Hamburger Hamlet Cooks Up a Comeback : Competition and the recession have battered the restaurant chain. Now, a new leadership team is trying to turn the company around.
Shawn Holder, a restaurant executive hired in August to rescue the sinking Hamburger Hamlet chain, sent a letter this month to the company’s major investors. The message is written in bland Wall Street-speak, but if it were translated into everyday language, Holder says it would go something like this:
“Dear shareholders: We just lost $10 million. Aren’t you glad you hired me?”
For Holder, investors and Hamburger Hamlet Restaurants Inc.’s 2,500 employees, the answer to that question will depend on what happens next.
From 1950, when the first Hamburger Hamlet opened on Sunset Boulevard, until just a few years ago, few local restaurant chains were as popular or profitable as Hamburger Hamlet. Generations of Southern Californians piled into the Hamlet’s red vinyl booths to munch on zucchini zircles, lobster bisque and gourmet burgers.
But a series of troubles in recent years has caused the Sherman Oaks-based chain to spill red ink like a broken bottle of ketchup. Most of the company’s restaurants are in Southern California, where the recession decimated Hamlet’s middle-class customer base. Meanwhile, the already crowded casual dining market has been invaded by innovative new chains, including Cheesecake Factory, California Pizza Kitchen, the Olive Garden and Wolfgang Puck Cafes.
As a result, Hamlet’s profits plunged from a peak of $2.94 million in 1992 to $458,000 the next year, before crashing into a $10.6-million loss last year. Hoping to reverse the slide, a group of shareholders led a corporate coup last spring, tossing aside Thomas A. McFall, the New York investment banker who had been CEO since 1988, when he led a leveraged buyout of Hamburger Hamlet from the husband-and-wife team who founded the chain.
Shareholders then turned to Holder, a 47-year-old surfing fanatic and onetime dishwasher who helped build the Islands restaurant chain. His mission: bring back customers who abandoned Hamburger Hamlet in recent years as the menu got stale, the service got cold and the competition got better.
Holder has some high-profile help. His chief financial officer is Jack Lavine, a 53-year-old Texan who in 1975 helped found the hugely successful Chili’s restaurant chain. Together, they have moved swiftly to mark a new course for the Hamlet chain.
Last quarter, Holder and Lavine lopped off $6 million in goodwill from the company’s balance sheet, an acknowledgment that the company simply isn’t worth as much as it used to be. They crossed off another $1.25 million to reflect the amount the company expects to lose when it sells four of its money-losing restaurants in the next year.
Earlier last year, they eliminated 30 of 70 corporate positions and added 60 new employees at the restaurant level, including new assistant managers and hosts for just about every location. Holder doubled to 12 weeks the training program for restaurant assistant managers and gave managers new control over work scheduling, as well as hiring and firing. Previously, even busboys were hired and fired at corporate headquarters.
Holder has also pledged to continue remodeling the company’s 30 remaining restaurants, merging modern touches such as terra-cotta tile and splashy lighting with the traditional decor of red vinyl seats, green carpet and movie star photos hanging on the walls. This spring, the menu will be updated to include more pastas, new desserts and a few pricier dinner entrees.
It’s a lot of medicine to take all at once, but Holder and Lavine said they can’t afford to wait.
“If sales stay where they are, we could limp along for a couple years,” Lavine said. But if sales, which dipped 1% to $67.8 million last year, continue to slide, “it would require us to sell more stores and pare down the size of the company even further. At some point, you can’t make it.”
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Executives at competing restaurant chains say a Hamlet turnaround is possible because the name is still widely recognized, and the company, which does not sell franchises but owns and operates all of its restaurants, has many terrific locations in lucrative markets. But clearly, they said, Hamlet needs repairs. The menu and look are “20 years outdated,” one executive said. “It certainly doesn’t bother us to be located next to them,” said another.
Hamlet traces its troubles back to 1988, when McFall and a group of East Coast investors paid $40 million to buy the company led by Harry and Marilyn Lewis, a Beverly Hills couple who founded Hamburger Hamlet in 1950. (The Lewises walked away with about $28 million from the sale.)
Harry had been a Warner Bros. actor known mainly for his supporting role in the Humphrey Bogart film “Key Largo,” and Marilyn was a former dress designer. Together, they were the creative engine behind Hamlet’s success. Even today, Hamlet officials said, 75% of the 120 or so items on the menu are Lewis creations. When the Lewises sold the company, there were 24 Hamlet locations, including restaurants in Washington and Chicago.
McFall, who had no restaurant experience, saw Hamlet as a profit-making machine waiting to be throttled. He planned to leave existing management in place--minus the Lewises--and start rolling out new restaurants. Initially, it worked. Hamlet’s sales were just $44.8 million in 1989, but soared to $64 million three years later. Meanwhile, McFall took the company public in 1991 at $11.50 a share, raising nearly enough to pay off the $28 million in debt remaining from the initial acquisition.
But trouble was looming as Southern California’s economy turned sour, wiping away huge chunks of Hamlet’s customer base. “This was a white-collar recession,” said Stephen D. Weinress, an Irvine-based restaurant analyst who has been eating at Hamlets for decades. “The people who got laid off were working at Teledyne and Raytheon and fit the profile of who would go to this restaurant.”
Meanwhile, rivals were introducing customers to new sights and tastes that made Hamlet look increasingly stodgy. Cheesecake Factory opened big, bright restaurants with ceilings painted to resemble a star-lit sky, and California Pizza Kitchen brought surprising entrees such as Peking duck pizza to the masses.
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Hamburger Hamlet might have been hard-pressed to handle such challenges even with the leadership of the Lewises, analysts said, but without them, it was paralyzed. Same-store sales slipped 8% from 1991 to 1993. McFall, who still owns 12% of the company’s stock, acknowledged in a recent interview that “the dynamics of the original owners, their creativity, their flair, were very much missed.”
He tried to change the lunch menu and started remodeling the older restaurants. But shareholders were angry that McFall had waited so long to act, and that he was spending two weeks of every month at his home in New Jersey, so they finally forced him out and hired Holder.
Shortly after taking over, Holder did something his predecessor had never done. He called the Lewises, who now run a trendy Beverly Hills restaurant called Kate Mantilini’s, to ask for advice. And a few days later, over lunch, the past and future of Hamburger Hamlet tried to connect.
Harry Lewis, 74, with long gray hair curling up on his shoulders, said this month that he regrets ever selling the Hamlet chain because he still has a sentimental attachment to the company he and his wife built. Recently, he agreed to buy back one of the more upscale restaurants in the chain, the Hamlet Gardens in Westwood.
The advice Lewis gave Holder was neither profound nor comforting. Simply offer “good food, good service and lots of attention,” he said. But Lewis said he came away thinking that the new CEO had already grasped a lesson his predecessor had learned too late. “You can’t just expect a restaurant to go full speed ahead,” Lewis said. “It doesn’t work like that.”
Holder, who wears Aloha shirts to work and drives a van so that he can carry his surfboards, said he walked into a company frozen in time. “The company stopped evolving in 1988,” he said. “It was like a car going 100 m.p.h. that slipped into neutral.”
He tours the restaurants every week, unscrewing dim light bulbs and replacing them with brighter ones, telling hosts and food servers to pull their hair back off their faces, and introducing employee games designed to boost sales. During certain hours of the day, waiters and waitresses can win free meals and other prizes if they sell enough desserts, bottles of wine and appetizers--all big profit items.
Mike Dubois, general manager of the Hamlet on Sepulveda Boulevard in West Los Angeles for two years, applauds Holder’s changes. Dubois said his new control has enabled him to cut payroll costs, and spend more time training employees and improving customer service. Asked whether patrons have noticed a change, Dubois quoted a recent customer. “Last time I was at the bar, your servers ignored me for an hour,” the customer told him. “This time, you’re really on top of things.”
Another key to Hamlet’s rejuvenation is the ongoing remodeling of its aging sites. Eight Hamlet restaurants have been remodeled in the past two years, and more will be upgraded as the company raises cash from the planned sales of four poorly performing restaurants, Holder said.
The remodeled Pasadena restaurant reopened two months ago with two dining rooms that retain the traditional Hamlet decor. But the largest dining room has brighter lighting and a tile floor, and the front of the restaurant is now a roomy, sidewalk patio. Since that restaurant reopened, sales have been up 15% to 20% each week, Holder said.
If Holder and Lavine can build on those results, they will be rewarded. Holder makes about $200,000 a year, about half his predecessor’s salary, and Lavine is paid $120,000. Each executive also has lucrative stock options that would give him up to 5% of the company if the stock climbs to a series of prices between $10 and $20 per share.
But that may take a while. On Friday, Hamburger Hamlet’s stock closed at $4.125 per share.
