The Rise and Fall of The Discovery Zone
Hi there! I’m Jason and welcome to my YouTube channel, Company Insight. In this video, I’m
going to talk about the story behind the Rise and Fall and What happened to Discovery Zone.
Who remembers Discovery Zone? DZ Discovery Zone! I was obsessed with that place as a
kid, running around getting lost through the tube tunnels, the ball pits, roller slides
and ziplines. It was unbelievable fun and good memories. Did you grow up in the United
States during the 1990’s? If you did there is a greater than 60% chance that you attended
a party at an “indoor entertainment facility,” the major names being Chuck-E-Cheese, Funtime
America and … The Discovery Zone. Chuck-E is still in worldwide existence with its electronics-based
carnival aesthetic. Funtime America has been reduced to only a handful of locations nationwide.
But the saddest story is with The Discovery Zone - An indoor party venue that became the
crafters of 45 McDonald Play Centers in 1994 and ultimately running over 300 centers in
that same year. With affiliations with other 90’s juggernauts like Blockbuster, McDonald’s
and Entertainment Industry Giant Viacom, the publicly traded Discovery Zone intended to
be the leader in the indoor-fitness-party venue in the world. But what happened? What
drove such a well-positioned business into the ground, seemingly over night? Today we’ll
dig deeper to uncover what happened to this remarkable brand. Whether you’re a boomer,
Gen X, millennial or younger, you’ll be a DZ business expert by the end of this video
and relive part of the nostalgia along the way.
But first, I just need a quick favor from you. If you wouldn’t mind just hitting that
LIKE button for the YouTube algorithm, it would help me out a ton. The more engagement
a video like this gets, the more likely the YouTube algorithm is to push it out to more
people to enjoy. And as this is a brand-new channel, it helps me out a ton and it’s
free to do.
Thanks for doing that and now let us continue on with the Rise and Fall of the Discovery
Zone video.
What is DZ Discovery Zone?
In 1989, Discovery Zone was founded by Jim Jorgensen, Ronald Matsch and Dr. David Scheonstadt
in Kansas City, Missouri, opening 15 locations in their first 18 months of existence with
a business model based around active entertainment, featuring expansive, multi-level elaborate
indoor mazes. Cost for kids was about $6 per hour with an additional $2 for each additional
hour. Between the kid friendly zip lines leading into large ball pits and the exploratory potential
of these landscapes the company could confidently boast the motto, “Never The Same Fun Twice.”
That is merely from the physically active perspective, DZ Discovery Zone also hosted
video game arcades, a must for any 1990’s, kid party venue.
Let’s look at the key metrics in the first few years. As you can tell, things were on
a roll. From 22 locations in 1992, they grew to 61 locations in 1993. Yearly revenue had
also tripled from $20 million in 1992 to $61 million in 1993. In June 1993, the Company
went public on the Nasdaq stock exchange at $22 a share and immediately closed over 60%
higher at $35 on the first day of trading. With the IPO, DZ was able to raise over $50
million to fund their growth. At their peak, DZ Discovery Zone had 347 location between
the United States, Canada and Puerto Rico in 1994 and revenues hit $181 million that
year.
Wow! What a huge accomplishment for such a young company! You could say this was like
the WeWork of the 1990’s, minus the IPO and Adam Neumann.
Huge Advantage – Big Powerful Shareholders
Let’s look at the strengths of Discovery Zone. I’ll skip past the awesome and fun
experience that everyone knows about DZ Discovery Zone and focus on the less spoken about advantage,
which was their powerful sponsors. First of all, they had huge brand name sponsors and
were able to raise large amounts of investor capital. There were other indoor playgrounds,
but none were as large as DZ Discovery Zone because Discovery Zone was the only one with
access to capital.
Sponsor #1 - Blockbuster Video & Viacom
Blockbuster Video and its then parent company, Media Giant Viacom, infused over $10 million
into the burgeoning DZ Discovery Zone in April 1993. With Blockbuster’s partnership they
gained a 20 percent stake in the company with the soon realized option to increase their
investment to a majority holding beyond 50%. With plans to jointly design and launch 10
locations in Great Britain and their rights for Blockbuster to design 50 Discovery Zone
locations, Blockbuster saw the marketing potential of this merger.
The notion of creating a party venue with the marketability of “bringing the party
home” with a movie or video game rental from Blockbuster was a good one at the time.
A one stop shop of culturally cutting edge, modern 90’s entertainment was worth the
gamble. As we look back from the clear view of hindsight, the marketing value of this
merger doesn’t seem to make that much sense, which makes it difficult to question the investment
of then Fortune 500 company, Blockbuster Video. Blockbuster’s then parent company, Viacom,
looked to boost DZ with its strong cultural ties in April 1994, when Blockbuster claimed
50.1 percent of company holdings. With Viacom’s media empire, they planned to brand DZ with
Nickelodeon, Paramount Pictures, and Showtime icons, but these plans were never fully realized.
After signing a promotional contract with Saban Entertainment for the rights to use
characters from their 1995 property, Mighty Morphin Power Rangers, no further major alliances
were made with DZ. You guys remember Power Rangers?
Now back to Discovery Zone - Viacom’s video distribution service was not the only company
to jump on the sinking ship of the Discovery Zone. Let us dig into who else was, reasonably
duped into one of the most surprising corporate failures of the 1990s.
Sponsor #2 - McDonald’s
The world’s largest restaurant chain, McDonald’s, had first introduced the “PlayPlace” concept
to stores in 1987. The original McDonald’s PlayPlaces were created and organized by a
company called Leaps and Bounds, known for their signature indoor play areas defined
by two horizontal tubes joined by a sphere, which is a staple in all Playplaces to this
day. Playplaces were seen as a branding opportunity for McDonalds and to add to kids experiences
with happy meals. McDonald’s work with DZ Discovery Zone started in 1995 when it sold
its 45 Leaps and Bounds stores to DZ Discovery Zone for $111 million in cash and stock thus
becoming a shareholder in Discovery Zone.
Again, this appeared to be a savvy move from both parties involved.
According to the then director of corporate communications for McDonald’s, Charles Edeling,
"We view it as a merger of the two pioneers of the child-entertainment industry. We intend
to be involved for the long term."
Speculation aside, the logic of these two mergers, with Blockbuster and McDonald’s
seemed perfect fits for the ever-growing Discovery Zone. None of these financial backers can
be held at fault for pumping money into The Discovery Zone. They all had solid logic,
that a children’s party destination would be an effective platform for marketing other
products, whether that be VHS tapes from Blockbuster, or burgers and fries from McDonald’s.
So Why Did DZ Discovery Zone Fall?
The first signs of things starting to break could be shown by the number of franchise
locations operating.
In general, for a growing Company, the franchise route is usually the fastest way to growth
as other people are investing in the fitout and furniture to open Discovery Zone branded
locations. Each DZ Discovery Zone is said to cost about US$700,000, which is approximately
$1.2 million in today’s dollar after taking into account inflation. Money printer go BRRR
[https://knowyourmeme.com/photos/1789428-money-printer-go-brrr] Franchise owners paying for their own fitout
and paying the Company monthly fixed fees and a revenue percentage share is the best
deal as it’s a very asset light model that allows for the Company to expand quickly.
Let us look at Discovery Zone. Franchises accounted for 67% of properties in 1992 and
34% in 1993. However, by 1994 this was already down to single digits. After the initial excitement
in 1992 and 1993, franchise owners realized they were not making money and were leaving
in droves.
Reason #1 - Only Weekend Business
The first problem DZ Discovery Zone playgrounds faced was obvious from the start. The centers
were extremely crowded on weekends but literally vacant during the weekdays.
As said by equity analyst, Michael Moe, "The trick there is how to get kids and people
in there during the week when they are supposedly doing homework. The situation now is the viability
of the concept is in doubt."
Reason #2 - It Got Boring After a While In addition, DZ Discovery Zone failed to keep
its concept fresh with new attractions like video games or rides. As a result, many parents
and children did not make return visits.
Sean McGowan, an analyst who covers toys at Gerard, Klauer & Mattison said, "I call these
things hamster habitats. If all you've got is a hamster habitat, you're probably not
going to go back."
The arcade landscape of the early 1990s was an ever-changing field. Presumably, a nightmare
for owners of these establishments, as graphic capacity and cost were on a steady incline
throughout the decade. It was imperative to keep up with the desires of American youth,
especially those deciding to host a party at The Discovery Zone.
In 1996, the Nintendo 64 hit the market with 3D graphics, unrivaled by any videogame previous.
This cultural tide would prove critical for any youth entertainment business. As mentioned
before in creating such expensive locations with beautifully elaborate jungle gym structures,
The Discovery Zone was not fiscally prepared to stay up-to-date with the state-of-the-art
video games.
The question is, how many times can someone go back to DZ Discovery Zone if no changes
and new equipment was being built at the location?
Reason #3 - Declining Quality and Service
Third, with the huge expansion, quality was falling as well. Craig Bibb, an equity analyst,
summarized the problems, “The company expanded rapidly with the goal of getting there first
to keep the competition from appearing. They made a trade-off in rolling out that quickly,
which is they really didn't build the infrastructure behind the organization to support all the
units they were building. The result was a decline in service at the playgrounds, which
showed up in inattentive employees and low-quality food service. That made DZ Discovery Zone
unpleasant for some adults."
This was also verified by a franchise owner who owned two locations. The owner explained
that operating her two Discovery Zone playgrounds has been more expensive than she anticipated
because of the company's problems. For example, rather than buying her food through the corporate
office, which would give her the buying power of a large corporation, she bought Domino's
Pizza and Baskin-Robbins ice cream cakes for her own stores to offer better products to
her customers.
Back at corporate, the Discovery Zone spokesperson agreed and acknowledged that the chain had
problems with management and food service in some stores. This was a small item that
lead to the downfall.
Reason #4 – Rocket Level Expansion Too Fast Lead to Huge Losses
But the biggest issue were the business fundamentals. Finally, the DZ Discovery Zone spokesperson
also acknowledged that the rapid expansion had cost Discovery Zone in other ways: Many
of its hastily signed leases were too expensive and the company has a burdensome debt load.
Let us look at the how the Company was doing revenue and earnings wise.
By 1994, problems were happening. Net income margins in 1993 were positive 5% with 168
locations. However, Discovery Zone kept expanding and expanding. But as they expanded, they
started going into more city locations and rentals, which were one of their highest expenses,
kept on going up as the easy and cheaper outskirt locations were all taken and they wanted to
keep growing rapidly.
Industry consultant, William Haralson, described the problem further, “Discovery Zone must
generate repeat business from a very narrow audience. To find enough children, centers
would need to locate in high-population areas, where rents tend to be high. Your rent's comparable
to what a retailer would pay, but your revenues are not. They may be doing everything exactly
right, and still have a problem concept.”
By 1994 even though they were opening more locations, net income margins fell to negative
14% with the company losing $25 million that year. Fast forward one year, 1995 was a complete
disaster. Revenues had increased to $259 million but losses had ballooned to negative $449
million. That’s nearly half a billion dollars! And that was the year the Company started
shutting locations down.
The modest competition, primarily Chuck-E-Cheese, based their locations on the state-of-the-art
arcade access rather than the active-playground space. This allowed for smaller spaces and
more affordable infrastructure. Even with DZ Discovery Zone offering a better product,
they went for the monopoly status in the industry, hoping to dominate based on nationwide ease
of access and quality of product. Alas Discovery Zone flew too close to the sun and landed
themselves in over $360 million in debt by 1996.
In March 1996, DZ Discovery Zone filed for bankruptcy. The losses had grown too large
that it was becoming too difficult for anyone to stem. The number of locations fell from
321 in 1995 to 212 in 1996 and Viacom completely wrote off 100% of its Discovery Zone investment
that year.
Company Insight DZ Discovery Zone Lessons To Be Learned
Keep tabs on your contemporary market. Know the trends and observe them closely. For DZ
Discovery Zone, these trends need to follow the 1990s childhood dream. They started just
where they needed to be. Pizza, Junglegym, Arcade. In other words Youth-Food-Culture,
Youth-Active-Imagination and General Video-Game Trends.
Conservative business sense is equally important to a great idea. How many times can I state
it, the original idea for DZ Discovery Zone was brilliantly, pin-point correct. Their
business model flawless, with evidence by their place as a widely held nostalgic memory
for people growing up in the 1990’s middle class America. They painted the portrait of
the “Ideal Kids Party” from that era.
Fiscally, they were foolish. Diving too deep, too quickly into the nationwide market. DZ
did not leave themselves the wiggle room to update with the times, and though they made
a valiant attempt to refresh their brand with massive corporate partnerships, they could
not meet the financial overhead necessary to maintain their 300 plus locations.
Conclusion To wrap up the sad failure of DZ Discovery
Zone, let's analyze their prospects for the future at the time, as their corporate leaders
struggled to think their way out of bankruptcy. In a 1995 article by The Los Angeles Times,
The Discovery Zone was in the developmental stages of a new project, now geared towards
an older audience. “These complexes are beginning to appear around the country, led
by a chain called Dave & Buster’s. Discovery Zone is working on such a project, dubbed
Metro Zone, using elements borrowed from smaller family entertainment centers in Chicago suburbs
that Discovery Zone acquired in 1993 and 1994.”
I choose this example to punctuate their corporate failures, because it shows a repeated bashing
on the same strategy that led them to failure. Throwing massive amounts of money at new ideas,
rather than keeping their scale down and maintaining quality in existing locations. It would appear
that with a completely new business, alongside the almost 300 DZ Discovery Zone locations,
that there would not be enough money to do the necessary updates to keep in cultural
vogue.
DZ Discovery Zone is cemented in the millennial-middle-class-America’s nostalgic views of the 1990s, because of its
failures. The Discovery Zone committed so intently to the early 1990s cultural dogma,
that as culture shifted, they could not keep up. One thing you can say, for those growing
up in the 1990’s DZ Discovery Zone is a profound cultural time capsule. If you’re
around the United States, a shout out, be sure to check out the City Museum at St. Louis.
It’s literally one of the most fun places I’ve been to in my life and is like the
modern day Discovery Zone for children and adults alike.
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 YouTube section below, it would
really help out a lot. Did you go to Discovery Zone as a kid? What are your memories there
like? Be sure to check out some of my other videos, like the Rise and Fall of New York
and the Rise and Fall of Orbitz Drink from the 90’s. Thank you again for watching and
stay tuned for another episode of Company Insight next week.