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What happened with Dave & Buster’s?

Eatertainment chains like Chuck E. Cheese's were all the rage, until suddenly they weren’t, says RB’s The Bottom Line.

The Bottom Line

Time was, not very long ago, when Dave & Buster’s and Chuck E. Cheese's were boasting good sales, with enviously strong margins generated by the games and amusements.

Dave & Buster’s was quietly one of the better performers among restaurants on Wall Street, surging from the midteens following its 2014 IPO to more than $70 a share at one point last year.

Chuck E. Cheese's, meanwhile, was reportedly preparing for an IPO just one year ago. The company had really turned it around, one investment banker told me at the time. They replaced tokens with cards and saw improved sales.

The two chains were part of a generation of eatertainment concepts taking advantage of a counter-trend to the convenience-above-all shift in the restaurant industry. Millennials, everybody said, want to have a good time when they go out. So you’d better have something to lure them in.

But a funny thing has happened in recent months. Their sales have taken a sudden turn for the worse.

As I wrote about last week, Chuck E. Cheese's same-store sales declined 6% in the last three months of 2017. The company partially blamed its own challenges with technology, as well as competition from trampoline parks and bounce houses, for the weakness.

And as my colleague Peter Romeo wrote about earlier this week, Dave & Buster’s same-store sales declined 5.9% in the fourth quarter ended Feb. 4. “The most dramatic aspect of the trend was the slowdown in amusement,” CEO Steve King wrote.

Dave & Buster’s same-store sales have been slowing significantly over the past year. In the fourth quarter a year ago, its same-store sales rose 3.2%. The quarters since: up 2.2%, up 1.1%, down 1.3% and now down 5.9%. That’s a 9.1% negative swing over five quarters, for those of you doing the math.

That’s the exact same slowdown as Chuck E. Cheese's over the same period. The chain’s same-store sales increased 3.1% in the fourth quarter a year ago. But its same-store sales fell 2.8% in the first quarter, then declined 3.8% in the second and 6.9% in the third—so the 6% decrease in the fourth quarter was an actual improvement.

It’s possible that the similarity is pure coincidence. After all, Dave & Buster’s was designed to target a more adult audience than Chuck E. Cheese's, which relies heavily on revenue from birthday parties.

And both chains have their own issues, as Chuck E. Cheese's noted with its technology problems. The company was losing customers because of problems associated with its shift to a new point-of-sale system as credit cards were being denied.

But the similarity in the slowdown between Dave & Buster’s and Chuck E. Cheese's suggests they are facing the same challenges to a certain extent. And though they have different customer bases, they are similar, with Dave & Buster’s frequently labeled an “adult Chuck E. Cheese's.”

Competition is one potential factor. More options competing with both chains have popped up in recent years, be they trampoline parks in Chuck E. Cheese’s case, or companies such as Top Golf competing with Dave & Buster’s. Then there are at-home options. Both companies compete with the at-home market, which routinely comes out with new games designed to keep people on their couches. And let’s not forget those wonderfully large television screens we have at home.

One potential competitor: “Fortnite,” a multiplatform online game that has 150 million users worldwide. It was introduced in July.

(I’d argue, in fact, that “Fortnite” is as big an issue for Dave & Buster’s as, say, Top Golf.)

Here’s the problem with competition: It’s been there for a while. It’s not as if a bunch of eatertainment concepts suddenly popped up over the past year and took sales away, and video games have been there, too.

If a few games and restaurants can pull down sales by 910 basis points over five quarters, then maybe the market isn’t as big as we thought it was.

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