The rise and fall of Chuck E. Cheese

Arcade games and pizza made Chuck E. Cheese's the go-to spot for kids' birthday parties. But with $1 billion in debt, it filed for bankruptcy in June.

• Atari co-founder Nolan Bushnell came up with the idea for Chuck E. Cheese back in 1977. 
• Combining arcade games, pizza, and animatronics, Chuck E. Cheese was a success, and it rose to kids' birthday party stardom by the 90's.
• But due to its $1 billion debt load and the COVID-19 pandemic forcing closures of all its locations, the parent company, CEC Entertainment, declared Chapter 11 bankruptcy in June 2020. 
• Experts say the company will be fine, but may come out of the pandemic and bankruptcy looking different.
• CEC Entertainment did not respond to Business Insider's request for comment.
• Visit Business Insider's homepage for more stories.

Following is a transcription of the video.

♪ 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!'

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?

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 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 that 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, 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. 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.

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.

Narrator:CEC Entertainment did not respond to Business Insider's request for comment.

Chuck E. Cheese: At Chuck E. Cheese's, we celebrate over a million happy birthdays every year.