Ponderosa Steakhouse History

Address:

P.O. Box 578
Dayton, Ohio 45401
U.S.A.

Telephone: (513) 454-2400
Fax: (513) 454-2525

Wholly Owned Subsidiary of Metromedia Company
Founded: 1968
Employees: 18,000
Sales: $450 million (1994)
SICs: 5812 Eating Places

Company History:

Under the parentage of the Metromedia Company, Ponderosa Steakhouse is one of America's leading budget steak house chains. After 20 years of sometimes heated competition, Ponderosa was brought together with rival Bonanza under the corporate umbrella of John Warner Kluge's Metromedia Company. Each chains' profitability has historically been subject to the vagaries of fluctuating beef prices and a highly price-sensitive clientele. Moreover, when the United States dipped into recession in the late 1980s, Metromedia's budget steak chains went into a persistent decline. While Ponderosa had more locations than any other U.S. steak house chain in the early 1990s, it faced some challenges in the form of declining profits and management shakeups, and its sales lagged segment leader Sizzler by more than $100 million.

The first Ponderosa Steak House was established in 1968 in Kokomo, Indiana, by Dan Lasater and Norm Wiese. Barely out of his teens, Lasater had a high school education and a couple of years' experience managing McDonald's restaurants. Wiese was an auto dealer who held a key piece of real estate near a highway interchange. The two had joined forces to launch their own hamburger chain, Scotty's, but were inspired to enter the budget steak arena after learning of Bonanza's success in the South.

Bonanza International had been founded in Dallas by the Wyly brothers, Sam and Charles, in 1963 and was beginning to develop a national presence. But instead of buying a Bonanza franchise, Wiese and Lasater worked with their own, albeit similar, concept, which they called Ponderosa. Both Ponderosa and Bonanza menus featured a limited selection of steaks served with baked potato, salad, and a dinner roll. Cafeteria-style service kept labor costs low, and the use of lower-grade meat tenderized with enzymes helped keep food costs low. Much of the savings was passed on to the customer; Ponderosa's basic dinner cost just $1.39. The Indiana chain later bought its own beef processing subsidiary, ESI Meats, to further cut costs.

In keeping with the restaurants' shared western theme, competition between Bonanza and Ponderosa was wild. When the Wylys discovered the threat from the North, they looked for ways to trip up their new rival. Lasater related one of their "skirmishes" in an interview with Lawrence A. Armour excerpted in Dun's: "When the Bonanza International people saw that [we were starting a steak house] they hot-footed down and trademarked the Ponderosa name, which we had forgotten to do. We were pretty upset, but I got to wondering how smart they really were....They hadn't [trademarked their own name]. So I went down and trademarked Bonanza, and we swapped off with them."

Lasater and Wiese were soon joined by Jack Roshman, a Dayton, Ohio, restaurateur who had been the largest franchisee in the now-defunct Burger Chef chain. Roshman took the Ponderosa concept to Ohio, while the original partners licensed expansions into Illinois and Kentucky. From 1968 to 1969 alone, Ponderosa System's sales multiplied from less than $1 million to $3.5 million. But the chain soon encountered a problem endemic to the fast food industry during this period: uncontrolled growth. Lasater pinpointed the difficulties in his interview with Armour: "We didn't have any controls, and we were having management problems. Money was going into unproductive investments like land, and legitimate creditors like equipment manufacturers weren't being paid." Lasater's expertise was in operations, and Wiese was little more than an investor; neither was particularly interested in fiscal administration. The company was insolvent by December 1969, and some creditors made moves to foreclose. The chain's credit was so bad that Wiese and Lasater were forced to take out personal loans to keep it afloat.

At that time, they promoted 28-year-old Gerald S. Office, Jr., from general counsel to chairman and chief executive officer. Office helped turn Ponderosa around. By mid-1971, the company had recovered enough to warrant a new stock offering. Annual sales increased from $42 million in 1972 to $73.54 million in 1973 and $114.76 million in 1974. Net grew from $6.05 million in 1973 to $9.47 million in 1974. Ponderosa's stock soared from $3 per share in 1970 to $84 per share in 1972, when it surpassed Bonanza to become the country's largest steak house chain. At that point Lasater, a 30-year-old multimillionaire, retired.

Ponderosa's managers got their first inkling of the beef industry's cyclical nature when a mid-1970s recession saw earnings tumble by more than 80 percent. But the chain recovered along with the nation in the late 1970s. Ponderosa's best year of the decade came in 1978, when the company chalked up $13.8 million in profits on an estimated $272 million in sales.

The roller coaster ride continued in the 1980s, however. Annual revenues increased to about $490 million by 1985, but earnings plummeted to $4.8 million. From 1980 to 1985, Ponderosa's return on equity averaged 9.9 percent, compared to 15 percent for Los Angeles-based Sizzler International, an up-and-comer that appealed to a more upscale clientele. Ponderosa's poor results were blamed on a variety of problems. Over half of the chain's restaurants were located in the Midwest's "rust belt," which was then enduring a major transition from its traditional manufacturing base to a more service-oriented economic base. Moreover, due to a lack of reinvestment, Ponderosa restaurants were becoming run-down and dated. The company also failed to quickly change its menus to accommodate American dietary trends that were increasingly calling for healthier fare, such as fish and chicken.

In an effort to balance out its changeable returns, Ponderosa attempted an early 1980s diversification within the restaurant industry. In 1982, CEO Office directed the acquisition of the five-unit Casa Lupita Mexican dinner chain. He hoped that the chain's high meal tabs, low food costs, and fatter profit margins would be the formula for more consistent earnings at Ponderosa Systems.

Ponderosa became a target of several takeover attempts during this period. The first came in 1980, when General Host Corp., the Stamford, Connecticut, parent of Hickory Farms, made its play for the steak houses. Then, in 1984, third-ranking Bonanza (U.S.A. Cafes) tendered a $154.8 million takeover bid for Ponderosa. Although the Wylys offered a ten percent premium over their rival's prevailing stock price, the leading chain's board rejected the offer as inadequate. Ponderosa's takeover defense cost it hundreds of thousands, but the company did manage to repel the threat.

In 1985, Ponderosa hired Thomas J. Russo as president. Russo had enjoyed a long career with Howard Johnson Restaurants, and had been credited with engineering a successful two-year turnaround at the struggling chain. He hoped to build Ponderosa into a 1,000-location chain by 1991. Instead, the mid-to-late 1980s deteriorated into a "baffling and demoralizing" time for Ponderosa and especially its franchisees, who operated over 40 percent of the chain's more than 650 locations. Increased competition within the budget steak segment combined with management and ownership instability to create an extremely difficult operating environment. A Ponderosa franchisee recalled in a 1991 article by Bill Carlino of Nation's Restaurant News: "I don't care how good you are; you can't operate successfully with three leaders in three years."

In 1986, takeover artist Asher Edelman made his play for Ponderosa with the purchase of 18.5 percent of the chain's shares, a larger stake than that of the entire board of directors. Later that year, Edelman offered a generous $27.50 per share for the remainder of the company's stock, finally sealing the deal with a $29.95 bid that valued the chain at $235 million. The takeover shocked many restaurant industry observers. Charles Bernstein of Nation's Restaurant News editorialized that Ponderosa was "just a financial toy in Edelman's growing network of unrelated companies" and mourned "the loss of [the restaurant industry's] entrepreneurial spirit" in a March 1988 commentary.

His characterization of Edelman's approach proved accurate. Edelman installed himself as chairman, as Gerald Office ended his career at Ponderosa with a $12 million "golden parachute" severance package, and went on to purchase Empire Family Restaurants Inc. In classic fashion, Edelman tried to squeeze as much cash from Ponderosa as possible in as short a time as possible. He cut $7 million in expenses, eliminated 30 percent of the corporate staff, and terminated quality programs.

The newly-appointed management team was led by CEO Frank Holdraker. Formerly an executive with Pizza Hut, Holdraker instituted the Grand Buffet concept, an 80-item "all-you-can-eat" food bar. Although the Grand Buffet would become a popular feature at Ponderosa, it initially infuriated franchisees. Specifically, franchisees believed that the Grand Buffet raised their costs, while discounts and couponing intended to increase traffic (and thereby raise cash flow) only squeezed profits. Holdraker's unilateral decisions also engendered franchisee criticism. For example, the new leadership upgraded meats at company restaurants to USDA choice, while franchisees kept lesser cuts on their menus. When the chain tried to pass its higher costs onto customers, it only drove the notoriously price-sensitive clientele away.

In spite of all his efforts, Edelman found himself unable to reduce his heavy takeover-related debt, let alone turn the quick profit he had hoped for. In 1988, he sold out to John Warner Kluge's privately-held Metromedia Co. It was later revealed that Kluge had paid $8.6 million cash and assumed $290 million in debt to take control of the chain. Ponderosa formed the cornerstone of Metromedia's second incarnation. The new parent had operated a group of largely independent television stations from the 1950s to the early 1980s, when Kluge took it private. The six TV stations he sold to Rupert Murdoch in 1985 had formed the core of the Fox television network. At that time, Kluge liquidated virtually all of Metromedia's holdings, thereby generating a multi-billion-dollar personal fortune. Not content to sit back and count his billions, the venture capitalist saw in Ponderosa an opportunity to build a second empire, this time in steak houses.

Ponderosa's second ownership change in as many years brought a corresponding management transition. Holdraker resigned in 1989 and was replaced by J. Michael Jenkins. Jenkins had left S&A Restaurant Corp., operator of the Steak & Ale chain, in 1986 to assume the presidency of T.G.I. Friday's. He had tried to acquire S&A in the intervening years, but apparently gave up to join Ponderosa. Jenkins boosted his standing with Ponderosa's franchisees with the prompt ouster of Senior Marketing Vice-President Darrough B. Diamond. Many of the chain's affiliates had blamed Diamond for the costly Grand Buffet and what they perceived as Ponderosa's general lack of marketing focus.

In the midst of this management upheaval, Metromedia had purchased two of Ponderosa's competitors, S&A Restaurant (which operated both the previously mentioned Steak & Ale chain, as well as the Bennigan's chain) and Bonanza. Many analysts suggested, in fact, that Bonanza co-founders Sam and Charles Wyly, who had owned about 47 percent of the master limited partnership's stock, were behind the $83 million transaction. Immediately following its acquisition, the Bonanza chain was affiliated with Ponderosa under the aegis of Metromedia Steak Houses L.P.

This rapid succession of acquisitions and corporate shuffles sent another rumble through the restaurant industry, as well as Bonanza franchisees. Roger Lipton, an industry analyst with Ladenburg Thalman (New York) told Nation's Restaurant News's Bill Carlino that Ponderosa "had been mismanaged for years," while Bonanza had "a good management team in addition to profitable stores."

Jeff Rogers, who had come up through marketing and became CEO of Bonanza in 1983, was the leader of that highly-praised team. He had guided Bonanza to its best year ever, in 1987, when net income rose to $8.6 million on about $500 million sales. Bonanza franchisees were chagrined to hear that Rogers was included in a 1989 management purge. His ouster was just one complication in what Carlino called a "bumpy transition process."

In spite of their apparent similarities, Ponderosa and Bonanza had evolved into two very different enterprises. Ponderosa's mostly company-owned units were concentrated in the Midwest. Bonanza had developed into a "pure franchiser," with only two company-owned locations. Most of its restaurants were located in the Southwest. As the "acquirees," Bonanza franchisees feared that the Bonanza name would be phased out and that they would have less input in the new organizational scheme. Several "area developers" (regional franchisee managers) joined forces and wrote an angry letter to Kluge noting that they had "retained independent counsel." Another group of "Bonanzans" incorporated their own franchise association. After an initial period of criticism--both from Bonanza franchisees and restaurant industry observers--several major Bonanza franchise owners converted to the Ponderosa format. It did not appear, however, that Metromedia would compel a wholesale changeover.

It seemed that Kluge had accumulated a critical mass in the steak house segment. The acquisitions gave Metromedia a stronghold of 1,300 units and over one-third of the $4 billion (1989) steak segment of the restaurant market. But this stronghold in no way ensured the type of success to which Kluge (and Kluge-watchers) had become accustomed.

In fact, Metromedia Steak Houses was regarded by many as a disappointment. Although Kluge was said to have poured over $1 billion into the steak house affiliate, it lost more than $190 million from 1989 to 1994. To top it off, by 1993 Ponderosa had slipped from number one to number two, and Bonanza dropped to sixth place in annual sales. These problems may have contributed to the reorganization that split Ponderosa (and Casa Lupita) off as the Ponderosa Steakhouse subsidiary and combined Bonanza with the more upscale S&A under the METSA, Inc. umbrella. Industry analysts blamed the difficulties on everything from high competition to scanty capital improvements and lingering takeover debt, but no one seemed to know how to turn them around. Continuing management purges could not have helped. In 1992, Kluge replaced Michael Jenkins with Michael Kaufman, an acquisitions specialist.

Although some observers speculated that Kluge would dispose of Metromedia Steak Houses, "the man with the Midas touch" wasn't known to sell at a loss. In 1993, Ponderosa franchisees attended an annual convention at which they learned of a new plan for the chain's success. Specifically, management was committed to updating and modernizing its restaurants and providing better training programs for employees. Moreover, the company proposed a "quality, service, and cleanliness program" (QSC) under which each restaurant would be analyzed and employee feedback would be sought in order to ensure efficient operations. With such reforms underway, Ponderosa hoped to realize improved sales figures in the mid-1990s.

Principal Subsidiaries: Casa Lupita Restaurants, Inc.; ESI Meats, Inc.; Ponderosa Financial Corporation; Ponderosa International Development, Inc.; Ponlupa Restaurant Financing, Inc.

Ponderosa Steakhouse History

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