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Issue Date: Vol. 44, No. 11, November 2004, Posted On: 11/11/2004


Chuck E. Cheese's Continues To Grow, Expanding Use Of Proprietary Games


Marcus Webb

IRVING, TX - Gene Cramm is the best-qualified man in America to answer the burning question, "Who moved my cheese?" That's because he is the executive vice-president of games and entertainment for the flourishing Chuck E. Cheese's chain. Today the company comprises 451 children's entertainment centers, including 404 corporate-owned stores and 47 franchise operations. The soft-spoken Cramm is a pretty big cheese himself: for nearly 25 years he has been in charge of selecting the CEC empire's games and deciding upon and executing its amusement strategy.

So, with a sharp eye on the bottom line , and a finger on the pulse of the Great American Kid , Cramm knows precisely where the cheese is at all times. The company has struck gold (gold cheddar, that is) catering to families with kids age two to 11. Despite CEC's already enormous store base, the company views the United States as a vast, underserved market. Cramm oversees the ambitious entertainment selection and installation process in conjunction with the company's overall expansion program through which CEC will open 30 to 32 new locations this year alone. Such a number would be inconceivable for virtually any other CEC or FEC chain in the world, but it is typical of the annual Chuck E. Cheese's growth rate.

"To qualify future sites for our stores," Cramm explained, "we rely on both internal and external real estate teams. These teams go into the potential markets, assess each area in light of our criteria, develop plans and then bring them back to our management group for the final decision."

An ongoing task for CEC is staffing this ever-expanding empire. As new stores open, experienced managers from older stores are transferred in, forming the skeleton crews. Then staffs are fleshed out with brand new recruits who are trained in CEC corporate culture. "That's just part of the business," Cramm pointed out. "As we open up new markets, if a manager has family from that area, they can apply and take a look at moving."

About 67% of CEC revenues are derived from food and beverage; the remaining 23% comes from games. CEC's latest quarterly earnings report showed same-store revenues up 5%, and overall earnings up 18% compared with the same quarter last year.

Chuck E. Cheese's food menu is founded on pizza, salad bar and sandwiches. A few variations have been added here and there over the years, such as chicken fingers and new salad bar items. "While we have evolved our menu to a certain degree, we remain focused on the basics," Cramm stated. "Our main goal is to continue to ensure that we execute our signature items in a high-quality manner."

WHEN HANDED A LEMON...

The shrinking volume of available, suitable games is "a concern" in the executive suites of CEC. But the company has turned this potential lemon into some quite tasty lemonade. Cramm says that like anyone, he would always prefer to see more strong products available for his particular market niche. "It is a longer process to find games and equipment today than it was a few years ago," he said. "Back then we might have seen 20 to 30 games at a trade show that I could select from, where today it might be 10 to 15."

Yet Cramm disagrees with those who worry that a shrinking manufacturer base will mean the industry is in danger of running out of product in a few years. "I don't see that at all," he said calmly. "It's true that we have seen a lot of fallout among the manufacturing base, but we still have a very strong group of manufacturers left. And, we are starting to see a few more start-up companies. Certainly it is not as many as we used to see, but a few new entrants do continue to pop up at each major trade show. I have just returned from a trip to Asia to scout for product, and I saw a lot of items under development that I feel very good about. I saw a lot of solid products exhibited at AMOA-Fun Expo this fall that I also feel very good about. I am very excited about the Sammy-Sega merger, and believe there is a lot of momentum for those folks. Mergers are challenging, but I'm confident a very strong company will emerge, so I'm excited to see what they're doing to drive that company forward."

There is one more important reason for CEC's confidence that good games will remain in healthy supply. Cramm and his team take an aggressive role in acquiring and/or developing a solid number of proprietary games. This includes both standard games that bear the Chuck E. Cheese's logo, and exclusive games that CEC develops with outside partners. Concepts for unique proprietary games come both from CEC , meaning Cramm himself in many cases , and from developer partners.

"Those two areas combined (branded and original games) represent a large portion of what we do," Cramm revealed. "In fact, our commitment to proprietary games is growing; I think it's a big key to our future. We will continue to develop and evolve games that fit our market niche and serve the needs of our guests."

While proprietary game development by CEC is driven in part by changes in the marketplace, it is also a strategy that enables the company to have its exacting standards for quality and value met more easily. "We have a very stringent list of specifications that we want incorporated into our games for reasons of safety, durability and ease of maintenance," Cramm explained. "These are key issues for all of our operators. We are determined to make sure we provide high-quality, safe, long-lasting games, rides and attractions for all of our stores. It is our responsibility to our customers and shareholders that we develop games that will retain value for many years."

The building of more games in Asia, rather than them being designed there and built in the U.S., is a major change witnessed by Cramm throughout his long career in the industry. But it's a change with which he appears very comfortable, and he is ready to make the best of it. He cites government subsidies for video game R&D in such places as Korea, coupled with lower labor and production costs, as important reasons behind the growth in outsourcing by the amusements industry. "Cost is a pretty big reason why people are going offshore," he said.

Redemption is a key component of CEC's overall game plan. "Today it's the majority of our business," Cramm stated. But it has yet to reach the 70% mark that, according to trade lore, has become typical of many of today's arcades. The company incorporates a fair number of quick-coin games in its mix, but remains committed to providing highly entertaining games as well.

Asked his views on the industry's ongoing debate between the relative virtues of licensed versus generic kiddie rides, Cramm declared: "Both sides are correct." That is, even two-year-olds recognize branded characters these days; yet small fries remain just as delighted with basic, classic themes in 2004 as they were in 1952. "So there is value in both, and an operator must create a blend of licensed and generic products to achieve the optimum value," Cramm explained. "Certainly a 'Barney' ride is very recognizable to children; at the same time, kids are still totally enthralled with a non-licensed horse."

BUILDING CHARACTER

The original CEC concept included an animatronic music review, and this element remains an integral part of the firm's entertainment offering. Several times each day, curtains automatically draw back on a small stage to reveal the company mascot, loveable Chuck E. Cheese himself. The mascot bursts into (recorded) song and is backed up by a band that consists of equally big, fuzzy animals who move in synchronization with the tune.

"Our animatronic show continues to evolve," Cramm noted. "Our current show is called 'Studio C' and features our characters supported by video technology and blue-screen technology. We change our software quarterly, adding new music and video to keep the show fresh." An in-house CEC music team licenses familiar music directly through publishers, then composes and records the songs in house, performing post-production and replication, and finally, ships the finished software to the entire CEC chain. Current selections include a mix of original songs (at least one per show) with classics like "The Hokey Pokey" or "Born To Be Wild." The goal is to create a musical menu that kids will enjoy and parents will recognize.

Advertising and promotion are essential in building brand recognition for CEC. This is particularly true since the company draws from a continual influx of potential new customers as young as three who, obviously, haven't yet experienced Chuck E. Cheese's. The company sponsors several PBS TV shows including "Clifford the Big Red Dog." PBS provides precise viewer demographics, indicating which shows hit CEC's desired age range. Said Cramm: "We advertise through television as our primary medium, with TV ads produced by the marketing team in concert with an outside production company. Our TV spots are supplemented by freestanding newspaper inserts that are produced in-house. We get a real benefit when kids say: 'Hey Mom, I saw Chuck E. Cheese on TV!'"

Demographics and shifting trends in children's upbringing and tastes get a lot of attention from Cramm and his management team. While children today go through the same development cycle as children of a generation ago, the kids of 2004 recognize more brands, more quickly, and are more accustomed to inserting coins or tokens into redemption games.

Although many of today's youngsters will surf the Internet for more than a decade before they will be able to obtain a driver's license, Cramm said he believes "Children continue to be children. Our responsibility is to remain focused on the mainstream of providing high-quality family fun that is wholesome, that serves the guests, and provides a great experience every time they come through our front door."

FORMULA FOR SUCCESS

Some FEC experts, such as Randy White of White Hutchinson Leisure & Learning, assert that successful fun centers tend to target a well-defined, narrow range of population segments, in terms of socio-economic class. Cramm readily conceded this theory may have merit for some, but he also believes CEC has found a formula that transcends demographic differences and appeals to families across a wide spectrum.

Accordingly, a Chuck E. Cheese's store is pretty much the same on either side of the tracks. Even the prizes at the redemption counter vary little from store to store, or from neighborhood to neighborhood, Cramm revealed. Age demographics are also working in CEC's favor. America's current, ongoing baby boom "absolutely" translates into more little feet walking in the door of Chuck E. Cheese's, he said.

Chuck E. Cheese's was launched in 1977 by Atari founder Nolan Bushnell. In 1984, the leading franchise owner, Showbiz Pizza, acquired CEC out of bankruptcy and merged the two concepts into one. Corporate ownership has remained stable ever since.

Cramm began his career in the amusements trade as a service technician and collector with John Cox, Jr.'s Cox Music Co. (Davenport, IA). He joined Showbiz Pizza as a store technician and swiftly moved up the corporate ladder to his present position. "The job has changed because of major changes we've seen in the industry," Cramm said. "The types of games that dominate the floor have certainly shifted over the years, but the rest of the responsibility is pretty consistent. Success is a matter of keeping committed and focused."

"Commitment" and "focus" are two words that a listener hears again and again from Cramm. The industry's ongoing rollercoaster ride of consolidation and expansion will not deter CEC from executing its master strategy, he asserted.

"I feel very bullish on the industry," he noted. "For us, the keys to continued, successful growth are to maintain our overall focus and commitment to stay on track with our business plan. Our mission is to continue to keep our facilities fresh, continue to provide quality family entertainment in our locations and remain very mainstream with our product."

The goals may be easy to state, but achieving them is hardly a matter of coasting on past momentum. CEC , along with Disney, McDonald's, and many other brand names that have perfected a popular formula , face a considerable challenge that outsiders rarely appreciate. How do you stay within the boundaries of your formula sufficiently to provide the proven product and experience that your customers expect' yet vary the execution of the formula enough over time so that it never grows stale?

In this department, too, Cramm "knows where the cheese is." Keeping CEC's appeal fresh, he said, begins with ensuring that company personnel , including himself , continually rediscover "how much fun this business really is." Cramm laughingly admits he is still a kid at heart, which (as Walt Disney often observed) just might be the best attitude for someone whose ultimate customers are families with small children. This, along with a determination to provide outstanding customer service, intangibly translates into the look, feel and flavor of the CEC operation on the street level. It may not show up as a line item on a P&L statement but customers can sense it in a heartbeat.

As Cramm explained: "We all need to feel good about what we do. The amusements industry continues to change and evolve. But as with any business, we can adapt to those changes just fine if we continue to focus on our core appeal and on what works. I see some exciting things ahead for our industry that we can all do together to move us forward. That's why we're confident that Chuck E. Cheese's will just keep building on its proven success to bring even more fun, food and family togetherness to moms, dads and kids for y, many years into the future."

 


Topic: Music and Games Features

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