The Rise and Fall of Rainforest Café | What Happened to Rainforest Café?
Hi! I’m Jason and welcome to my YouTube channel, Company Insight. In this video, I’m
going to tell you the story behind the Rise and Fall of the Rainforest Café and what
happened to this restaurant chain. Have any of you ever been to a Rainforest
Café? I went to a Rainforest Café a few times in my life about 20 years ago. That
might tell you something about how relevant the restaurant chain is in this day and age.
Although I still remember the loud tiger and gorilla growls or crash of thunder sounds
blaring over those iconic grainy 1990’s quality speakers, the one thing I remember
the most was the waffle fries! Buttery, soft, crispy but not too soggy, those waffle fries
made the whole adolescent years worth it. Now, Rainforest Café is but a former shadow
of its previous self. So what actually happened to this once thriving and iconic restaurant?
Why was the fall so quick and so drastic? In this video, I’ll dive deep into the Rain
Forest Cafe brand story and provide you with the Company Insight on the right and wrong
that happened with this Company and what you can take away.
But before we begin, if you guys enjoy topics like this, please click the Follow button
to know when new Company Insight clips come out each week. Thanks for doing that and
now let us continue on…
How did Rainforest Café Start?
So what is Rainforest Café? Rainforest Cafe is a place that simulated eating in a real
rainforest and was unlike anything at its time. The concept behind Rainforest Cafe was
initially created by fellow entrepreneur, Steven Schussler, back in 1989 in Bloomington,
Minnesota. Strangely, Steven first created the prototype for the business in his modest
home, where the neighbors had assumed he was doing some sort of strange ritual or illegal
activity, due to the loud bangs, strange noises and bright flashing lights that would come
from his home at all hours of the day and night. Just to give you an idea how crazy
Steven was, just imagine: * Over 3,000 extension cords to power sound
systems, lights and fog pumps * Over forty tropical birds, two 150-pound
tortoises, a baboon, an iguana and a school of tropical fish housed in ten 300-gallon
fish tanks * Over $2,000 in monthly electricity bills
* And overall, over half a million dollars spent to create a real experience of being
in the rainforest at his home. Sounds like something Mike Tyson would do!
But all of it eventually paid off! With some luck, he convinced investors to invest and
the first restaurant was opened at the Mall of America in October 1994 to huge fanfare
with queues longer than 3 hours outside the mall. So what lead to the success of Rainforest
Café? Personally, I think 3 factors lead to the success – a great product, a great
experience and being able to raise tons of investor capital.
Success Factor #1 - Great Product
First, Rainforest Café had a good product. At its core, they had good quality and tasty
food (as aforementioned with those iconic waffle fries).
Their cuisine was very on brand with the era, ranging from breakfast to dinner and every
meal and snack in between as well as alcoholic
beverages. It was a one stop family friendly location,
with high emphasis on sit down eating and quality family time. You did not go here to
have a quick lunch, it was more of a time-consuming
special occasion excursion and a far opposing reach from the fast, health and fitness foods
craze of today.
Success Factor #2 - Great Experience
Second, Rainforest Café provided a truly memorable experience. A rainforest café didn’t
have waiters and waitresses, it had Safari Guides. Bartenders were Navigators. It even
had live animals with fish and birds were flying around at most locations, while other
more exotic animals like big cats, popped up in larger locations from time to time.
It was a big draw for those people especially, in suburban and city locations that rarely
got to see wildlife, let alone while they ate! The appearance of the location was like
candy to a child with the colors and environment looking like a real rainforest. It was a huge
winning point among parents who wanted to feed but also entertain their children and
especially to children themselves who would often convince their parents to take them.
After all, we all know kids have all the power!
The Rainforest Cafe was the hot, trendy place to go in its day. Even several celebrities
endorsed it. Like much of this period and any other period for that matter, showing
off was all the rage. If you went to this restaurant, you were sure to brag to your
friends the next day about your “exotic” extravagant, rainforest expedition the night
before. If it is good enough for Michael Jackson, it surely was good enough for you!
Success Factor #3 - Great Funding
In the following years, Rainforest Cafes were popping up everywhere from Pennsylvania, California,
even Kansas. They were even opening overseas in Europe, South America and China! The key
to get things moving was investor capital. There wasn’t a very high barrier to entry,
so the Company had the first mover advantage to grow and scale quickly.
Luckily, with a great management team, financial investors were excited at the potential for
growth and Rainforest Café had an IPO on the Nasdaq stock exchange in April 1995 at
$6 per share. By October 1995, shares were trading at $22 a share and all the way to
$50 a share by June 1996. That’s a 8x return in about 1 year, even higher than the modern
day Tesla and Bitcoin returns! The IPO and warrants offering in 1995 brought in $23 million
in investment. Capturing the momentum, the Company then raised more capital of $74 million
in January 1996 to speed track expansion and another cool $96 million in September 1996.
That’s a total of $193 million raised in less than 4 years! Nearly $200 million to
open rainforest themed restaurants! Everything seemed bright and rosy, but then cracks started
to appear in the years ahead.
So What Happened to Rainforest Café? Beneath the shinny veneer on the outside,
problems were happening internally.
Failure Factor #1 - Costs Overboard
The first problem was that costs were going overboard and the Company was burning cash
faster than cash was coming in.
Back when Rainforest Café was a publicly traded company, they gave investment costs
to open a Rainforest Cafe in their 2000 annual report as shown here. These figures were provided
by management. They had mentioned mall locations cost about $7 million to open. That’s about
$10 million in today’s money after inflation. That is unbelievably expensive to spend that
much money opening a restaurant in a mall! Larger icon locations were costing $14 million
back in 2000 (about $21 million in today’s dollar value) and future icon locations they
were planning to open would cost over $20 million back then, which is $30 million in
today’s dollar. $30 million! I cant even believe it! Costs were completely going out
of control for the company as they needed to continuously raise larger and larger amounts
to keep opening new locations.
Failure Factor #2 – Business Metrics Weakening
And the problem was investors would only continue funding the expansion story if growth was
continuing and the stock price kept on going up. That’s generally how the game works.
But all that would come to an end soon. Revenue growth was slowing. By 2000, revenue for same
store restaurants were falling by close to 20% for the year over year. The Company started
to realize that as they opened new stores, it was difficult to keep same store sales
to continue growing. By 2000, they had opened enough stores and had gotten enough datapoints
to realize that after 18 months of a new store being open, performance was showing that sales
would start to fall after this point in time.
The issue was described by Nelson Schwartz in the March 1998 Forbes article, “Fueled
by the faddish success of just a handful of outlets, theme restaurant chains have a history
of pursuing breakneck expansion plans. For a while, all the new openings create strong
earnings momentum. In most cases, though, customer fascination wears off, repeat business
disappears, and market saturation dooms further growth.” This exact scenario happened to
Rainforest Café.
Failure Factor #3 – Cost Cutting Destroys the Rainforest Café Experience
By 2000, Rainforest Café was in BIG trouble. After years of revenue growth from $108 million
in 1997, to $214 million in 1998, all the way to $263 million in 1999, by October 2020
there was literally no more growth compared to the same period in 1999, even after opening
more and more restaurants.
To add to the trouble, net income margins were declining every single year from 11%
in 1997 down to 5% in 1998 and 2% in 1999. But nothing prepared the Company for the losses
in 2000, when they reported a Net Loss of over $100 million for the first 9 months of
the year. The Company was in a terrible financial situation with big losses and business metrics
worsening that they had no choice but to sell the entire business in a firesale to Landry’s
Restaurants, a company that also owns over 600 restaurants, hotels and casino and entertainment
destinations in the United States. They also own Morton’s Steakhouse, McCormick and Schmick’s,
Bill’s Bar and Burger and Bubba Gump Shrimp. Landry’s purchased the Rainforest Café
for $3.25 a share and took the Company off the public stock market. Just to give you
an idea, that’s a loss of over 90% for investors from just a few years back when the share
price was $50. That’s how bad things had become.
Before, the restaurant was known for over the top and extravagant presentations. After
2000, as the Rainforest Café was taken private by Landry’s, not a lot of information is
officially known. One thing that was publicly known to people in the industry is that the
new owner, Landry, then massively moved to cut costs. Then soon because of decreasing
revenue and other factors such as customer feedback and desire to gain profits, they
cut back on the Rainforest Café’s initial business model. They lowered their music,
changed their aesthetic and graphics inside the restaurants and most importantly they
got rid of most of their live animals throughout almost all locations. To give examples, live
birds were cancelled. Then the fish were removed. Menu items were changed and cheapened.
The iconic volcano birthday cake with shooting sparklers was changed to a brownie tower with
plastic. Everything changed to cost cutting, even at the sacrifice of the experience. All
the items that were probably the biggest draws for customers all along were completely nicked.
Quickly and without warning, most locations fully got rid of these animals, leaving customers
confused and unenthused with the prospect of returning. Now, these animals have been
replaced with plastic novelty creatures and robotic animal sounds. Without the live animal
incentive, customers felt they were no longer paying for a unique and fun experience. They
were just now spending their money on an overpriced burger and some flashing lights. Over time,
this change made customers disinterested and they soon realized they would be better off
spending their money elsewhere, where prices were more affordable.
The Outcome – More and More Rainforest Café Location Closures
Although Landry tried to revive the brand since taking over in 2000, net net, we can
tell they have been closing Rainforest Café locations ever since. Again, as a disclosure
to all you guys, there is no official public information on this since 2000, but I’ve
been able to piece together pieces of the puzzle to guesstimate what happened to Rainforest
Café to the best of my ability. Everything from year 2000 onwards is based on information
on the internet and from speaking with people in the industry.
When you look in detail on locations opening and closing, it is interesting to tell that
even after 2000, the Company looks like they did open another 9 locations in the past 20
years. However, at the same time it seems they closed around 27 locations since 2001.
What I’ve heard from talking with people in the industry is that some locations that
were opened were franchise locations where individuals or companies were opening Rainforest
cafes using the Rainforest café branding and probably paying for the fitout and investment
themselves. That probably made sense from Landry’s perspective as they already owned
the brand and had little to lose from new franchises. However, with such little new
franchises opening and some even closing a few years after opening, it’s obvious that
the business model wasn’t working anymore. Again, a lot of information simply isn’t
available. For example, an interesting fact that’s no where online is that Rainforest
Café officially opened in the capital of Jakarta, Indonesia in 2016. However, after
disputes with the owner, the location’s name was changed to MADAGASKAR, even though
all the interior decorations still look like a Rainforest brand Café. There is no mention
about this at all from the Company, as it must’ve been an embarrassing misstep.
Bob Goldin, head of Chicago-based food industry consultancy Pentallect ultimately summed up
quite well the problem with Rainforest Cafe, “Themed restaurants tend to have a short
lifespan. An entertaining setting can get diners in the door but is no guarantee they’ll
come back, especially since the food at themed restaurants often isn’t a great value. Rainforest
Cafe’s kid-oriented vibe also limited its audience. There’s a novelty factor that
wears off pretty quickly, and they’ve been around a long time.”
Conclusion
And that brings us to today. Currently, there are only about 22 Rainforest Cafes locations
still operating. And even at 22 locations, with the Covid pandemic, more locations are
likely to be shut this year. It wouldn’t be surprising to see this number falling to
15 or 10 in the coming years as leases come to expire. Based on the analysis of Rainforest
cafe, we can take away the knowledge that although the business ultimately struggled,
they clearly did a lot of things right to get to nearly 40 locations at one point. Simply
achieving that was a huge accomplishment against all odds. We learn from their business model
to be daring and to always strive to be innovative in creating a great product and unique experience
while thinking outside of the box when creating a new business. Meanwhile, it’s always important
to pay attention to costs and business metrics while doing the best to not remove the core
characteristics or experience that brought your customers to you in the first place.
So with that said, thank you so much for watching my video. There was a significant amount
of research and production that went into making this video possible, so if you wouldn’t
mind giving the video a LIKE and leaving a comment in the YouTube section below, it would
really help out a lot. Be sure to check out some of my other videos, like the Rise
and Fall of Orbitz Drink and the Rise and Fall of True Religion. Thank you again for
watching and stay tuned for another episode of Company Insight next week.