Don’t look now, but family fun has become a prime export for the U.S. thanks to the global expansion efforts of Mike Magusiak, president and CEO of CEC Entertainment Inc., the parent company of Chuck E. Cheese’s.
Facing a 12-year decline in the domestic birth rate and diminishing sales in the arcade, food and entertainment industry, Magusiak has redoubled his efforts to find new markets with a booming birth rate, burgeoning middle class and a penchant for family-oriented fun.
“When I look long term, I see no reason why we can’t have twice the number of stores internationally than domestically,” Magusiak says. “There are lots of places where the population is growing and people like spending quality time with family. Those markets are ripe for a concept like Chuck E. Cheese’s.”
That’s a pretty bold statement, when you consider that the rodent-mascotted chain, which generated revenues of $803.5 million in 2012, currently has 566 sites and only 18 are located outside Canada or U.S. territories.
After a rather slow start, Magusiak and the company are picking up steam. Together, in 2012, they’ve signed seven new development agreements for 42 stores in Mexico, Peru, the Philippines, Trinidad, Bahrain, Saudi Arabia and United Arab Emirates.
Although the international marketplace offers tremendous opportunities for growth, Magusiak says that a number of challenges must be properly understood and mastered before rapid expansion is wise.
“First, you need a differentiated product,” Magusiak says. “It would be very difficult to succeed if we were just selling pizza. Fifty percent of our revenue comes from food and 50 percent from entertainment. It’s our over-all experience that sets us apart.”
Once he’s surveyed the marketplace and verified that his brand will stand out, Magusiak relies on the following three-pronged strategy to identify and develop prime global opportunities.
Assess tangible and intangible assets
Magusiak says selecting an ideal global location isn’t rocket science but it does require an in-depth assessment of a region’s tangible and intangible characteristics.
For starters, he reviews GDP growth, birthrates and income data, but surprisingly, population density is a better predictor of success than discretionary income. Historically, Chuck E. Cheese’s stores in affluent areas haven’t fared as well as those located in lower income areas with high-density levels.
“We offer customers a great value, so we need sales volume to make our model work,” Magusiak says. “And because margins tend to be lower overseas, our international locations need even more volume than our domestic locations to turn a profit.”
Magusiak honed his location hunting formula by examining the profiles of top producing domestic stores like the one located in Bell, Calif. The store is adjacent to East Los Angeles, a largely Hispanic community that happens to be the most populous unincorporated region in California.
As a result, his initial forays into the global marketplace were focused on Latin American locales with similar demographics; however, the general population must also pass Magusiak’s cultural scrutiny.
“Our executive team visits the area and talks with prospective franchisees and guests to assess the cultural fit,” Magusiak says. “I’ve personally traveled to more than 150 locations including Abu Dhabi and the Philippines to gauge the local appetite for family-oriented entertainment.”
He says it’s easy to adjust menus, game distribution and pricing options to appease customers once they visit a store, but sustained growth hinges on cultural similarities, especially for a unique brick and mortar operation like Chuck E. Cheese’s.
“It’s not a ‘build it and they will come’ model; our guests have to like what we offer and what we represent,” Magusiak says. “You have to get out there and talk to people to see if your values match before committing to an overseas location.”
Find competent, passionate partners
A country’s populace isn’t the only place where Magusiak looks for compatible values; it’s a must-have requirement for Chuck E. Cheese’s franchisees. Successful candidates need business acumen, local market expertise, sufficient capital and what he calls a passion for the food and entertainment business.
“We don’t want absentee owners,” Magusiak says. “We’re looking for franchisees who are willing to immerse themselves in the business and interact with guests, because it’s their hands-on involvement that creates mutual success.”
Although 514 U.S. locations are company-owned, local ownership has been a critical component of Chuck E. Cheese’s early global success. In fact, every international franchise has been profitable from the outset.
Prospective franchisees are screened by staff and then interviewed by the executive team. Those passing muster then spend time in a U.S. store to get a feel for the guest experience and the basic operating model.
“We spend a lot of time with prospective franchisees, and we turn down a lot of people, but our slow and cautious approach has helped us avoid false starts,” Magusiak says. “Actually, many of our franchisees have been so successful they’ve asked to purchase additional development rights.”
In addition to turning a profit, Magusiak expects franchisees to boost the local appeal of Chuck E. Cheese’s brand by suggesting advantageous modifications to the company’s menu and operating procedures. For example, the franchisee in Monterrey, Mexico, added piñata rooms, and in Santiago, Chile, the chicken wings are spicier than those served in U.S. restaurants to satisfy the taste buds of local residents.
To ensure that modifications don’t stray too far from the company’s core values and brand, alteration requests are reviewed and approved by the company’s executive team.
“We don’t want to change what’s sacred about Chuck E. Cheese’s,” Magusiak says. “But if you hire smart, passionate people with good judgment, you need to listen to them.”
For instance, targeting teens instead of children isn’t an option, and it’s not OK to remove pizza from the menu. But Magusiak had no problem shutting down a salad bar in a Chilean store after sales records showed that locals weren’t embracing the concept.
“Customization is less important if you’re selling products over the Internet,” Magusiak says. “But it’s vital when you’re selling an experience and our franchise model has been instrumental in helping us develop a local approach and a solid business plan.”
Walk before you run
Magusiak honed his expansion strategy for three to four years while using his existing staff to identify and develop selected global opportunities. While some executives might question his speed, his methodical approach was designed to protect the company’s bottom line, iron out the kinks in the franchisee selection and assimilation process, and ensure the success of early adopters.
“We didn’t try to force things,” he says. “We wanted to remain profitable by expanding our model based on demand and by adding resources as necessary. Now that we’ve built out our infrastructure, we’re in a perfect position to jumpstart global expansion.”
To keep costs low, early franchisees were trained in U.S. locations. For example, the Peru franchisee spent time in Bakersfield, Calif., learning the nuances of Chuck E. Cheese’s guest service model before transferring the concept overseas. In addition, Magusiak insists that locations are profitable before granting additional rights to global franchisees.
“Going slow helps us tweak game distribution, token pricing and the details that contribute to a store’s profitability,” Magusiak says. “Plus, we can fund infrastructure investments as we go, which helps us try new things without incurring substantial risk.”
Once the company got solid footing, Magusiak hired an experienced globe-trotting Sherpa to identify new locations and a salesperson to recruit franchisees. He also hastened the franchisee assimilation process by adding a regional trainer.
Proof of Chuck E. Cheese’s concept, a proven track record and the addition of resources are behind the company’s recent surge in global expansion.
“You have to be patient,” Magusiak says. “We’re not just selling food. You have to make sure your brand aligns with the local culture when you’re selling quality family time and memories.”
How to reach: Chuck E. Cheese’s (972) 258-8507 or www.chuckecheese.com
Takeaways
Identify global expansion opportunities by evaluating a region’s tangible and intangible assets.
Look for aligned values when selecting business partners.
Be patient, test and achieve profitability before aggressive global expansion.
The Magusiak File
Mike Magusiak
President and CEO
CEC Entertainment Inc.
Birthplace: Warren, Ohio
Education: He received a bachelor’s degree in accounting from the University of Southern Mississippi and a master’s degree in business with an emphasis in finance from the University of Texas at San Antonio. He’s also a CPA.
What was your first job and what did you learn from it?
I worked as an auditor for Holiday Inn in Memphis, Tenn., after graduating from college. It was there that I got my first exposure to international business, because I traveled all over the world auditing various subsidiaries.
Who do you admire most in business and why?
I admire Dick Frank, who served as chairman and CEO of CEC Entertainment Inc. from March 1986 to December 2008. He was not only a great person, but from a business perspective, he was a great simplifier. He was bombarded by opportunities, demands and challenges all day long, but he had a way of filtering everything down into a few simple priorities. He would often say that the key to business success is keeping guests happy or pursuing the right opportunities. He definitely had a knack for keeping everyone focused on what was important.
What is your definition of business success?
First of all, I’m not sure that you ever get there because success is a never-ending journey. But over time, seeing people grow is not only rewarding it’s the hallmark of a high-quality organization that’s financially successful. It’s all linked together; you can’t have financial success unless you have successful people.
What was the best business advice you ever received?
You can’t go from good to great if you get spread too thin. Focus on what you do best, execute and your company will be successful.
