Chuck E. Cheese's feels the heat from trampoline parks

The chain tests a new payment system to fend off competition

Chuck E. Cheese’s could turn to unlimited games in its war with neighboring trampoline parks.

Same-store sales fell 6% in the fourth quarter ended Dec. 31, parent company CEC Entertainment said on Tuesday. And total revenues declined $10.6 million, or 5%, to $196.7 million.

The company blamed a handful of issues for the sales weakness, including a shift in the company’s credit card system last year, which executives said turned off some customers.

But they also said that growing competition from “bounce houses and trampoline parks” drained some customers, particularly birthday parties, in a number of the chain’s markets. Those kid-focused destinations have become more prevalent in recent years, moving into cheap real estate left by closed retailers and restaurants.

“We’re aware that cheap real estate for many bounce houses and trampoline parks has led to the quick entrance of new kid entertainment centers,” CEO Tom Leverton said on a conference call Wednesday.

CEC is cutting costs to offset lower revenues, including a corporate reorganization to reduce the number of operating regions, which could save $3 million a year.

Leverton said the company is testing “impactful” efforts to “combat increased competition.” CEC, which owns 605-unit Chuck E. Cheese’s and 149-unit Peter Piper Pizza, is remodeling locations, adding new birthday packages and promoting a new loyalty program.

The company hired a new chief marketing and concept officer last month in Ashley Zickefoose.

But it is also testing a new form of games payment, one that would abandon the point system—which itself replaced the tokens long common at Chuck E. Cheese’s locations—with a time-based system offering unlimited games for set periods.

The company is testing time-based play in 40 markets. “It’s proven very popular with guests,” Leverton said, adding that Chuck E. Cheese’s plans to expand that test in another 26 stores by next week.

The company has also been making software patches at its locations to fix problems that came up with its switch of credit card technology to a chip-and-PIN system, which led to a “significant disruption,” Leverton said.

The new system would sometimes mistakenly deny credit cards, which would frustrate customers, who turned and walked out.

“If the system rejected the card two or three times and the guest was maybe credit sensitive, that is a negative experience,” Leverton said. “They would leave with their kid in tow. That’s a big deal. We need to overcome that negative experience.”

But Leverton insists those customers will come back.

“The customers will come back again,” he said. “Chuck E. Cheese is an iconic destination. I think parents have an obligation to bring their kids in.”

“It was just overcoming that negative experience,” he added.

And Leverton believes that Chuck E. Cheese’s is in a “very good spot” relative to growing competition in the kids entertainment space.

He said the problem tends to be in specific markets, notably small towns, where a new kids entertainment location opens up near a Chuck E. Cheese’s unit.

“It varies very much locally,” he said. “When you have a small town, and if there’s a Chuck E. Cheese there and maybe a pizza restaurant, a Chick-fil-A or a McDonald’s, and then a new bounce house opens up across the street, you can see it very dramatically, really on the birthday side of the business.”

“These things come in swells,” he added. “There are a lot of mom and pops. We see the swell and then the downswell afterward.”

Leverton expects volatility to continue as these concepts come and go in specific markets, but he believes that, as a 40-year-old brand, Chuck E. Cheese’s has the wherewithal to handle the competition.

“They can come in and make some money from time to time and then they pop out of business,” Leverton said. “It’s a lot of volatility. But we think that volatility speaks to the staying power of Chuck E. Cheese.”

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