ShowBiz Pizza Time, Inc.

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ShowBiz Pizza Time, Inc.

4441 West Airport Freeway
P.O. Box 152077
Irving, Texas 75015
U.S.A.
(214) 258-8507
Fax: (214) 258-8545

Public Company
Incorporated: 1980
Employees: 14,000
Sales: $267.8 million
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 6794 Patent Owners & Lessors

ShowBiz Pizza Time, Inc. is the only child-oriented restaurant entertainment chain in the United States; it’s slogan is “Where a kid can be a kid.” Aimed at families with children between the ages of two and 12, the restaurants augment a pizza and sandwich menu with games, rides, and animated musical and comic entertainment. Stage shows feature life-size, computer-controlled robotic characters, the most famous of which is Chuck E. Cheese, the chain’s rodent mascot. As of March 1995, ShowBiz operated a system of 328 Chuck E. Cheese’s restaurants in 45 states, with 1994 sales of $267.8 million. Of the restaurants, 227 were company operated; the other 101 were run by franchisees. In 1994, ShowBiz sold its 27 Monterey’s Tex-Mex Cafe restaurants as part of a repositioning effort in the face of increased competition and decreased revenues.

The history of ShowBiz Pizza Time, Inc. follows two companies, each operating a chain of pizza/entertainment centers. The first company, Pizza Time Theatre Inc., operated Chuck E. Cheese’s Pizza Time Theatre outlets between 1977 and 1984. The second company, ShowBiz Pizza Time Inc., operated ShowBiz Pizza Place outlets. ShowBiz Pizza Time’s parent company, Brock Hotel Corp., purchased Pizza Time Theatre in 1984 and operated ShowBiz and Chuck E. Cheese’s outlets under its ShowBiz Pizza Time division until 1988 when it spun off that division. ShowBiz Pizza Time became a publicly traded company in 1989.

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, teenagers were 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, according to a 1982 Fortune article, Bushnell “wanted to operate and take in those quarters.” But he wanted something different than the typical game arcade. He came up with the idea of using the games to fill the 20-minute wait for a pizza order to be prepared. By banning unaccompanied teenagers and adding automated entertainers for younger children, he hoped to attract families and avoid having the pizza entertainment centers turn into teenage hangouts.

The Warner Corporation agreed to build one restaurant after buying Atari from Bushnell for $28 million in 1976. The first Chuck E. Cheese’s Pizza Time Theatre opened in May 1977, in San Jose, California, as a division of Atari. 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 the robots were better than those used by Pizza Time and tried to get out of the contract with Bushnell. When Bushnell refused, Brock and Fechter went ahead and negotiated a preliminary agreement. Early in 1980, Brock told Bushnell their agreement was cancelled. Bushnell sued for breach of contract and Brock countersued for misrepresentation. Brock and Bushnell eventually reached a legal settlement under which Brock could use the Pizza Time Theatre concept by paying fees based on a percentage of the annual gross revenues of the first 160 ShowBiz restaurants.

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.

The two companies were battling for a very lucrative market. In 1981, according to the 1982 Fortune article, ShowBiz restaurants averaged $1.45 million in revenues and Chuck E. Cheese’s 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 was size: the typical 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 all those quarters being played on the video games, which brought in over 25 percent of sales revenues. Of course, the restaurant/entertainment centers were also more expensive to build and outfit. The Fortune article reported that “a ShowBiz 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, 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 video-game 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.

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. Cheese’s (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 2 to 12 and their parents.

His strategy was to improve the food quality and make the outlets attractive to parents as well as their 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 prototype (8,500 square feet) which could be built for roughly half the cost of the old format.

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 ShowBiz 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 in the mid-1990s.

The independent ShowBiz also purchased Integra’s Mexican dinner chain, Monterey House, with 58 restaurants. ShowBiz 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. In 1989, ShowBiz became a publicly traded company on the NASDAQ stock market.

Frank’s efforts to understand and please his customers appeared to be working. By the middle of 1990, the company’s stock was selling at $25.25 (up from $5.25 at the beginning of 1989 when the company went public), after 17 quarters of increased same-store sales. 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’s 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 midatlantic regions of the country and was opening between 20 and 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 28 consecutive quarters of 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 McDonalds, 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. The desire of parents for safe environments 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.

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 proceeded with updated decor, more game packages for older children, and new proprietary Chuck E. games for youngsters. A new play attraction, Skycrawl, was introduced as free entertainment. 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, reducing to two the levels between top management and restaurant managers, 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.

Despite its problems in the early 1990s, 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 the company had a cash flow of over $30 million. In shopping centers and suburbs around the country, Chuck E. Cheese continued to be a big draw. 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, “Kids love Chuck E. Cheese’s. And as any parent knows, kids may not make money, but they sure help decide how it gets spent.”