which, he admits, produced only short-term results.

"Now we handle it differently," he says. "We offer better customer service and new, innovative food items. We are always looking to give the customer what he or she wants, and that is new and tasty dishes. We are being responsive."

Each month, Max & Erma's introduces approximately six new items to its menu. But that's only part of Barnum's equation; his philosophy carries over into every other aspect of the company -- growth strategy, franchising plans, hiring practices and training.

Ensuring that special experience for customers is one reason Barnum says Max & Erma's, which had revenue of just over $180 million last year from nearly 100 restaurants (20 of them franchises) in 11 states, will continue to expand at a measured rate.

"We are under no pressure to grow fast," he says. "We'll grow where we know we can give a dynamite experience to the customer. Our long-range growth strategy is to develop the Midwestern markets more. We've found that the markets actually do better when we layer stores in existing markets. We go into new markets cautiously on the corporate level and more aggressively with franchises."

Still, Barnum says, the company plans to open only three or four corporate stores this year, and only about five franchised locations -- modest growth for the restaurant industry.

"I've seen chain after chain grow at a pace the equity markets want them to grow without the ability to properly manage the stores," says Barnum, who's been in the restaurant industry for 33 years. "The customers walk out without a great experience."

That's also a key reason why he won't sell a franchise to just anyone.

"I will not sell to an investor," he says. "The person has to be an operator and have experience. Because of that stipulation, we've had no failures of franchise stores."

Barnum says despite this, he is ramping up the organization's training and support so that when the time is right, he can step up the pace of growth. But that's a few years away. For now, he's content to keep his growth slow and steady to preserve the new culture he's recently imbued into Max & Erma's.

"It keeps us in good shape financially because we're not taking on more debt," he says. "And customers are assured of a great experience, which is what it's really all about."

Staying smaller also gives the company a competitive advantage during this critical time in its growth, Barnum says.

"We will open our 100th store some time this year," he says. "But we still operate like a small company. We are able to react quickly to changes and we work very hard to make sure we are not too structured so our managers can make decisions. They know the customers."

A company, however, especially one in the service industry, is only as good as its employees. And so, in order to get Max & Erma's to succeed the way he desired, Barnum set out to develop a new corporate culture.

Building the experience culture
The driving force for Barnum's vision is a new group of managers who view the restaurant business through a different lens than their predecessors. Last year, the company's vice president of operations retired, and his replacement, armed with an edict from Barnum, embarked on numerous changes within Max & Erma's ranks.

"We had a lot of management changes on the operation side," says Barnum. "They (the new managers) are much more results-oriented. I visited every restaurant we own last year, and I have never been as impressed with the store management team."

That's because its members buy into Barnum's vision.

"We believe the vision and purpose must be woven into every thread of our culture for people to live it," he says. "It is integrated into every facet of our human resources processes, from interviewing to training to discipline and rewards."

Barnum implemented two initiatives to emphasize the importance of "living the brand."

Voice of the Customer is a series of customer feedback systems designed to help Barnum's staff "understand the truth of how our guests experience Max & Erma's."

The second program, Internal Marketing, is comprised of internal promotions - bonuses and other incentives - for line associates that are tied to guest promotions.

"Both of these initiatives serve as continual reminders of our vision and the purpose we serve for our guests," Barnum says.

As a result, Barnum's new management team - and those left over from his previous one -- have embraced the notion of thinking "customer first."

"It's what we've been working toward," Barnum says. "We've given the managers more latitude, and they are acting more like entrepreneurs."

Barnum says this ownership spirit has proved especially effective because each Max & Erma's has its own unique environment.

For example, the store in Hilliard is more of a neighborhood place; the store at Polaris hosts a more transient population of customers.

"The Hilliard store is full of local memorabilia, and everyone knows each other," says Barnum. "Polaris draws people from the mall. But that's what makes it special. We don't want cookie-cutter stores and invariably, our customers agree. Everyone has their favorite Max & Erma's location."

And as such, the customer experiences become personalized, says Barnum.

"We have some regular guests who prefer the competition's cola over the one we currently serve," he says. "As soon as the servers see those guests coming, (they) go to the restaurant next door to purchase the preferred cola for those guests."

Another of Barnum's favorite examples is the time a server overheard a guest saying she was craving coffee ice cream -- an item not carried at Max & Erma's - for dessert.

"This server took it upon herself to go to the ice cream store next door and buy gourmet coffee ice cream for this unsuspecting guest," he says. "That's a wow experience."

People with a capital P
Barnum's makeover of Max & Erma's doesn't end with personnel. He recently made the difficult decision to take the company off the NASDAQ National Market, end reporting to the Securities and Exchange Commission and essentially take Max & Erma's private. There was, he says, only one reason behind this drastic change -- cost.

"We looked conservatively at the amount of money we were going to spend to comply with Sarbanes-Oxley," he says. "It was going to cost somewhere between $300,000 and $400,000 the first year, and $250,000 to $300,000 each year on an ongoing basis."

Since Max & Erma's qualified as a small cap company with low-volume trading, Barnum says remaining on the NASDAQ wouldn't have brought value to the company's existing -- and future -- shareholders. So in January, with Barnum spearheading the effort, shareholders voted in favor of making the move.

Under the arrangement, which included a series of reverse and forward stock splits to ensure there would be fewer than 300 shareholders, Max & Erma's will continue to report its quarterly earnings, generate an ann ual report and be traded on the pink sheets, a daily publication of stock prices. But its days as a conventional publicly traded company are over, despite a stock price floating around $15 per share.

That, says Barnum, plays right into his strategy of focusing on what he values most -- his employees.

Barnum says the turnover rate for all associates runs in the high 80s percentile, which is low compared to the industry average. Even so, it could be better. So Barnum's team constantly recruits and trains -- and Barnum doesn't see anything to suggest that trend changing any time soon.

"We are in a people business," he says. "Every store has one manager and two or three associate managers, so we need to keep recruiting a lot of folks. We are investing a lot of our budget in our people with a capital P."

Barnum is, however, dedicated to reducing turnover in one area -- his managers.

"Reducing turnover is mainly a function of creating a positive work environment," he says. "The nature of the work environment is greatly affected by the management leadership in the stores themselves. So we have developed specific training programs and processes to address the 'how to' of creating a positive work environment within the culture of Max & Erma's."

Part of that leadership involves reward programs designed to ensure that the managers know their work is appreciated.

"You have to throw your arms around them and tell them you love them and love working with them," he says.

To demonstrate this appreciation, Barnum took about one-third of his managers -- a group of top performers --to Atlantis in the Bahamas.

Yet, it isn't only human resources Barnum is watching out for. He is also keeping a close eye on the company's financial resources. And his strategies of growing slowly and providing an excellent customer experience are paying off.

"We are fortunate that we have the financial resources that allow us to do what we want," says Barnum. "Last year, when hamburger and chicken prices went through the roof, then produce prices followed, we didn't have to pass those increases on to the customer."

It's that type of insulation, achieved by building a model designed to weather difficult times, that has helped Barnum keep his eyes on the prize -- return visits.

How to reach: Max & Erma's, (614) 431-5800 or www.maxandermas.com