Children's birthday parties used to mean video games, singing robotic
animals, and lots of pizza.
And the brand that brought all those concepts together under one roof
for a generations of enthusiastic kids was Chuck E.
Cheese. "You know, the great thing about Chuck E.
Cheese is how popular we are with children.
Your average kid asks to come to Chuck E.
Cheese nine times a year.
They only get to come three because we need to make sure that mom and
dad are willing to drive them.
So a lot of our investments have been to make it better for mom and
dad once you walk in."
"It's hard to keep your eyes on one thing.
There's a huge amount of games, and the lights are just everywhere.
And there's birthday cake, there's pizza, there's kids running
around. There's the band, can't forget the band.
So all of this is happening at the same time while parents are
actually running after their children, too."
But in June 2020, the restaurant that told parents there was a place
"Where a kid can be a kid" filed for bankruptcy after years of
lackluster sales and a shutdown of venues initiated by stay-at-home
orders. Chuck E.
Cheese is one of the biggest restaurant brands of 2020 alongside
French-inspired bakery chain the Le Pain Quotidien to file for
Chapter 11 bankruptcy.
And there are fears it might not be the last.
According to a June 2020 poll by Datassential, a food industry
marketing research firm, 47% of people plan to avoid eating out
entirely in the future.
The National Restaurant Association estimates that U.S.
restaurant losses in 2020 could add up to $240 billion due to the
coronavirus pandemic.
So after numerous reinventions, nearly $2 billion dollars in debt and
more than 40 years in business, will Chuck E.
Cheese be able to survive bankruptcy?
And what are rival brands like Domino's and Papa John's doing
differently? Chuck E.
Cheese got its start in 1977 in San Jose, California under the name
Chuck E. Cheese Pizza Time Theater.
The restaurant was the brainchild of Atari co-founder and Pong
inventor Nolan Bushnell.
Bushnell launched Atari in the early '70s with his partner, Ted
Dabney, laying the foundation for the coin operated video game
industry. By the late 1970s, teenagers everywhere were flocking to
arcades. Arcade operators were making a hefty profit collecting all
those quarters, and Bushnell saw an opportunity to expand the
business. Chuck E.
Cheese would be the family-friendly arcade for kids barring unruly
teenagers, and allowing children to play video games while their
parents waited for pizza.
The eatery featured a cast of computer-controlled robot characters
led by Chuck E. Cheese, the pudgy cigar smoking rat with a New Jersey
accent. On the first day of business, the line was out the door.
"I think Chuck E. Cheese really set the standard for what we call
today Eatertainment.
You see a lot of companies like Dave & Buster's or Top Golf, places
where it's not really focused necessarily on the dining out, but
really on the entertainment aspect.
And I think that Chuck E.
Cheese was really the forbearer of this."
Pizza Time Theater, the parent company of Chuck E.
Cheese's, went public in April 1981, and by the end of April 1983 had
more than 250 locations, almost half of which were franchises.
But 1983 proved to be a disastrous year for the video game industry.
A flood of cheaply made look-alike games crashed the market, and
Chuck E. Cheese was losing millions.
In 1984, the company declared bankruptcy.
Bushnell was out, and Chuck E.
Cheese was bought by rival Showbiz Pizza Place.
In 1989, Showbiz Pizza Place began trading on the Nasdaq.
In 1992, all of the venues were united under the same name, and a few
years later, the restaurants were renamed Chuck E.
Cheese's. The '90s saw rapid growth in the children's play center
business with competitors like Discovery Zone and Club Disney
arriving on the scene.
Experience-themed restaurants for adults were gaining popularity, too.
Planet Hollywood opened in New York City in 1991, and the ESPN Zone
opened in Baltimore a few years later.
But for children's birthday parties in the 1990s and the early 2000s,
Chuck E. Cheese was the place to be.
"People have a very polarizing relationship with Chuck E.
Cheese. So, when I mention it to parents, I can just hear in their
voices how traumatized they are by the whole thing.
They they don't they didn't really enjoy that experience.
But as a kid, as an immigrant kid, it had a profound impact on my
understanding of the new country where we were in."
In 1998, the parent company changed its name to CEC Entertainment and
began trading on the New York Stock Exchange.
By 2012, Chuck E.
Cheese was rebranded as a hip, electric guitar-playing rock star
mouse with a baseball cap.
And in 2014, private equity firm Apollo Global Management bought
Chuck E. Cheese's parent company for about a billion dollars, taking
it private and saddling the company with almost a billion dollars in
debt. The company also acquired Peter Piper Pizza and to enhance the
Chuck E. Cheese experience, redesigned restaurants and ditched the
iconic tokens in favor of newer plastic cards.
"So in the past, you might think about the Chuck E.
Cheese, you have the video games, but then also in the past, you've
had the animatronics, the robot Chuck E.
Cheese that might be singing and dancing some of the songs that might
stick in your head. We still have Chuck E.
Cheese and the band do a lot of songs to make the kids happy, but we
break it up with, like Katy Perry, Taylor Swift songs in there to
give mom and dad a mental break and just make the atmosphere a little
bit more adult without spoiling some of that magic that makes it the
kid-focused business that it is."
But by the 2010s, changes in children's entertainment habits and a
shift to healthier eating started to weigh on the business.
"I think that we've seen the downswing for this company really in
process the last seven years.
But ultimately, these businesses are tough to sustain over a long
period of time just because consumer preferences not only change
regarding eating, but also what you know, what they're looking for,
for entertainment." The restaurants precarious position was made
worse by the coronavirus pandemic.
Like other brick-and-mortar businesses, Chuck E.
Cheese's sales dried up after stay-at-home orders forced the
restaurant chain to close its locations.
"And then you run into the pandemic, which basically saps you of 90%
of your revenues. You have a potentially long recovery period for
them. And it's a really difficult combination."
With venues closed, to make some extra cash, the restaurants started
to offer a low-budget takeout menu that offered five dollar pizzas.
It also created a virtual restaurant called Pasqually's Pizza and
Wings in March 2020 that serves pizza made in Chuck E.
Cheese's kitchens.
But it wasn't enough.
As of 2019, CEC entertainment lost money in five of the past six
years. In 2013, it lost $28.9 million dollars.
As of December 2019, there were 555 Chuck E.
Cheese and Peter Piper Pizza restaurants in the U.S.
and in six foreign countries and territories.
186 venues were franchises.
By April 2020, CEC Entertainment reported that first quarter
same-store sales were down almost 22% at the 550 Chuck E.
Cheese and Peter Piper Pizza-operated venues.
CEC Entertainment filed for Chapter 11 bankruptcy in June 2020.
CNBC reached out to CEC entertainment, but they did not respond to our
request for an interview."
The restaurant business is a competitive one.
Chuck E. Cheese's indirect challengers come from every corner of the
market. One rival brand that is firing on all cylinders despite the
Covid outbreak is Domino's Pizza.
"I think the companies that most come to mind that I think about that
are going to be the winners and losers.
I mean, I think a company like Domino's, which no surprise, they've
got a great value platform.
They've been a leader in technology for several years now.
And generally speaking, they're in pretty good financial health,
particularly as you see franchisee level returns improved so much the
last couple of years. So I think that they're an obvious winner,
too." Domino's Pizza had U.S.
same-store sales growth of 16% in the second quarter of 2020.
The pizza chain said it planned to hire 10,000 workers to meet demand
and its stock price is up 39% year to date as of August 18th, 2020.
"We're continuing to serve our customers through both the delivery
channel that I mentioned earlier, but also the other big piece of our
business, which is carryout.
Now, we've rolled up all the tables and chairs inside our stores, so
nobody is sitting in the stores today.
But we do have procedures in place to safely serve our customers
carryout, either as a counter, at pick-up windows in some of our
stores, or at the curb.
So because we don't have a significant sit down table service
business, you know, we've been able to continue to serve our
customers as they need us.
And, you know, to the second part of your question, we enter into
this period of time very healthy as a company, very healthy balance
sheet."
Pizza maker Papa John's is also killing it.
The company said estimated same store sales in June surged 24% in
North America and 5% internationally, as the coronavirus crisis
caused more people to turn to delivery and takeout.
Papa John's stock is up 54% year to date as of August 18th, 2020.
"Now, theoretically, Chuck E.
Cheese should have a decent takeout business because it does pizza.
But that's not what it's about.
It's not really about pizza.
It's something to feed you while you go play the games because the
games are just far, far, far more profitable."
So why is Chuck E. Cheese lagging behind these competitors?
Experts say it comes down to three things.
Its menu prices weren't nearly as competitive.
Its tech for online ordering isn't as advanced as its rivals — it
mainly relied on GrubHub and Door Dash — and it has way too much debt
on the books. Another major problem: in 2019, the company made more
than half of its sales from in-restaurant entertainment and
merchandise sales, an income stream that was cut off while
restaurants remained closed in 2020.
Only 44% of its revenue came from food and beverage.
"The trends that that led to the company's recent struggles, whether
it be changing in children's entertainment habits, eating
preferences, shift towards healthier eating, and less focus on just
overall the entertainment aspect of it all.
I think those are hard to overcome.
Those those trends, I think are structural instead of cyclical, and I
think they're going to continue."
Just take the rise of Chipotle.
The brand has seen tremendous success as a healthier option for
takeout. And it's also done another big thing right.
It's invested heavily in tech.
Chipotle said digital sales soared more than 200%, but same-store
sales declined almost 10% as dining room closures weighed on revenue.
"I think a company like Chipotle, which has really done a good job not
only on mobile ordering side, but also really become a leader in the
delivery front, as well as things like pick-up windows.
They've done a good job kind of rethinking what their format could
look like in the future." "We've invested quite a bit over the last
couple of years to create the digital access point and obviously
consumer behavior because of the pandemic accelerated the adoption of
our digital channels. And I think that behavior is going to be one
that people actually like the experience where, you know, they can
order ahead, select a pick-up time, and really the convenience and
the contactless nature of the occasion.
I think it's always going to be valued for those occasions going
forward." According to analysts, quick service restaurants like
McDonald's or Restaurant Brands International, which is the parent
company of Burger King, are also getting their digital assets in
place and are in a good position to take market share in the future.
There were more than a million restaurants in the U.S.
at the start of 2020.
And while some chains like Chuck E.
Cheese have struggled to keep their business afloat, analysts say the
back half of the year could see even more bankruptcies."
"I could easily see a number of other bankruptcies throughout the
industry like this because a lot of restaurant companies carry a lot
of debt." "But I think those companies that focus really on the
experience, whether it be entertainment or even fine dining, I think
those are the categories where you know, again, it's a focus on
experience. They don't have as many to-go, delivery, or takeout
options, those are the ones that are going to really struggle in this
environment." Dave & Buster's has had its share of troubles.
The sports-themed restaurant that caters to adults by offering video
and simulation games temporarily closed all of its 137 stores in
March 2020.
The company had a loss of $43 million dollars in the first quarter of
2020 and as of August 2020, its stock has fallen almost 65% so far
this year. But the company was given a lifeline.
In May 2020, investment firm Jefferies purchased $100 million dollars
of the company's stock.
David & Buster's said it planned to use the money primarily to
strengthen its balance sheet.
And Chuck E. Cheese is planning for the future, too.
As of June 24, 2020, the company said 266 Chuck E.
Cheese and Peter Piper Pizza restaurants had reopened.
CEC also said it's closing an undetermined number of locations as it
haggles with landlords over lease agreements.
For venues that are open, games and dining rooms are sanitized every
30 minutes. Some booths are closed to provide social distancing, and
customers with a temperature of over 100 degrees or higher are denied
entry. And while it's too soon to tell what lies ahead for Chuck E.
Cheese, analysts say the entire restaurant industry could be on the
verge of a massive realignment.
"Disruption we've seen across the retail category is a good way to
frame what might happen in the restaurant industry.
If you think back, the retail space about 10 years ago was a point
where Amazon came in and forced a lot of retailers to rethink their
strategies. A lot more online ordering, a lot more ship to consumers
homes. And we started to see that the last couple of years in the
restaurant space where less and less people are going out to
restaurants and instead they're using delivery partners to get their
food. And so I think that what we're seeing now with, you know,
basically consumers being restricted from eating out, there's going
to be a lot more changes at the restaurant level."
According to analysts, there will still be a need for restaurants that
offer an experience as we come out of the pandemic.
But in general, we're likely to see fewer restaurants in the future
and the ones that remain will have a smaller footprint and be
optimized for takeout and delivery.