Master showman Featured

12:13pm EDT May 15, 2006
In 1985, Richard M. Frank received an offer that many executives would have turned down without a second thought: Run a company that was hemorrhaging money and on the verge of bankruptcy.

Frank was COO at the successful Steak and Ale restaurant chain and had to think carefully about the job offer.

He started with research, and what he found ultimately led him to become chairman of the board and CEO of CEC Entertainment Inc., the new parent company that today operates Chuck E. Cheese restaurants. Among Frank’s first decisions was to drop the less popular ShowBiz Pizza name, which the company had operated under previously, and continue the business under the name Chuck E. Cheese, which he believed had more recognition in the marketplace.

“The reason I finally decided to come was that I just started going out to a bunch of ShowBizes and Chuck E. Cheeses as I traveled,” Frank says. “Even though the stores were really run down and the employees not doing that great of a job, I still saw a bunch of little kids running around with smiles on their faces. They still loved the concept. They still loved Chuck E. Cheese, loved the characters and animation, and I thought, ‘There has to be something to this.’

“If they love this experience, and it’s not even very good, just think of what this could be if someone could really do something with it in a more quality way.”

While on these visits, he experienced the restaurants as their customers did. He ate the pizza and thought it wasn’t good. He examined the dcor and found it dingy, dirty and dated. He even took a hard look at the restaurants’ customers. They were a mix of toddlers who loved the place, parents who hated it but came with their kids, and teens, many of whom smoked, played video games and intimidated the parents. It wasn’t a happy mix.

His first order of business was to stop the bottom-line bleeding.

“We weren’t paying most of our rent,” Frank says. “We weren’t paying our debt at all. We were focused on making our payroll and paying our purveyors that were supplying us with the products we needed to operate. That was about it.”

When he took over, there were 300 stores. He closed the 100 least profitable ones, then sought out help in the financial sector.

An investment firm worked with the company to renegotiate its debt with 96 percent of its creditors, a move that staved off bankruptcy. That reduced the company’s debt from $110 million to $30 million, and Frank and other executives then raised enough money to pay off the $30 million.

“That gave us a chance to survive,” Frank says. “It was still a very difficult position we were in, because same-store sales at that time had been declining for a good six or seven years, almost since the beginning of both businesses, and many of those years, it was double-digit declines. You can restructure the debt, but if you don’t get the sales turned around, you’ll be right back at bankruptcy.”

Bringing back the moms
By the summer of 1986, the restructuring was complete, and it was time for the chain’s makeover.

“To the degree that kids loved us, parents disliked us almost as intensely,” Frank says. “The service wasn’t any good, and the stores were dirty. ... We had to make sure that kids still loved to come to Chuck E. Cheese but do it in a manner that was more acceptable to parents.”

To help accomplish that, Frank made a decision that alienated some of its customers: It banned from the stores all children under 18 who were not accompanied by an adult, and it deep-sixed all but the most popular video games. That meant that the teens who had spent their afternoons hanging out at Chuck E. Cheese were gone.

Those video games were replaced with games of skill, such as Whack-A-Mole and ball tosses, where kids and even parents could win prizes as they played. Frank also added a salad bar, all the rage in the 1980s, to lure in parents, and upgraded the restaurants’ pizza. And, to make sure the public knew about the changes, he brought in a new marketing executive, Dick Huston, who is still with CEC today, to get the word out. Television ads in larger markets helped tell the story.

“Without a doubt, that was the most important thing I did in the first year of the company,” Frank says.

And slowly but surely, CEC began to show signs of life. By early 1986, same-store sales had stabilized, and by 1987, the stores “got off to the races,” Frank says, with increases in same-store sales becoming the norm.

In 1989, Dallas-based Brock Hotel Corp., the parent company of CEC, spun CEC off into its own publicly traded company.

“That was a key point for our company,” Frank says. “When Bob Brock founded Brock Hotel Corp. and got into the ShowBiz business, I think he believed there were a lot of synergies or potential synergies between the hotel business, and ShowBiz and Chuck E. Cheese. The reality is that when he got into the business, there really weren’t. The businesses were so different that, in my opinion, they needed separate staffs and separate people focused on the hotels and restaurants. We needed to be more autonomous, and the hotel division needed to do likewise.”

One of Frank’s biggest challenges was getting employees invested in their jobs again. At the time he came to the company, employees spent more energy worrying about whether they would have jobs the next day than doing their jobs, much less thinking of ways to improve operations. Frank made appreciating employees and keeping them a priority, and that’s still reflected in the company’s philosophy today.

Keeping those employees happy is important to CEC’s bottom line.

“There is no doubt,” Frank says. “You can just look at single locations, and where we have a quality general manager who has been there a long time, the earnings and sales and profits at that location just continue to grow. If you have a store where you are constantly turning over management, you’ve got a store where sales will be, at best, volatile, at worst, declining. Stability is everything.”

CEC keeps managers on the job by compensating them appropriately, Frank says, as well as making sure they have autonomy to do their jobs well and even have fun.

New locations
Today, Chuck E. Cheese has 474 locations, with just 44 f those as franchises.

“We are not selling any franchises in the U.S., and we are a buyer of our franchise locations from time to time,” Frank says. “We probably average buying three to four locations a year.”

Some franchisees have been in the business for more than two decades, he says, and they want to either grow the business or move on to something else. Since Chuck E. Cheese isn’t selling any new franchises, most owners simply want out, and those buyouts help the company to grow.

“We are the logical buyer there because there are efficiencies there for us,” Frank says. “A well-run Chuck E. is greater in its ability to generate earnings if it is company-owned than if we are just collecting royalties off of a franchisee.”

The company is also branching into Canada. Frank says it has to change its model very little to make the restaurants work in Canada, so it makes sense to take advantage of that opportunity.

“The concept seems to work there,” Frank says. “We think it’s an opportunity to grow Chuck E. up there in the next three to five years.”

There are a few franchised locations in other countries, including Saudi Arabia and Guatemala, but the company doesn’t plan to move into more foreign markets, preferring instead to focus its growth efforts in North America. In 2006, Chuck E. Cheese wants to have about 26 to 30 more stores, either by opening new ones or by buying back stores from franchisees. Frank says the company wants to continue that brisk pace for at least the next several years.

CEC’s criteria for new store locations help keep the company profitable. Frank hunts for places with dense population counts rich with children up to about age 12. The company also studies median income.

“The higher the kid count, the lower we can go in terms of average or median income in the area,” Frank says. “If the kid count is lower and the median income is higher, you can make the case that the frequency might be higher.”

CEC likes to have locations in freestanding buildings, preferably on major traffic ways. When possible, it buy lands but will lease if need be.

“What we’re focused on is getting the best piece of real estate,” Frank says.

Keeping restaurants fresh-looking is also a top priority that keeps customers coming back. CEC has targeted 140 to 150 locations for remodeling in 2006, with about 100 of those getting a new game and ride package that costs about $100,000 per restaurant. The other 40 to 50 stores also get the new games and rides, but in addition, they will undergo a major remodeling project at a cost of about $450,000 per store, Frank says.

CEC uses Dallas-based Parkway Construction to do its remodeling. All of the work is done at night, and stores are not closed while the remodeling is going on. Frank believes keeping the stores current is essential to the company’s continued growth.

“It’s critical,” Frank says. “If we didn’t do it, we’d have sales issues very quickly.”

As a comparison, the loss of 117 operating days chainwide because of hurricane damage in 2005 negatively affected comparable store sales by 0.5 percent.

Another significant goal for the company is addressing value, Frank says. Gas prices have sucked funds out of the budgets of young families, so the company is battling back by offering more coupons to customers. With the restaurants now serving better pizza and with a fresh look, it’s important to make sure customers still think the place is a bargain.

“We think that a key part of our plan in 2006 is increasing the distribution of coupons in the marketplace but also combining the increased number we’re putting out with increased offers,” Frank says.

The company will offer coupons 16 times this year instead of 13, with a greater variety of offers. There’s also a free-token promotion for guests under 12, and TV spots are being increased to 30 seconds from 15 to better communicate the company’s message.

The bottom line is that Frank wants to make sure the company continues its strong growth. In 1990, it posted net income of $8.5 million on revenue of $182 million. Last year, it posted net income of $73 million on $726 million in revenue. Frank says continued growth is possible, in 2006 and beyond.

“We believe that there are still a fair amount of growth opportunities here in North America,” Frank says. “We want to continue to stay focused on what we do best, which is grow Chuck E. Cheese in a quality way.”

How to reach: CEC Entertainment, www.chuckecheese.com