The rise, fall and resurrection of Chuck E. Cheese's

If you're a part of my generation, and I'm 51, 100% chance that you went to a kid's birthday party at Chuck E. Cheese. It was a beloved institution for games and pizza, guaranteed to leave you with a sugar high or at least a pizza fat coma. But believe it or not, Chuck E. Cheese wasn't about games or cheese or pizza or anything involved any of that stuff. It had an entirely different secret and reason to exist. And it turns out it went bankrupt twice since it was founded back in 1976. Both by owners who didn't understand the real reason behind Chuck E. Cheese. Today, the chain has emerged as something very different in a post-pandemic world. This video is the rise, fall, and redemption of Chuck E. Cheese. Oh, and by the way, thanks to Bolt.new for sponsoring this video. More on them later. And if you're interested, I do a companion document for each and every video I make. You can download the one for this video on girdley.com/youtube. The story starts back in 1976. A visionary entrepreneur, a guy named Nolan Bushnell, has sold the video game company Atari to Warner Communications, and suddenly his whole idea of being an entrepreneur swashbuckler is out the door. The suits are now in charge, and they're running everything by spreadsheets. At the time, he's a young dad. He's got money, he's got time, and he's got kids, and they're unruly, and he's got no place to take them. Disneyland is too far, movie theaters don't want screaming kids, and heck, his kids aren't going to sit still for 2 hours anyway watching Raiders of the Lost Ark. So there's got to be something else. What if there was a place a kid could be more of a kid? Run around, scream, move, and eat good food. And he'd actually pitched this idea to Disneyland, who hated it. The reason he thought Disney might be interested was he envisioned having this restaurant place for kids to go would have animatronics in it. Disney didn't want to cannibalize their Disneyland and Disney World businesses with localized parks with animatronics in them. So Bushnell, he was unfazed. He went ahead and built his vision himself anyway. And in May 1977, in San Jose, California, located at the southern end of Silicon Valley, Bushnell built the very first Chuck E. Cheese Pizza Fun Time. I think that's the correct name, but anyway, it's a pretty long name. It had animatronic shows. If you were a kid, you remember those things, these like 5-foot-tall dancing robot type things. It had pizza and it had games. And by all conventional wisdom, it should have flopped immensely. And it didn't immediately. It didn't. It was a hit. We're in the kitchen making the best pizza in town. Chuck E. Cheese's is better than ever. Thank you, thank you, thank you. And I talk about on this channel how if you want to predict the future outcome for any individual, just look at the patterns of their past. And Nolan's past had been one filled with visionary ideas, out-the-gate kind of inspiration, and put the thing out into the world. And then as it was time to operate whatever he'd built, it would be a mess. And that mess would cause him to lose control, just like he'd done at Atari. And Chuck E. Cheese would follow the arc of Nolan's personality. But out the gate, it had explosive growth. By 1981, they had 200 locations and they went public, valuing the company at a half a billion dollars, $500 million. A lot of money back then. Still a lot of money. Today's dollars, that's $1.7 billion for a chain of pizza restaurants with skee-ball and dancing mice robots. Parents loved it because they could show up and finally relax in a safe environment while their kids are running around being doofuses, jumping in ball pits and all that kind of stuff. And kids loved it because they could run around and be doofuses without mom and dad worrying about them. They could get all the dopamine hits of playing games and then gorge themselves on mediocre pizza. And Nolan had quietly hit on one of the best business models in restaurant history. You sell people pizza, which I've covered on this channel if you want to watch my Pizza Hut video. Has insane margins 'cause of subsidies of cheese and all that kind of stuff. And pizza's got great margins, but even better are the margins around the arcade game business. Basically, you come in, parents would buy their kids tokens, the kids would go spend the tokens, and then they get a dopamine hit at the end when they get some tickets and they go take it and redeem it at the little gift store. And tokens use the same kind of psychology that they use at casinos. Notice how casinos don't use real money? Well, that's 'cause if you're handling real money psychologically, it causes you to be more risk-averse. And same thing with kids. If you gave them real money, they'd realize there's real value there. But if you give them a plastic token, man, they throw it around like somebody who's had too many Bud Lights at a casino. And so basically it was a casino he was running for kids. You know, you go do skee-ball and you don't know if the machine's going to throw out 2 tickets or 20. And at the end, there might be a Nintendo or— well, they didn't have Nintendos back then, but you see what I'm saying? That's just something big that you could buy in the little gift shop. And worst case, you get a little plastic trinket to take home. As a dopamine reward. And they've done studies of this. If you go look at it, the actual best way to get somebody addicted to a game is to have variable rewards. In other words, you spin the wheel on the slot machine and you don't know if it's going to lose all your money or give you $1,000,000. And sometimes in the middle gives you a bunch of different stuff. Greatest way to get people addicted. And it works with kids too. The reason Bushnell would go on to lose so many of the ventures that he created— Atari and now Chuck E. Cheese— was he sucked as an operator. Wasn't good with finances. He was great with vision. But if you're not good with finances, well, you'll start to not watch the dollars and cents the way you should. But before we get to that, I wanna talk about today's sponsor, Bolt.new. And the reality is in today's era of AI coding, it is really easy to ship stuff really fast when you build a new application. The hard part is making sure the stuff is ready for production and scale. And oftentimes these apps that you create using AI and that sort of thing, they work great 'cause they're in the generator's own code environment. Bolt.new is a new service that allows people building AI apps the best of both worlds. You have the speed and flexibility that comes from AI-centric development of new applications, but at the same time, you have an environment in which you can trust those applications to scale and perform. With Bolt.new, you could build apps that are ready to basically be functional in whatever environment you're doing. You're not just building little code snippets that you have to assemble together yourself. You're able to look holistically at the entire application and deploy them and be ready for the real work. So that's why Bolt.new is the choice for many who want to accelerate their development, whether they're building a new project from scratch or accelerating their existing development schedule to bring stuff to production faster. Rapid development you can get anywhere, but if you want rapid development you can trust, that's what Bolt.new is about. Encourage you to check them out in the links below. Tell them we sent ya. Bolt.new. Bushnell was also a genius at this moment that they had started to franchise aggressively. Remember franchising enables you to grow using other people's money. You just take a percentage royalty on what they basically sell, and there's also franchise fees at the front. In this case, Bushnell leaned totally into that, and franchisees started to pop up all over the country. There's one problem with franchising. It's that you open up your whole operation so other people understand how it really works. One of those guys was a guy named Aaron Fetcher, and he was watching the whole thing very closely. In 1980, Aaron launched a place called Showbiz Pizza Place. It was a direct ripoff of Chuck E. Cheese, except it did one thing much better than Chuck E. Cheese did. Its animatronic shows were over-the-top amazing. This created a problem. Suddenly we have an arms race in the pizza casino business for kids, and Chuck E. Cheese and ShowBiz were suddenly duking it out and having to invest tons of capital to outdo each other. You can see where this goes. You start to lose margin and profitability, and both sides lose from the competition. There's only so many parents out trying to give their kids dopamine hits and go to Chuck E. Cheese or Showbiz. And in 1983, something horrible happened to the entire industry. As I covered in my video about Atari on this channel, a confluence of things all happened at once to the video game industry. The first of them was that too many games were getting produced, and that meant there was just a flood of these things out in the market. At the same time, home consoles were becoming a thing. People like me could buy an Atari 2600, and we didn't need to go to an arcade in the mall anymore, or or Chuck E. Cheese. With these headwinds, the chain probably would have been okay, but there was another problem. Bushnell, remember, was not good at managing, uh, costs. Whoop. And that meant he had expanded way too fast, and their balance sheet was not ready for the downturn in the arcade industry. And in March 1984, Chuck E. Cheese basically had to, uh, declare bankruptcy for the first time. Bushnell had gone out and basically done the exact same thing that he'd done with Atari and grown quickly, had a visionary idea, and then lost control. Normally when there's a bankruptcy, then companies either reorganize or disappear entirely. And if you're a restaurant, you tend to disappear entirely, especially back in the 1980s. But that's not what happened next. In a bankruptcy proceeding, it's possible for another competitor or company to come in and buy and basically pay off all or a portion of the creditors. Bankruptcy courts are basically the Wild Wild West. And guess who showed up inside a bankruptcy court? Yep. The guy behind Showtime Pizza, Aaron Fetcher, who had created Showtime. In 1985 was suddenly the owner of Chuck E. Cheese. He had taken everything he'd learned from Nolan and as a franchisee and was now using, using that to buy the bankrupt assets. They realized that Chuck E. Cheese was actually a much better brand than Showtime. I remember going to Showtime as a kid. That Rockafire thing they had, it was kind of scary. Like, I left kind of creepy. At least Chuck E. Cheese felt like a kindly, you know, cool country mouse, you know, at Chuck E. Cheese. So that's what they did. They rebranded all the Showtimes and the Chuck E. Cheeses to be Chuck E. Cheese. There was also no reason to actually have great animatronics anymore. Chuck E. Cheese was now trying to run for margin, and a lot of the folks that had come in and invested, they were now in control and they started to rip out Aaron Fetcher's over-the-top expensive animatronics in favor of cheaper ones that were all Chuck E. Cheese. And by this point, Fetcher had lost control of the company. Believe it or not, he would spend the rest of his career basically maintaining a lot of the old animatronics for collectors, the ones he'd created back in the Showtime's early days. Kind of crazy. A birthday song just for you, performed by the one and only Rockafire Explosion. Pretty neat, huh? At Chuck E. Cheese's, we make pizza good and we make pizza fun. But there was about to be a psychological time bomb that would explode underneath Chuck E. Cheese's, and it's something people don't really talk about, which was the animatronics themselves and the way human nature works. And if the Chuck E. Cheese's executives had called in some psychologists, especially child psychologists, they might have known why the 1990s were proving not to be an amazing time for Chuck E. Cheese. They were on a slow decline. People couldn't figure out why. And in the '90s, this was peak time for a chain like Chuck E. Cheese. The baby boomers were parents, and they loved nothing more than to have big lavish birthday parties and spend money with tons of gifts and all that kind of stuff. At the same time, people had money. The economy was doing well post the early '90s. Kind of setbacks in the economy. And it was just that, well, basically Chuck E. Cheese wasn't doing well and it was confusing. But unwittingly, Chuck E. Cheese had stepped into a phenomenon with the animatronics. When the animatronics were new, people would see them as obviously fake and they weren't like kind of disruptive or scary. And as those animatronics started to get older and the chain started to do worse, the movements would get more herky-jerky and they would get kind of faded and they would just kind of look off. And this thing psychologists call the uncanny valley. Same feeling you or I have when we see, like, you know, a weird clown or some of the old carnival stuff. It just feels creepy. It doesn't feel cool anymore. And it scares us. It makes us feel uncomfortable. It's when something feels almost alive, almost human, but just not quite there. And it basically freaks us out. It's the same evolutionary problem that makes us freak out when we see corpses. Like, they're close to human. But they're not. And to us, that feels weird and we want to get away. And while a perfectly maintained animatronic is charming, a degraded one might as well be a scary-ass clown. I don't like clowns either. They're freaking scary. And if you want to see what this looks like, go on YouTube and search for broken Chuck E. Cheese animatronics and tell me if you don't feel creepy. Actually, finish watching my video first, then go to YouTube and do that. Otherwise, there's going to be some weird stuff with the analytics. There was actually a horror movie called Five Nights at Freddy's. It is perfectly built on this premise by itself. The filmmakers there understood this thing. The guys behind Chuck E. Cheese, they didn't. This would set the foundation for what would happen next. And by the early 2000s, the home entertainment consoles— Nintendo, Xbox, and all those guys— they would get so good, it would be basically impossible for Chuck E. Cheese to compete in terms of entertaining kids and supplying return on investment. At the same time, we went from having, you know, baby boomer parents and Gen X parents to more millennials becoming parents at this time. And the last thing they wanted to do was go to Chuck E. Cheese where they remembered a bunch of scary-ass animatronics from their childhood, or to go to a place that felt really unhealthy, chemically smell, and at worst case was gonna get your kids sick. Remember the stinky ball pits I talked about? They were still there. The 2000s went on, these headwinds really affected the chain. They started to degrade in terms of revenue per location and began the downward spiral that we've seen often retail on this channel. Fewer customers come in, so you spend less on improving your business. Your inventory gets worse, your pizza supply gets worse because you start to cut costs. The animatronics get even scarier, and fewer people come in, so therefore less revenue. And the downward spiral continues and compounds until you eventually die. There's one group in the United States who loves a bargain and loves an opportunity to inject money into things and see if they can turn around and make a profit. And the next group that would enter, well, they They go by the initials PE. In 2014, Apollo Global Management, one of the largest PE funds in the world, bought Chuck E. Cheese for $1.3 billion. The playbook's pretty straightforward. They put up some capital from their fund, which they've raised from endowments or universities or pension funds, and then they borrow the rest using debt. And then ideally they fix the company, make it better, and they turn around and sell it. But there's a fundamental problem with PE ownership and why you see so many kind of horror stories on this channel about it. PE funds have a limited lifecycle, 3, 5, 7, or 10 years. So that means you're bringing in owners who are not thinking about the long term. They're thinking about how they make this thing really valuable and flip it to the next people relatively quickly. The first thing Apollo did was load the company up with $900 million in debt. Then whatever real estate they own, which had a lot of value and safety for the company, they sold that off. And here's something the PE guys didn't understand. The uncanny valley. One of the things they cut, amongst other things, was the maintenance budget. So let's take the already beginning to be scary animatronics and make them even worse. Believe it or not, they actually had the vision that they were going to make it even more fancy and go upmarket than where they were, all the while cutting the value of Chuck E. Cheese. And you see this playbook often. Investors are rich people. So their notion is they're going to start thinking about how do they turn a business to be for somebody like them, you know, a normal rich person. But in reality, the majority of the world is not rich people. We're just normal people looking for value. On this channel is story after story of some rich investor thinking that everybody else thinks like they do, but they're worth $50 million. Normal people are not. JCPenney, Panera Bread, all things that just went off the rails because the investors didn't understand their customers. By 2019, Chuck E. Cheese had $1 billion in debt on the books and barely enough cash was coming in to be able to service that. And that meant any shock at all was going to be able to push the chain over the edge and into disaster. And one came in Q1 of 2020, and that thing was the COVID pandemic. Everything about the pandemic and Chuck E. Cheese was a mismatch. Remember, this is a place that kids would go in whether they got snotty noses or not, into an enclosed environment, rub their hands on a bunch of stuff, cough, breathe, sneeze on everything. So immediately the entire business model for Chuck E. Cheese collapsed, as did most birthday parties. Like, nobody had birthday parties. Hilariously enough, birthday parties have never come back. Maybe that'll be a good future topic for a video. Every Chuck E. Cheese location closed immediately overnight. But there was a problem. They still had to make debt payments on that billion dollars that they owed. It was suddenly bleeding $20 million a month with no revenue coming in at all. In June 2020, they declared their second bankruptcy, Chapter 11, the second one in history of the company. Hilariously enough, one of the things Apollo had tried to keep the company bringing at least some revenue was to start to sell pizza. Under a different brand name on DoorDash during the pandemic. But their brand name, Chuck E. Cheese, was so bad and so tainted by this point that they renamed it Pasquale's Pizza Company. And Pasquale had been the name of the little mouse. That's how bad it got. And here was a company that in the '80s and '90s had basically industrialized the idea of paying a lot of money to have a big fancy birthday party. And here their brand name was so toxic that people wouldn't even touch their pizza unless they renamed it. But there are two types of bankruptcy. One is called Chapter 7. That's where you liquidate. Chapter 11 is where you reorganize and try to make your debt more manageable and come out the other side able to be a, you know, ongoing concern. And Chapter 11 is what they pursued. December 2020, they emerged from bankruptcy, new cap table, meaning new equity owners, new debt stack, and a new plan. The linchpin of that plan was to kill the animatronics. Finally, somebody had actually called a psychologist and figured out what was going on. And they'd already started actually a few years before. Removing a lot of the animatronic shows and replacing them with screens and dance party areas. In 2023, all the animatronics will be gone across Chuck E. Cheese. It wasn't the only liability they wanted to get rid of. They wanted to upgrade the games to be more experiential and things you couldn't play in your house. They also went around to try to fix the pizza. Remember how terrible the pizza had been during COVID when they tried to get people to buy it? Well, they need to have decent pizza if they're going to be competitive. Chuck E. Cheese has trampolines, dance floors, and arcade games. So as I said before, that you can't find at home. And as we head into 2026, they're still trying to figure out what they're going to be when they grow up. But at least they know what worked in 1980 and 1990s isn't what's going to work in the 2020s. Companies can get in trouble when they don't spend enough time truly understanding what their market wanted. And you see this back with Apollo's ownership. They basically tried to create something that would be upmarket and fancier without spending enough time outside of their private jets and New York City boardrooms to truly understand what their customers wanted, which was just better pizza and better games. And the great companies, whether they're big or small— Intuit is a great example, the guys that make TurboTax, famously each year they make everybody in the company spend time answering questions from customers who are using the software to prepare their taxes. And the great companies all find systematic ways to put their employees in front of customers as often as possible to make sure the voice of the customer is in each employee's head every time they make a decision. And for us as business owners, that's a great lesson. Like, how do you spend as much time with your whole team understanding who the customers are and what their problems are? 'Cause ultimately, that's what the whole business is about anyway, making people happy at scale. All right, let me know what you think about the story of Chuck E. Cheese in the comments below. If you tell me I did a good job, it helps me do more in the future. I appreciate you. Talk soon.