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  • Chuck E. Cheese

  • Chuck E. Cheese

  • When you're hungry for fun

  • It's Chuck E. Cheese

  • Narrator: Chuck E. Cheese was once the go-to spot

  • for birthday parties, marketing itself as a place

  • where a kid could be a kid.

  • Kid: When my mom asked me where to go for my birthday,

  • I said, 'Chuck E. Cheese's!' (kids cheering)

  • Narrator: With its infamous pizza, iconic games,

  • and this guy.

  • Kate Taylor: People loved the rat.

  • Narrator: It was a huge success from the start.

  • Kate: Kind of like living your seven-year-old dream

  • to just roll around in a ball pit

  • and play some arcade games.

  • Narrator: Through the decades it became a behemoth

  • of a brand.

  • In 2019 Chuck E. Cheese saw $913 million in revenue.

  • It had about 15,000 employees

  • and over 600 locations across the globe,

  • but with nearly a billion dollars in debt

  • and a 21% drop in sales in the first quarter of 2020,

  • Chuck E. Cheese declared bankruptcy in June.

  • So what happened?

  • (lasers blasting)

  • Nolan Bushnell,

  • the co-founder of the video game company, Atari,

  • came up with the idea for Chuck E. Cheese.

  • He felt there was something lacking in restaurants.

  • He once told Fast Company,

  • "I wanted to add a dimension of fun

  • "to the act of having a meal."

  • So he put video games into a restaurant,

  • and he served pizza.

  • So while customers waited for their pies,

  • they could play arcade games.

  • Kate: He was not someone who was coming from this

  • from a pizza angle.

  • He was like, 'Okay, I know video games.

  • And I think that I can bring animatronics

  • into the world of pizza.' Which is kind of a crazy idea.

  • But clearly it has worked over the years.

  • Narrator: Originally, Bushnell planned

  • to name the restaurant Coyote Pizza.

  • So he ordered what he thought was a coyote costume

  • for his lead animatronic.

  • It turned out to be a rat,

  • and Bushnell decided to run with it.

  • First he thought of changing the restaurant's name

  • to Rick Rat's Pizza,

  • but his team convinced him that having rat

  • in the restaurant's name wasn't the best idea.

  • So they agreed on calling the mascot Chuck.

  • Kate: Chuck E. Cheese was originally almost

  • more geared towards adults.

  • He smoked a cigar, he had a Jersey accent.

  • It was kind of like an adult night out.

  • Chuck E. Cheese: Happy birthday to you.

  • Happy birthday to you. You get it?

  • Kate: But pretty quickly it became clear

  • that kids are the ones who actually enjoy

  • being around animatronic animals.

  • Narrator: And thus, Chuck E. Cheese's Pizza Time Theater

  • was born, with the rat mascot front and center.

  • The first restaurant opened up

  • in 1977 in San Jose, California.

  • And the concept blew up.

  • Thanks to three things:

  • Chuck E. Cheese's could fit over 400 guests,

  • way more than any other pizzerias.

  • And the 20 minute window waiting for pizza

  • was a gold mine for the arcade.

  • They could lure people in with a few free tokens

  • with each meal.

  • People would stay, popping in quarter after quarter

  • into those 75 arcade games.

  • Gustavo Schwed: Restaurants tend to be

  • low-margin businesses,

  • and those games are very profitable.

  • Narrator: Those games accounted for 40% to 50%

  • of Chuck E. Cheese's restaurant profits.

  • Kate: The iconic Chuck E. Cheese tokens,

  • that's where people are spending most of their money,

  • to get the tokens, to play the arcade games,

  • to kind of have this party experience, not so much on pizza.

  • Narrator: Now before Chuck E. Cheese even launched,

  • Bushnell sold Atari, including the Chuck E. Cheese concept,

  • to Warner Communications in 1976.

  • So in '78, Bushnell bought back Chuck E. Cheese

  • for $500,000,

  • and he quickly expanded into new locations.

  • Then things got a little complicated.

  • Stay for the fun

  • Narrator: Chuck E. Cheese's success caught the attention

  • of businessman Robert Brock,

  • and he signed on to franchise more than 200 locations.

  • But that same year, Brock ended up canceling the deal,

  • finding an engineer for animatronics,

  • and launching a family restaurant chain of his own.

  • He called it ShowBiz Pizza.

  • Kate: The concept was pretty much the same.

  • It was different characters,

  • but the same kind of like pizza, arcade games.

  • Narrator: And while Chuck E. Cheese's had been growing

  • alongside the blossoming gaming industry,

  • through the early '80s, it found itself in a bitter battle

  • with copycat ShowBiz.

  • Kate: There was definitely a rivalry

  • between the two at the time.

  • Narrator: And ShowBiz had arguably better animatronics.

  • Chuck and his friends were limited to frames on the wall.

  • ShowBiz had an entire band called Rock-afire Explosion,

  • made of full-body characters.

  • By 1981, ShowBiz locations were raking in

  • nearly $1.5 million in revenue,

  • outperforming Chuck E. Cheese's by $260,000 per store.

  • But Chuck E. Cheese still had more locations,

  • and was still outpacing Pizza Hut and McDonald's

  • at the time.

  • So that year Bushnell took Chuck E. Cheese's public,

  • but there were problems looming on the horizon.

  • Chuck E. Cheese's was no longer the best arcade,

  • and it definitely wasn't the best pizza restaurant.

  • As the market became crowded,

  • novelty wore off, and things turned sour.

  • To try and outpace ShowBiz,

  • Bushnell expanded faster and faster,

  • opening a new location every five days

  • and driving the company into debt.

  • Then came the video game industry crash of 1983.

  • As people turned to computer games,

  • consoles and arcades were hit hard.

  • Video game sales dropped 97% nationally,

  • and arcades closed across the country.

  • It wasn't a great time to have a restaurant

  • centered on arcade games.

  • That year, Chuck E. Cheese's losses reportedly totaled

  • $15 million.

  • And a year later, Chuck E. Cheese's declared bankruptcy.

  • But it's rival ShowBiz?

  • Well, that company weathered the crash a little better.

  • And in a wild twist,

  • ShowBiz ended up buying Chuck E. Cheese for $35 million.

  • The copycat had bested the original.

  • But the acquisition breathed some life

  • back into Chuck E. Cheese.

  • By the early '90s, all the ShowBiz restaurants

  • were transformed into Chuck E. Cheese's.

  • Kate: For some reason Chuck E. Cheese, the mascot,

  • really did have staying power.

  • People loved the rat.

  • Narrator: And those better animatronics over at ShowBiz

  • got a new life too.

  • The Rock-afire Explosion band was stripped of its costumes

  • and replaced with Chuck E. Cheese and crew.

  • Kate: The fact that Chuck E. Cheese died

  • and then was reborn in a new company is just very bizarre.

  • Narrator: Fast forward to 1998,

  • and Chuck got a little bit of a makeover.

  • The parent company dropped the name ShowBiz

  • for CEC Entertainment.

  • By 2000, there were 300 locations,

  • and the company was steadily growing.

  • Kate: I would say the '90s, the early 2000s,

  • Chuck E. Cheeses was really thriving.

  • That's when people my age have the memories of childhood,

  • the really nostalgic memories.

  • The best era for Chuck E. Cheese really.

  • Narrator: This renaissance didn't last long.

  • Twelve years later, even

  • though locations continued to open up,

  • they'd hit another sales slump.

  • So again, Chuck E. the Rat was rebranded.

  • This time as a rockstar mouse with a backstory.

  • According to the company's website,

  • Charles Entertainment Cheese is an orphan,

  • who celebrates other's birthdays

  • to make up for his tough childhood.

  • The new mouse came alongside an option of gluten-free pizza.

  • Two years later, despite slumping sales,

  • private equity firm Apollo Global Management

  • saw an opportunity.

  • Chuck E. Cheese still had brand recognition

  • and locations across the globe.

  • Gustavo: Restaurants tend to have a short life cycle.

  • What's nice here is the children age out,

  • and new children come in.

  • So that gives the business, or gave the business,

  • a certain degree of resilience.

  • Soma Biswas: Private equity firms,

  • they approach the owners with an idea that like,

  • 'Hey, we're gonna expand this business.

  • We're gonna bring it overseas to other countries.'

  • And so that's attractive.

  • Narrator: Apollo acquired Chuck E. Cheese Entertainment

  • in a leveraged buyout for about a billion dollars.

  • In a leveraged buyout,

  • private equity firms purchase a company

  • with partly their own money and partly borrowed money.

  • That turns into debt the company is responsible for paying.

  • Ultimately the acquisition saddled Chuck E. Cheese

  • with nearly a billion dollars in debt.

  • Gustavo: It was quite a bit of debt

  • for a company like Chuck E. Cheese.

  • Narrator: Chuck E. Cheese already had a lot of expenses:

  • monthly rent on all of its locations, pricey arcade games,

  • and animatronics to maintain.

  • Soma: They haven't actually paid off any debt,

  • but they've been able to service their debt.

  • So, in other words, make the interest payments.

  • Narrator: The company has reported losses

  • five of the six years since the acquisition.

  • Similar private equity buyouts have contributed

  • to the fall of Toys "R" Us, Gymboree,

  • and Payless ShoeSource in the past decade.

  • To try and keep up with debt payments,

  • Chuck E. Cheese tried revamping again.

  • It retired it's famous animatronics,

  • added an interactive dance floor,

  • redesigned the restaurant,

  • and replaced the iconic gold tokens with a Play Pass card.

  • But operating income had slowly been declining.

  • And the last couple of years haven't been much better.

  • A 2019 planned reverse merger was going to help them

  • with their debt load, but it didn't come through.

  • Things only got worse when famous YouTuber Shane Dawson

  • posted a video circulating decades-old rumors

  • that Chuck E. Cheese recycled pizza.

  • Kate: Chuck E. Cheese definitely denied

  • that they're recycling their pizza.

  • However, the pictures make it look like they do.

  • Narrator: Despite the company's insistence

  • of zero pizza foul play,

  • the damage to Chuck E. Cheese's reputation had been done.

  • Narrator: Then as we all know, in 2020,

  • the coronavirus pandemic hit,

  • forcing Chuck E. Cheese to close down locations

  • for dine-in in March.

  • Kate: When you can't have kids in for parties,

  • that is kind of their bread and butter,

  • and that's always been their bread and butter,

  • so to lose that during coronavirus,

  • it's really the final nail in the coffin.

  • Narrator: By June, only about half

  • of the nearly 560 locations had reopened

  • for dine-in, delivery, or takeout.

  • Soma: Anyone who's in casual dining is much worse off

  • than someone who's like a burger chain has drive-in.

  • Whatever little revenue some of these other restaurants

  • are getting from takeout,

  • that's not really going to help them so much.

  • Narrator: Sales declined by 94%

  • during the last two weeks in March,

  • and 21% overall in the first quarter.

  • And the company was forced to furlough 65% of its support staff,

  • and the majority of hourly employees.

  • By June 25th, the parent company had filed

  • for Chapter 11 bankruptcy with nearly $2 billion in debt.

  • An announcement of 34 permanent store closures

  • soon followed.

  • (midi music trills)

  • Even though this all may look bad,

  • experts say Chuck E. Cheese will be fine.

  • For one, there's its valuable name recognition.

  • Kate: Will the company survive in its current form?

  • It's hard to say.

  • As we saw, even if a concept is not financially viable,

  • the brand itself kind of still has power.

  • Narrator: Chuck E. Cheese said it's taking the bankruptcy

  • to off-load some debt and restructure.

  • There have even been reports that the company plans

  • to continue opening stores

  • while going through bankruptcy proceedings.

  • Gustavo: The whole purpose of a Chapter 11 bankruptcy

  • is to try to protect the integrity of the business

  • while getting rid of the large amount of debt

  • that put the company in the bankruptcy to begin with.

  • Narrator: And the Wall Street Journal reported

  • interested buyers are circling.

  • Soma: I think a lot of it depends on what happens

  • with the pandemic and what happens with the economy.

  • Narrator: So what Chuck E. Cheese might look like

  • in the future is still unknown,

  • but it's likely the company

  • will have to redesign itself again.

  • Kate: They're definitely going to want to emphasize

  • some of the really nostalgic aspects of the brand,

  • but they're going to have to rethink a lot about

  • what their revenue streams are, how they're making money.

  • Everyone in the restaurant industry is struggling right now,

  • and everyone's kind of throwing things at the wall

  • and seeing what sticks.

  • CEC Entertainment did not

  • respond to Business Insider's request for comment.

Chuck E. Cheese

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