Jerry’s Famous Deli Inc.

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Jerry’s Famous Deli Inc.

12711 Ventura Blvd., Suite 400
Studio City, California 91604
U.S.A.
(818) 766-8311
Fax: (818) 766-8315
Web site:http://www.jerrysdeli.com

Public Company
Founded: 1978
Employees: 1,530
Sales: $56.4 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: DELI
SICs: 5812 Eating Places

Jerry’s Famous Deli Inc. is known as the number one consolidator of independent delicatessens and restaurants in the United States. In 1998, the company operated ten facilities in the states of California (mostly in southern California) and Florida under the three names of Jerry’s Famous Deli, Solley’s Delicatessen and Bakery, and Rascal House.

Re-creating the nostalgic ambience of restaurants in Manhattan’s theater district, Jerry’s Famous Deli, whose motto is “Where food and people mix,” has restaurants which operate 24 hours a day, seven days a week. With more than 700 items on their extensive menu, all of which are available for takeout, delivery, and catering, as well as eating in-house, anything one wants to eat can probably be found there.

The company was founded in 1978 with the opening of its Studio City, California, restaurant. Three additional facilities were opened in 1989, 1991, and 1994, with two additional restaurants being opened in February and June 1996. Two more restaurants (Solley’s) were acquired as of June 1996, and one additional restaurant (Rascal House) was acquired in September 1996. Another Jerry’s Famous Deli restaurant was opened in August 1997.

Guess Who’s Coming to Dinner?: The Early Years, 1978-94

The first Jerry’s Famous Deli restaurant debuted in Studio City, California, on November 1, 1978, where it has since attracted a wide-ranging loyal customer following of residents and those who work in the nearby area, including the adjoining movie and television studios.

The company’s first expansion from its Studio City roots came more than a decade later when, in July 1989, the company acquired a facility in Encino, California. Following one of the company’s four strategies for growth, the previously existing eatery was converted into a Jerry’s Famous Deli restaurant, and managed to triple its annual revenues very quickly. The Encino restaurant was owned and operated in 1998 through JFD-Encino, a limited partnership of which a wholly owned subsidiary of the company is an 80 percent general partner, with California-based Valley Deli Inc. making up the other 20 percent of the partnership. The general partners receive a management fee equal to three percent of the gross revenues of the Encino restaurant, as well as being allocated 25 percent of net profits, net gains, and distributions of JFD-Encino until such time as the limited partners have received cash distributions equal to 100 percent of their contributed capital plus an amount equal to 10 percent per annum of their capital contribution. Jerry’s Famous Deli is also a 7.55 percent limited partner in the agreement. From its inception in April 1981, through December 1994, Isaac Starkman owned Jerry’s Famous Deli L.A. Inc., the co-general partner of JFD-Encino. In January of the following year, Starkman contributed the shares of JFD-LA to Jerry’s Famous Deli Inc. for no additional consideration.

Two years (almost to the day) later, in July 1991, the company made its first foray outside the San Fernando Valley area, opening a location in Marina del Rey, California. A second high-profile location restaurant opened its doors three years later, in January 1994, when the company set up shop in West Hollywood, near Beverly Hills, across the street from the famous Beverly Center and Cedars-Sinai Hospital. Adjoining, and operated as a part of, the West Hollywood restaurant is a private bar and cigar lounge called Guy’s Place, which opened at the end of September 1995.

In 1994, after the company catered a private function for the cast, crew, and guests of the successful “Frasier” television show, several persons complained of food poisoning symptoms and filed claims against the company. Jerry’s Famous Deli, believing that the claims made against it were without merit, together with the company’s insurance carrier, contested the legal action, which was slated to go to trial in early 1998.

DELI-cious: Going Public, 1995

In January 1995, the company acquired a subsidiary called Pizza by the Pound Inc., owned by Isaac Starkman and one other partner, which operated a 2,300-square-foot pizza restaurant in Sherman Oaks, California, called Jerry’s Famous Pizza. But, feeling the restaurant was not in line with the company’s growth direction, in June of that same year the company ceased operations at the pizza parlor.

Also that year, in October, Jerry’s Famous Deli Inc. became a publicly traded company, listed on the NASDAQ under the symbol “DELI.” Total revenue for the company that year reached $28 million, with a net income of $782,234.

On a (Sesame Seed?) Roll, 1996-Date

Proceeds from the successful initial public offering helped the company expand very quickly in 1996, as it more than doubled the number of restaurants it operated. The four original Jerry’s Famous Deli restaurants were joined by two new locations in California: in Old Pasadena (opened February 1996) and in Westwood (June 1996) within a matter of a few months. The Westwood restaurant building and adjacent parking spaces and parking lots, were leased from The Starkman Family Partnership, a business entity controlled by Isaac Starkman, who is also the chairman and CEO of Jerry’s Famous Deli Inc. His two sons, Guy and Jason, also served as vice-presidents in the company.

The elder Starkman had been involved in the restaurant industry prior to his work with Jerry’s Famous Deli. In November 1984, Starkman founded a casual dining establishment called Starky’s, which combined a deli operation with a pizza parlor and a video game arcade at the top of The Beverly Center in Beverly Hills, California. Due to the facility’s lack of street visibility, its location in an enclosed shopping mall that itself had a limited range of hours of operation, and numerous problems with hygienic conditions at the mall which were outside of Starky’s staffs control, the restaurant did not do as well as was expected, and its doors were closed in December 1992.

Also in July 1996, the company acquired two delicatessen restaurants operating under the name “Solley’s Delicatessen and Bakery” for approximately $2.3 million. The locations were in southern California, one in Sherman Oaks and one in Woodland Hills. The company, following the growth strategy of buying existing eateries, converted the neighborhood favorite in Sherman Oaks into the Jerry’s Famous Deli restaurant concept, and reported annual revenue at that location as having increased from $3.6 million to $5.8 million after its reopening in December 1996. The Woodland Hills location remained a Solley’s Delicatessen and Bakery.

In August 1996, the company needed to raise more capital for future growth. Pursuing this, Jerry’s Famous Deli entered into an agreement with Waterton Management LLC, Yucaipa Waterton Deli Investors LLC, and Jerry’s Investors LLC, eventually raising approximately $5.5 million from the sale of preferred stocks to those entities.

Yet a third strategy employed by the company for growth, acquiring existing restaurants and improving its operations, was put into effect when the company bought the venerable landmark restaurant Wolfie Cohen’s Rascal House in September 1996. Jerry’s Famous Deli purchased the 42-year-old restaurant following the death of Arthur Goodman, one of the principals of the facility. The 450-seat Miami Beach, Florida-based delicatessen restaurant, which was purchased for nearly $5 million, already was a high-volume restaurant, with well-known brand names and a strong and loyal customer base. The acquisition of the restaurant was the company’s first outside of the state of California. With the purchase, the company also acquired the experienced store management and personnel, began accepting credit cards at the facility for the first time in its history, and increased the annual revenue at the location from $7.7 million to $10 million in one year.

In a move to expand revenue, the company in the latter part of 1996 began marketing its expansive menu in a catering business, available via a number of its locations. Following the December 1996 opening of the Woodland Hills restaurant, some customers were drawn away from the nearby Encino and Pasadena facilities. To combat this, the company created a banquet room at the Encino restaurant, and the “Take Out” area was expanded. Marketing efforts were also stepped up at the Old Pasadena restaurant. The company’s total revenue for the year reached $40.2 million, with a net income of $578,713.

In March 1997, Kenneth Abdalla, an outside consultant, was given the mantle of president on an interim basis, with the specific objective of assisting in the execution of the company’s acquisition and expansion strategy, through December 1998.

Several months later, in June 1997, the company introduced “Early Bird Specials” dinners (offered daily prior to 6:00 p.m. at approximately a 40 percent discount from the normal retail price) to its southern California restaurants, following in the footsteps of the Sherman Oaks facility, which had previously offered them, marginally increasing revenue for the entire restaurant chain.

Company Perspectives

Jerry’s Famous Deli Inc. continues to search for prime locations appropriate for its customer base and to develop them into restaurants, both in the Southern California and Southern Florida areas, as well as new areas, while continuing to provide quality food and service in its existing restaurants.

With Abdalla arriving on the scene to help the company expand, in August 1997 a Jerry’s Famous Deli restaurant was opened in Costa Mesa, California. Located in the heart of southern California’s posh Orange County area, situated near the megamall complex of The South Coast Plaza, this facility followed the company’s first strategy for growth, which was developing “model Jerry’s restaurants from scratch.”

The fourth part of the company’s expansion strategy focuses on clustered growth, exploiting the benefits of its well-known brand names, which is what the company has done with Wolfie Cohen’s Rascal House name in south Florida, in addition to expanding the Jerry’s Famous Deli name in southern California.

By 1997, Jerry’s Famous Deli was following in the footsteps of other successful companies, such as Marina del Rey, California-based Cheesecake Factory Inc. (trading in 1997 at 35 times estimated 1996 earnings), McDonald’s Corp. (trading in 1997 at 22 times estimated 1996 earnings), and Wichita, Kansas-based Lone Star Steakhouse & Saloon (trading in 1997 at 25 times estimated 1996 earnings). Total company revenue for 1997 climbed to $56.4 million, with a net income of $563,170.

In January 1998, the company announced the establishment of a wholly owned subsidiary for the company’s Florida operations, planning expansion in that state.

The company also announced that month the planned acquisition of a gourmet food store called The Epicure Market Inc., owned by brothers Harry and Mitchell Thai, located in Miami Beach, Florida. The acquisition was completed in April of that year, with the company paying $7.1 million in cash, in addition to nearly a million shares of the company’s common stock. The company was planning for The Epicure Market to increase the interior sales area, install additional seating for in-house dining patrons, increase the store’s hours of operation, and expand overall operations to include delivery, catering, and home meal replacement. The Epicure Market was owned and operated by the Thai brothers and their family for more than 50 years, and the two brothers agreed to remain on the company’s staff as co-managers of The Epicure Market for an initial term of five years under new employment agreements, along with all 150 employees.

Also in January of that year, the company acquired a lease on an 11,000-square-foot restaurant property in Boca Raton, Florida, where the company opened a new Wolfie Cohen’s Rascal House in the summer of 1998 after renovations on the existing facility were completed.

By mid-1998, the company was poised for future growth, with the leading industry trade magazine Restaurant News noting that,’ ‘Jerry’s is one of the few deli concepts to grow into a multi-unit operation of any note,” and, in its rankings of national restaurant chains in July 1997, Jerry’s Famous Deli was ranked as the Number One Deli Growth Chain and the Number Two Unit Growth Chain for 1996. By mid-May 1998, all of the company’s facilities, which had been inspected by The Los Angeles County Department of Public Health regarding requirements for food preparation, handling, and storage, had received an “A” rating, the highest rating possible for the restaurant industry.

Knowing that the existing restaurants can not show substantial growth in per-restaurant revenues, the management believes that any significant sales growth will have to come from additional restaurants. Therefore, the company continues to search for prime locations appropriate for its customer base and to develop them into restaurants, both in the southern California and southern Florida areas, as well as new areas such as Las Vegas and New Orleans, while continuing to provide quality food and service in its existing restaurants.