CEC Entertainment, Inc.

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CEC Entertainment, Inc.

4441 West Airport Freeway
Irving, Texas 75062
U.S.A.
Telephone: (972) 258-8507
Fax: (972) 258-8545
Web site: http://www.chuckecheese.com

Public Company
Incorporated: 1982
Employees: 12,000
Sales: $379 million (1998)
Stock Exchanges: New York
Ticker Symbol: CEC
NAIC: 72211 Full-Service Restaurants

CEC Entertainment, Inc., formerly ShowBiz Pizza Time, Inc., is the holding company for the popular child-oriented Chuck E. Cheese restaurant and entertainment chain in the United States. Appealing primarily to families with children between the ages of two and 12, the restaurants supplement a pizza and sandwich menu with games, rides, and animated musical and comic entertainment. Stage shows feature lifesized characters, the most famous of which is Chuck E. Cheese, the chain’s rodent mascot. Of these restaurants, 256 were company-operated; the other 60 were franchised.

Pizza Time Theatre Opens in 1976

The concept for the novel mixture of games, pizza, and electronic animals originated with Nolan Bushnell, the founder of Atari video games in the mid-1970s when teenagers began flocking to game arcades to test their reflexes on the latest craze—video games. The revenues generated by the quarters slotted into those games were huge, and Bushnell, who “wanted to operate and take in those quarters,” came up with the idea of using the games to fill the 20 minutes customers spent waiting while their pizza order was prepared.

The Warner Corporation agreed to build one restaurant after buying Atari from Bushnell for $28 million in 1976, and the first Chuck E. Cheese’s Pizza Time Theatre opened in May 1977, in San Jose, California, as a division of Atari. By banning unaccompanied teenagers and adding automated entertainers for younger children, Bushnell hoped to attract families and avoid having his pizza entertainment center turn into a teenage hangout. After a year of operation, Bushnell left Atari and bought the Pizza Time restaurant and the rights to the idea from Warner for $500,000. He then began looking for franchisees.

One person interested in such a franchise was Robert Brock, whose Dallas-based company, Brock Hotel Corp., had 1978 profits of $4.6 million. In 1979, Brock signed a co-development agreement with Bushnell to build Pizza Time restaurants and sign up franchisees in areas he knew from his Holiday Inns and their restaurants. Before the 1980 date for opening his first restaurant, however, Brock was introduced to a Florida inventor, Aaron Fechter. Fechter’s company, Creative Engineering Inc., produced animated characters and singing robots for amusement parks.

Brock thought Fechter’s robots were better than those used by Pizza Time and tried to get out of his contract with Bushnell. When Bushnell refused, Brock and Fechter went ahead anyway and negotiated a preliminary agreement. Early in 1980, Brock told Bushnell their agreement was canceled. Bushnell sued for breach of contract, and Brock countersued for misrepresentation. Brock and Bushnell eventually reached a legal settlement whereby Brock could use the Pizza Time Theatre concept in return for fees paid on a percentage of the annual gross revenues of the first 160 ShowBiz restaurants.

ShowBiz Pizza Place Opens in 1980

Brock opened his first ShowBiz Pizza Place in March 1980, incorporating under the name ShowBiz Pizza Time, Inc. in Kansas. The restaurant’s electronic host was Billy Bob Brokali, a large bear with an ironic smile. That same year, Bushnell’s Pizza Time Theatre showed a profit for the first time, and, in 1981, Bushnell took Pizza Time Theatre public. Both companies expanded quickly, building restaurants primarily in the Midwest, Southwest, and on the West Coast.

Brock and Bushnell were battling for a very lucrative market. In 1981, according to a 1982 Fortune article, ShowBiz restaurants averaged $1.45 million in revenues and Chuck E. Cheese’s Pizza Time outlets averaged $1.19 million each. This compared to average sales that year of $320,000 at PepsiCo Pizza Hut restaurants and $1.1 million at McDonald’s outlets. Part of the reason for the better performance was size: the typlcal ShowBiz and Chuck E. Cheese’s unit was between 10,500 and 11,000 square feet and could serve 400 to 500 customers per restaurant, compared to about 100 customers for most pizza chain units. The second reason for their success was the many quarters being played on the video games, which brought in over 25 percent of sales revenues. Of course, the restaurant and entertainment centers were also more expensive to build and outfit. The Fortune article reported that “a Show-Biz unit cost $1.25 million, including $90,000 for eight animals and their stage effects plus $200,000 for 50 video games and 30 amusement park devices for children. Pizza Time Theatres, slightly larger, cost $1.6 million each.”

The two chains offered customers a similar experience, with very few distinctions other than their entertainment. Most notably, the restaurants were big and loud. An article in Inc. described Pizza Time Theatres as “Las Vegas casinos for kids.” In the dining area, customers sat at tables, ate pizza, and watched large, wildly costumed robot animals sing and perform skits. On one of the three stages at ShowBiz, the Rock-A-Fire Explosion Band, consisting of a gorilla, a bear, a mouse, and a dog, performed songs from the 1960s to attract parents. In another room, adults had the alternative of watching soap operas on wide-screen television. At Chuck E. Cheese’s Pizza Time, the big rodent led sing-alongs and cracked jokes while customers in other lounges were entertained by robotic animals resembling human entertainers such as Dolly Parton and Elvis. Above the sounds of the songs and jokes rang the bells, whistles, and shouts from the game area, at which youngsters played video and other arcade games and romped about on kiddie rides. A merchandise booth at most restaurants sold hats, T-shirts, stuffed animals, and other toys.

Despite the restaurants’ popularity, there was skepticism among some financial analysts regarding their staying power, given emerging competition that offered better games and better food. But the trouble, when it came, was not from the videogame manufacturers and other companies who had opened a few competing outlets. By the mid- 1980s, the video game craze was over. ShowBiz and Pizza Time Theatre began losing the teen market, and the food and other entertainment was not enough to draw new or return customers. Each company also carried large debts as a result of their rapid expansion.

ShowBiz Buys Out and Revamps Pizza Time in 1984

When Pizza Time Theatre went into bankruptcy in 1984, Brock Hotel Corp. promptly bought up its competitor’s assets. But Brock soon found the two Pizza chain subsidiaries were draining his company’s resources. To avoid bankruptcy itself, Brock Hotel Corp. underwent a refinancing.

Between 1986 and 1988, according to Restaurant Business, The Hallwood Group made an equity investment in the company, receiving 14 percent ownership and control of the board of directors. Robert Brock resigned and, in 1985, Richard Frank, an experienced restaurant executive, was hired to head up the ShowBiz Pizza Time division as president and chief operating officer. In 1986, he was named chairman and chief executive officer of the restaurant division. When Frank assumed control, ShowBiz Pizza Time operated 262 restaurants: 107 Chuck E. Cheeses (30 company-owned and 77 franchised) and 155 ShowBiz units (95 company-owned and 60 franchised).

Frank began by initiating customer research, which found that although younger children liked the restaurants, their parents did not. There was too much noise, the food was mediocre, and, because there were no service personnel, parents had to order and serve themselves. Frank decided to reposition the restaurants as places to take the family and to concentrate on kids, ages two to 12, and their parents.

His strategy was to improve the food quality and make the outlets attractive to parents as well as kids. Beginning with company-owned units, ShowBiz increased the lighting, added windows, and hired service personnel to deliver the food. Restaurants reduced the number of video games, offered more rides and games for the under-12 set, and installed games of skill to attract more fathers. Moreover, the company improved the pizza and expanded the menu, installed self-serve drink stations, moved the salad bars into the middle of the room to make them more accessible, built a two foot-high wall around the toddler area and put windows in the wall between the dining area and game rooms so parents could keep an eye on their children but not hear all the noise.

Frank also implemented a new marketing approach, advertising special price deals in newspaper inserts several times a year. Television spots focused less on the animal characters and more on parents and children having fun together at the restaurant. His plan required putting money into existing outlets in addition to opening new ones. He also designed a new, smaller, 8,500 square-foot prototype, which could be built for roughly half the cost of the old format.

Company Perspectives:

We dedicate ourselves … to become the premier growth company in the entertainment and restaurant industry by operating multiple concepts with each being the Number One brand in its segment. Our concepts will be characterized by quality entertainment and food service, fun activities, while giving exceptional value and satisfaction to our customers.

ShowBiz Becomes an Independent Company in 1988

In 1988, Brock Hotel Corp. changed its name to Integra-A Hotel and Restaurant Company, and spun off ShowBiz Pizza Time through a stock swap with shareholders. As reported in Nation’s Restaurant News, for every ten shares of Integra they held, shareholders received about four shares of ShowBiz. A lawsuit arose from the Hallwood Group refinancing and Show-Biz divestiture in which plaintiffs alleged violation of Texas security laws and fraudulent transfer. Among its allegations, a group of Integra stockholders claimed that the stock options, warrants, and preferred stock they received in the refinancing became worthless when ShowBiz, which by 1988 was the biggest revenue producer in Integra, was spun off to common stock holders, primarily the restaurant management and The Hallwood Group. ShowBiz maintained that the suit had no basis, and the case remained in litigation until the mid-1990s.

The independent ShowBiz also purchased Integra’s Mexican dinner chain, Monterey House, with 58 restaurants. Show-Biz attempted to broaden Monterey’s base of blue-collar, low-income adults by attracting more families with an expanded Tex-Mex menu, modernized furniture and brighter, lighter dining areas. However, by the end of 1989, there was no improvement in sales and the company decided to convert 26 of the units to a trendier concept, Monterey’s Tex-Mex Cafes, and close the rest. In addition to Richard Frank, the new company’s management team consisted of Terry Spaight, president and chief operating officer; Matthew Drennan, executive vice-president and director of operations for Monterey; and Michael Magusiak, chief financial officer.

Unification Under the Chuck E. Cheese Name in 1989

Frank’s efforts to understand and please his customers appeared to be working. By the middle of 1990, after 17 quarters of increased same-store sales, the company’s stock was selling at $25.25 (up from $5.25 at the beginning of 1989 when the company went public). Deciding it was necessary to create a single, stronger identity for marketing, Frank moved to unite his two pizza chains under the Chuck E. Cheese name. Within two years, the company had converted the animated characters in all its own ShowBiz restaurants to Chuck E. Cheese and his friends. It also had moved into New England and the Mid-Atlantic regions of the country and was opening 20 to 30 new outlets a year.

With an increasing employee base, ShowBiz established Chuck E. Cheese’s University to train its operations and technical managers. New managers went through three weeks of hands-on training in guest relations, personnel management, food quality, and entertainment. Technical managers spent two weeks learning the basics of operating the rides, games, and animated stage shows.

Frank’s strategy of reinvesting in the existing restaurant base, developing new locations, and accelerating debt repayment continued to be successful. ShowBiz reported same-store sales increases with a net income of $15.5 million on revenues of $253.1 million in 1992. However, when the company announced lower-than-expected second quarter earnings in June 1993, its stock dropped 35 percent to $18.75 a share. In a Wall Street Journal article appearing the Monday after the drop, the company attributed lower sales to ineffective advertising and a slowdown in unit remodeling. Analysts also pointed to the introduction and growth of new commercial indoor playgrounds at restaurants such as McDonald’s, which attracted families with young children and provided the first real competition to ShowBiz’s entertainment center concept.

Believing in the soundness of the Chuck E. Cheese’s concept, Frank continued his customer-oriented policies, remodeling and refining existing restaurants. In 1993, smoking was banned in most of the restaurants. The company spent a year planning the change after an earlier attempt resulted in a significant drop of sales at smoke-free outlets. This time, Frank emphasized preparing customers for the change and stressing the move was being made for the kids’ sakes. Parents’ desire for a safe environment for their children also led to the new “Kid Check” child identification policy. Upon entering a restaurant, adults and children had their wrists stamped with matching invisible ink codes to show they were together. Codes were checked when an adult left the premises with a child to make sure the codes were the same.

Updating the Chuck E. Cheese Concept in the Mid-1990s

When research revealed that customers thought they were spending too much for what they got at Chuck E. Cheese’s, Michael Magusiak, who was named president in 1994, began testing a value-pricing strategy. The resulting policy of having customers buy discounted game tokens when purchasing a meal, rather than at a change dispenser, allowed parents to pay for everything at one time—and actually brought in more revenues. The remodeling of units updated decor, added more game packages for older children, and new proprietary Chuck E. games for youngsters. A new play attraction, Skycrawl, was introduced as free entertainment, and the show was updated in consultation with Walt Disney Co. to include more animated characters backed by video effects. New menu items aimed at both children and their parents were also tested. These included pizzas topped with traditional kids’ foods, such as french fry and hamburger pizza or macaroni and cheese pizza, as well as a southwestern chicken pizza for adults. During 1994, 22 units were upgraded and 12 more were opened, a much slower rate than in previous years. The company also restructured its management and sold its Monterey’s Tex-Mex Cafes. However, it retained a 12.5 percent equity interest in River Associates, Inc., the company purchasing the Monterey’s chain.

Still revenues declined from $272 million in 1993 to $268 million in 1994, and dropped again in 1995 to $264 million. Net income for that year was a mere $63,000. Despite these financial problems, ShowBiz’s new policy of renovation, cautious growth, and aggressive marketing was seen by many of the company’s institutional investors as the right approach for keeping the kids’ market. “They got caught in a really competitive environment and maybe started doing things a bit late, but when they realized something needed to be done, they did it,” one analyst noted in the Dallas Morning News. By the mid-1990s, the remodeled restaurants were generating sales at a double-digit pace, and in shopping centers and suburbs around the country, Chuck E. Cheese continued to be a big draw.

In 1996, the company purchased the 19 Chuck E. Cheese restaurants owned by its largest franchiser, McBiz Corporation, for $2.6 million plus remodeling costs, leaving only 71 of its 315 sites still franchised. A move to remodel all of its restaurants solidified a turnaround for Chuck E. Cheese. Revenues for 1996 rebounded significantly to $294 million, while comparable store sales increased 9.8 percent and net income totaled $13.2 million.

About the time Chuck E. Cheese celebrated his 20th birthday in 1997, parent ShowBiz Pizza Time launched two other initiatives aimed at spurring growth for Chuck E. Cheese. In March, it concluded its secondary public offering of common stock, and in June, it entered into several licensing agreements to promote the Chuck E. Cheese name. The first of these agreements was with the Delicious Frookie Company to produce Chuck E. Cheese snack crackers and cookies; the second was with Street Players of Los Angeles to manufacture Chuck E. Cheese poseable figures and other toy items; and the third was with K & L Enterprises to manufacture a limited edition of Chuck E. Cheese collectible cookie jars. The year 1997 was one of record earnings for the company, which closed out its fiscal year with revenues of $350 million, net profits of $26 million, and a comparable store sales increase of almost 11 percent.

The Mouse That Roared: A Strong Showing in the Late 1990s

In 1998, ShowBiz Pizza Time tried another novel approach to increase its business, initiating a successful lottery-like incentive program among its hourly employees, issuing scratch-and-win tickets to those who exceeded sales goals for six add-on food items. The company also resumed its new store opening schedule, with 18 to 22 new units planned for the year, and ploughed almost all of its cash flow back into remodeling already existing stores. Riding the wave of the revitalizing restaurant sector, ShowBiz expanded its marketing program by underwriting children’s television shows, such as “Barney & Friends” and “Wishbone.”

In July 1998, ShowBiz Pizza Time changed its name to CEC Entertainment and, at the same time, moved its stock from the NASDAQ to the New York Stock Exchange. For the first six months of the year, the company’s stock rose from $23 to more than $40 per share, winning it a spot among the “Top Ten Stock Performers” listed by Nation’s Restaurant News in December 1998.

With the under-13 population expected to reach 56 million by 2010, CEC Entertainment implemented a five-year strategy in 1998 aimed at giving the company expansion options once it reached its U.S. saturation level, which it estimated to be at about 500 stores. Although the company’s focus remained on the growth of the Chuck E. Cheese brand through the end of 1999, it began to plan the development of a casual dining concept that, unlike Chuck E. Cheese, had its primary focus on food. The new concept’s entertainment was to be geared toward older children as well as adults, while its menu was to feature a broader menu that included burgers, salads, steaks and seafood. As part of this expansion, the chain undertook to develop an animated version of Chuck E., designed to appeal to children older than seven.

In addition to concept development, CEC continued to pursue licensing items, adding frozen pizza snacks to its retail food line and introducing a line of toys in 1999. It also began to focus on small acquisitions. In December 1998, CEC acquired six more Chuck E. Cheese units from its largest franchisee. In July 1999, it acquired most of the remaining assets of the bankrupt Discovery Zone for $19 million. These included its rival’s name, logo, 13 “fun centers,” two parcels of undeveloped real estate and the rights to seven leased properties. Discovery Zone, founded in 1989, had been the largest operator of children’s indoor entertainment facilities until the early 1990s, when, like CEC, its revenues and customer counts had fallen drastically. Despite a systemwide renovation program, Discovery Zone never recovered and had twice filed for bankruptcy before CEC purchased it. CEC began plans to convert six of the units it acquired to the Chuck E. Cheese concept, putting off until later the decision of whether to operate the remaining locations or sell them.

By the late 1990s, the Chuck E. Cheese name had returned with a vengeance. The stock which had been at a low of $5 a share in 1994 now traded at $38 in May 1999. Nation’s Restaurant News honored Richard Frank with its 1999 Golden Chain award. As Jonathan Clements wrote in The Wall Street Journal after an afternoon at one of the chain’s outlets with his five-year-old daughter, “as any parent knows, kids may not make money, but they sure help decide how it gets spent.” Revenues for 1998 bore out the truth of his statement. Net income in 1998 increased to $33.7 million while revenues came in at $379 million.

Principal Operating Units

Chuck E. Cheese Restaurants.

Principal Competitors

Leaps & Bounds; McDonald’s; Pizza Hut.

Key Dates:

1977:: The Warner Corporation opens the first Chuck E. Cheese’s Pizza Time Theatre in California.
1980:: Brock Hotel Corp. opens the first ShowBiz Pizza Place in Kansas.
1981:: Chuck E. Cheese Pizza Time Theatre goes public.
1984:: Chuck E. Cheese Pizza Time Theatre enters bankruptcy; Brock Hotel Corp. buys its assets.
1988:: Brock Hotel Corp. spins off ShowBiz Pizza Time.
1990:: ShowBiz and Chuck E. Cheese restaurants are united under one name, Chuck E. Cheese.
1998:: ShowBiz Pizza Time changes its name to CEC Enterprises.
1999:: CEC Enterprises acquires the assets of the bankrupt Discovery Zone.