-1-
Chuck E. Cheese’s Franchise
Business Plan
Rami Elhakim
Praise Lee
Derek Tan
Shang Wong
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Table of Contents
Executive Summary
1.0 Introduction
1.1 Company Overview
1.2 Industry Overview
1.3 Mission Statement
1.4 Goals and Objectives
Page
4
5
6
6
6
2.0 Marketing Plan
2.1 Product
2.2 Pricing Strategy
2.3 Place
2.4 Distribution
2.5 Promotional Strategy
2.6 Customers and Target Markets
2.7 Competition
2.8 SWOT Analysis
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10
12
3.0 Operational Plan
3.1 General Operations
3.2 Location
3.3 Average Day
3.4 Working Capital
13
13
14
17
17
4.0 Human Resources Plan
4.1 Organizational Structure
4.2 Organizational Chart
4.3 Board of Directors
4.4 Management
4.5 Job Description
4.6 Training Programs
18
18
18
19
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21
5.0 Financial Plan
5.1 Initial Investment
5.2 Revenue
5.3 Cost of Goods Sold
5.4 Operating Expenses
5.5 Financing
5.6 Expected Rate of Return
5.7 Sensitivity Analysis / Assumptions
5.8 Break-Even
5.9 Ratio Analysis
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6.0 Conclusion
24
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List of Figures
Figure 1.0 Aerial View of Location
Figure 2.0 Floor Plan
List of Schedules
Schedule A: Income Statement
Schedule B: Balance Sheet
Schedule C: Statement of Cash Flows
Schedule 1: Economic Variables
Schedule 2: Revenues
Schedule 3: COGS
Schedule 4: Expenses
Schedule 5: Capital Budget
Schedule 6: Financing
Schedule 7: Debt Amortization Schedule
Schedule 8: CCA
Schedule 9: Income Taxes
Schedule 10: Investment Analysis
Schedule 11: Ratio Analysis
Schedule 12: Sensitivity Analysis
Schedule 13: HR Labour Plan
Page
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Excel Spreadsheet
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Executive Summary
The proposed business plan for a Chuck E. Cheese`s franchise in Saskatoon,
Saskatchewan provides numerous benefits for potential investors. We will be located at
the corner of Center Mall on the intersection of 8th Street and Circle Drive. As Centre
Mall is one of the premier malls in Saskatoon and Circle Drive being the main traffic
artery, Chuck E Cheese will be able to attract families hoping for a pit stop as they travel
through Saskatoon.
Chuck E. Cheese is a hybrid restaurant integrating both dining and entertainment in a
family-oriented environment. The restaurant will offer a variety of pizzas, sandwiches,
appetizers, a salad bar and desserts along with soft drinks, coffee and tea. The
entertainment centre includes both a stage and playroom. The stage features musical
entertainment presented by robotic and animated characters and the playroom features
arcade-style and skill oriented games, video games, and rides. Tokens are used to
activate the games and redeem tickets, which are traded in for prizes. By integrating both
dining and entertainment, it will provide a Chuck E. Cheese experience that will bring
families together and provide wholesome fun and memories.
Because Chuck E. Cheese is both a successful company and a household name, we
anticipate general interest to be high. In order to operate Chuck E. Cheese, we will be
employing one general manager, two shift managers, a full-time electronics specialist,
and 20-45 part-time employees who will perform the cooking, cleaning, greeting,
serving, and entertaining. Chuck E. Cheese will be 14,000 square feet and will have a
maximum capacity of 425 guests at a given time. We anticipate each guest will spend an
average of $12 per visit by combining both food and entertainment revenue.
Chuck E. Cheese will be open 360 days per year which is consistent with industry. In the
first year, we anticipate an average of 450 guests per day with a 5% growth in each of the
-5next five years. In comparison to other Chuck E. Cheese stores, these figures are deemed
to be conservative.
The analysis completed in our business plan reflects a six-year plan with a 20% required
rate of return for investors. We anticipate a net present value of at $203,206 which is a
24% return on investment, which is over and above the required amount of 20%.
Dividends of $1,567,103 are expected to be distributed towards the investors over a
period of six years.
For the third year in a row, Saskatoon has led the nation in its GDP growth rate which
grew by 5.4% in 2008. Saskatoon also possesses a growing demographic of children
under the age of 15, which is in line with our target market of children from 2-12 years
old. In addition, we believe our strategic location by Centre Mall, along with the unique
integration of family-oriented dining and entertainment will ensure success within the
market. This is a fabulous and unique opportunity for an investor to receive generous
annual dividends along with a significant return on investment.
1.0 Introduction
1.1 Company Overview
Chuck E. Cheese is an interactive children’s entertainment center that is combined with
the features of a family pizza restaurant. The company started 25 years ago when Nolan
Bushnell opened a Pizza Theatre in San Jose, California in 1977. This venture was
triggered by his belief that there are not enough places for young people to go play video
games that had a family atmosphere. This restaurant was then merged with a chain of
restaurants called Showbiz Pizza Time, Inc. to form what is now known as Chuck E.
Cheese’s. Today, Chuck E. Cheese's consists of over 500 entertainment centers in 48
states and 6 countries.
-61.2 Industry Overview
Chuck E. Cheese is a recognized brand that offers a hybrid concept that combines
elements from both the Children Entertainment Center (CEC) and Restaurant Industry.
In the CEC industry, all the attractions are tailored towards children while encouraging
the parents to join the fun. Although the effort to satisfy the parents is only secondary,
these efforts are critical as they are the ones to decide whether or not their children will
be returning. The growing number of CEC ventures tends to incorporate different
attractions which include play-pure entertainment, children's fitness, parent-child
interaction, and/or education, targeting specific age groups. Currently, Saskatoon only
has one CEC that is specifically targeted towards children in our age group. See
Marketing Plan section for discussion on competitors below.
In terms of the restaurant industry in Saskatoon, this industry is very competitive as there
is an abundant supply of restaurants per capita, especially in the community that we are
planning to position our venue. However, despite the fact that we are planning to operate
within the competitive restaurant industry, we have identified a need for new family
restaurants. See Marketing Plan section below for discussion customers and target
market.
1.3 Mission Statement
“To bring families together in a wholesome environment for fun, games and kids”
1.4 Goals and Objectives
 To combine dining and entertainment, in a family-oriented environment, targeting
children from 2-12 years of age.

To provide guests with competitive food quality.

To achieve a return on investment of not less than 20% per annum.
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2.0 Marketing Plan
2.1 Product
Our guest experience combines wholesome family dining and entertainment. The
integration of dining and entertainment acts to attract families to enjoy a fun experience
together. Our Chuck E. Cheese restaurant will offer a variety of pizzas, sandwiches,
appetizers, a salad bar and desserts. Soft drinks, coffee and tea are also served.
The entertainment includes both the stage and the playroom. The stage features musical
entertainment presented by robotic and animated characters and the playroom features
arcade-style and skill oriented games, video games, and rides. Our entertainment is
targeted towards attracting and engaging kids aged 2-12 and their families. Tokens are
used to activate the games and redeem tickets, which are traded for prizes.
2.2 Pricing Strategy
Chuck E. Cheese prides itself on maintaining a price of one token, costing $0.25, per
game or ride since its inception in 1977. We believe that the food quality of Chuck E.
Cheese is favourable in comparison to competitors in providing guests with superior
value for their money.
Our principal competitive strengths consist of our established recognized brand, the
relative quality of our food and service, the quality and variety of our entertainment
offerings, and our location and attractiveness of our stores. Leveraging these strengths,
Chuck E. Cheese can command a slight premium price over its competitors in order to
maintain its high quality.
2.3 Place
Chuck E. Cheese restaurants are typically located in shopping centers or in free-standing
buildings near shopping centers and generally occupy 9,000 to 14,000 square feet in area,
averaging approximately 11,500 square feet per store. Thus, we will be located at the
corner of Center Mall on the intersection of 8th Street and Circle Drive. This location is
-8easily visible and accessible from both directions of Circle Drive. As Centre Mall is one
of the premier malls in Saskatoon and Circle Drive being the main traffic artery, Chuck E
Cheese will be able to attract customers with children hoping for a pit stop as they travel
through Saskatoon. Also, Centre Mall is located on another main commuter route 8th
Street which attracts large amounts of traffic due to the many businesses that adore both
sides of the Street. Furthermore, it is in close proximately to many well established
residential areas. Centre Mall contains two theatres which attract a relatively large and
constant amount of families as well as a Safeway grocery store and is in proximity to
many other franchise big name stores. See Aerial map Figure 1.0
2.4 Distribution
The majority of the food, beverages and other supplies used in Company-owned stores
are currently distributed under a system-wide agreement with major food
distributors/suppliers. Chuck E Cheese requires that the Franchisee purchase all
equipment, supplies and other products and materials used in the operation of the
Franchised Restaurant solely from suppliers approved in writing by Chuck E Cheese. To
qualify for approval, such suppliers must (i) demonstrate the ability to meet Franchisor’s
reasonable standards and specifications for such items, and (ii) possess adequate quality
controls and capacity to supply Franchisee’s needs promptly and reliably. In addition
Chuck E Cheese may require that its representatives be permitted to inspect the supplier’s
facilities and samples for laboratory testing. As Chuck E Cheese currently has a location
in Regina there are existing suppliers in Saskatchewan that have been approved by Chuck
E Cheese. This distribution system creates an economies of scale to drive cost and
operational efficiencies. We will utilize the same food distributors/suppliers to ensure
costs remain low while pir food quality remains high.
Chuck E Cheese will provide this list upon the commencement of our Franchisee
relationship. However, if the specified vendors are not available to meet our supply needs
at the Saskatoon location, there are many other alternative restaurant and national food
suppliers, such as McDonald’s Consolidated Ltd., where we can negotiate agreements
with.
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2.5 Promotional Strategy
It is imperative to promote Chuck E. Cheese to raise awareness of the branding and
experience towards the general public. A portion of gross sales will be devoted towards
the advertising fund which will be used to generate further sales from new customers
along w returning guests.
The primary advertising medium will be through television, due to its broad access to
family audiences and our belief in its ability to effectively communicate the Chuck E.
Cheese's experience. The television advertising campaigns will be supplemented by
promotional offers in newspapers, local corporations, our Web site, Internet advertising
campaigns and direct e-mail. We will launch an aggressive promotional campaign at
elementary schools to raise awareness to children and provide them with coupons and
specials for birthday parties. We will target large corporations within Saskatoon by
providing special arrangements for birthday parties along with corporate events such as
children’s Christmas celebrations. Radio promotions will begin a month prior to the
opening night and continue throughout the year to announce special promotions. We will
focus the radio promotions on news radio stations which should target parents. Finally,
our website will provide an online newsletter for guests to subscribe which will detail
special promotions.
2.6 Customers and Target Markets
The products and services offered by Chuck E. Cheese are targeted primarily to families
with children. A city such as Saskatoon is the perfect environment for our business
because of its high growth in spending. These strengths are supported by the nation high
growth in GDP of 5.4% in 2008 and expected 3.3% in 2009. Also, the city of Saskatoon
has an estimated population of 209,400 people as of December 31, 2008 and is
continuing to grow. Further the enticing growth in population and spending in Saskatoon,
the city also has a growing demographic of youth under the age of 15, which is
favourable to our business. Based on the latter factors and our observations in the
- 10 profitability of our competitors, namely Fuddruckers, Chuck E Cheese will carve out the
market by positioning itself to target kids between the ages of 2 and 12 (younger than our
competitor’s target) and capitalize on the family-oriented culture of Saskatoon.
2.7 Competition
Although the indirect competition for Chuck E. Cheese in Saskatoon is very high due to
the abundant supply of restaurants, our establishment offers a unique combination of food
and entertainment to our defined target market (families with children), positioning us in
a league of our own. As such, our product offerings create a competitive advantage over
the large number of indirect competitors in Saskatoon. This gives us the ability to attract
and retain our customer base. We have two primarily direct competitors in Saskatoon (1)
Fuddruckers and (2) The Fun Factory:
Venue
Fuddruckers
The Fun Factory
Product Offerings
Hamburgers, Batting Cage,
Mini Golf, Token Games.
Snacks, Token Games,
Laser Tag, Play Ground
Unit.
Address
2910-8th Street East,
Saskatoon, SK
1633C Quebec Ave N,
Saskatoon, SK
Fuddruckers
This establishment is a well known venue in Saskatoon that attracts a mass number of
families to it’s variety of entertainment and food offerings. From our observations of its
daily operations, this venue is often overwhelmingly busy with a large number of
customers that our business is tailored to capture (children between the ages of 2 and 12).
As such, we have identified an opportunity for Chuck E. Cheese to take on the over filled
customer base that Fuddruckers cannot efficiently service. As successful as the
Fuddruckers’ business is, a bulk of their entertainment offerings is seasonal. As a result,
their revenue generating products are limited to the months in spring and summer as
opposed to the year round offerings of our establishment. Furthermore, the food offered
at Fuddruckers is in a separate building from their multiple entertainment facilities. These
limitations to Fuddruckers business, provides Chuck E. Cheese an opportunity to
capitalize on.
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The Fun Factory
As this establishment offers food and entertainment to a target market similar to Chuck E.
Cheese’s, we consider this business to be our most direct competitor. However, based on
our research, “The Fun Factory” is not a strong threat to our business. “The Fun Factory”
is hidden in the north side of the city with a breadth of under developed product
offerings. For example, the food offered to the customers is in the form of a concession
stand which provides a limited selection of low quality foods. Moreover, there are only a
handful of arcade style games available in the token games area. Further, the main
attraction offered in this establishment is an indoor playground that can also be found at
some McDonald’s restaurants. As this attraction can potentially attract a large number of
children, the play unit is certainly not parent friendly, therefore, inhibiting all family
members from having fun “together.” Such restrictions are detrimental to future return
visits as the parents do not gain satisfaction from the experience. With the low brand
awareness of “The Fun Factory,” within Saskatoon, the widely advertised opening of
Chuck E. Cheese has great opportunity to capture and retain the attention of our targeted
customer base.
Why are we better?
As a well established franchise across North America, we are a well known organization
that competes for our customers on the basis of:




Name recognition
Competitive pricing of our quality, variety, and perceived value of food offerings
Quality of our customer service
Convenience and attractiveness of our facilities
As such, we are confident that we have an attractive range of product offerings and
exceptional customer service that will out compete both our indirect and direct
competition. As stated in our mission statement, our goal is “to bring families together in
a wholesome environment for fun, games and kids.” By positioning our Chuck E.
Cheese restaurant in Saskatoon, we will be the place to go for families to enjoy
exceptional pizza and entertainment together.
- 12 2.8 SWOT
Strengths:

Brand name – Chuck E. Cheese is a well established brand name that is recognized by
children across North America for its entertainment and good eats in a fun filled
environment.

Integration of food and entertainment – Currently in Saskatoon, there are very few
establishments that offer food and entertainment within the same venue. We offer a
wonderful family oriented concept that allows families with children to have fun and
food together.

Variety – Chuck E. Cheese offers a wide range of arcade style games and free
entertainment to its customers, and it does not stop there. We offer a feature musical
and comic entertainment, family oriented games, rides, and arcade style games in
conjunction with a variety of pizzas, salad bar, appetizers, and dessert that will satisfy
our diverse clientele.
Weaknesses:

Control – Under the franchise agreement, we are required to buy materials from
designated suppliers. As a result, we are restricted from pursuing further cost-saving
opportunities offered by local suppliers within Saskatoon.

Limited target market – Since Chuck E. Cheese is tailored to families with children
between the ages of 2-12, our product offerings will not have a share in the large postsecondary demographic market which drives the restaurant industry in Saskatoon.
Opportunities:

Unsaturated market – Saskatoon has higher population of youths under the age of 15,
yet, there are very few establishments that are specifically tailored towards children.
As such, we feel that this is an opportunity to capture this particular demographic with
our food and entertainment offerings.

Growing population and spending – The estimated population is 209,400 people and
growing as of December 31, 2008. Also, Saskatoon is expected to experience a nation
- 13 leading GDP growth for the third year in a row. Saskatoon has experienced a 5.4%
GDP growth in 2008 and will continue to see a nation high growth of 3.3% in 2009.
Threats:

Change in consumer preferences – As food trends are moving towards healthier and
nutritional dietary preferences, the pizza association with our recognized Chuck E.
Cheese experience will deter health conscious families from choosing our venture.

Shift in demographics – As family sizes are getting smaller, our population of our
target marking will also decrease. Although this shift in demographics is not a major
threat in the present, it will have detrimental effects on our long term profitability.
3.0 Operations Plan
3.1 General Operations
Chuck E Cheese’s operations focus on combining dining and entertainment.
Entertainment includes a stage with musical and comic entertainment by robotic and
animated characters, arcade-style and skill oriented games, video games, and rides. For
food, Chuck E Cheese serves beverages, pizzas, sandwiches, appetizers, salad bar and
desserts. Chuck E Cheese sells packages for food, beverage and game tokens. The store
is separated into three main areas. See Figure 2.0 for Floor Plan. First we have the
kitchen and related areas that occupies about 35% of the store. This area includes the
cashier and prize area, salad bar, manager’s office, technician’s office, restrooms.
Second, we have the showroom occupying 25% of the store, which provides comic and
musical entertainment by computer-controlled robotic characters, w/ video monitors and
animated props. Lastly, we have the playroom that occupies 40% of the store with
arcade-style and skill oriented games, rides, video games and other forms of
entertainment. In the playroom, tokens are used to activate games and rides in playroom
area. The maximum price for a token is $0.25 reduce prices when they purchase large
quantities or purchase with a package deal. The games will games dispense tickets.
Tickets are fed into a ticket counting machine which prints off a ticket with the quantity
of tickets. Tickets are redeemed for prize merchandise such as toys and dolls. The
playroom also has tubes and tunnels suspended from the reaching ceiling called
- 14 Skytubes, and other free attractions. There are some tables and chair seating in playroom
for the parents to watch their kids. Total table and chair seating in showroom and
playroom areas average 325-425 guests / store.
As a franchisee, we are restricted from any significant changes to the operation plan. As
such, any changes are at the discretion of the franchisor, and our establishment will be
notified of any mandatory/optional changes proposed.
3.2 Location
Chuck E. Cheese restaurants are typically located in shopping centers or in free-standing
buildings near shopping centers and generally occupy 9,000 to 14,000 square feet in area,
averaging approximately 11,500 square feet per store. Thus, we will be located at the
corner of Center Mall on the intersection of 8th Street and Circle Drive. This location is
easily visible and accessible from both directions of Circle Drive. As Centre Mall is one
of the premier malls in Saskatoon and Circle Drive being the main traffic artery, Chuck E
Cheese will be able to attract customers with children hoping for a pit stop as they travel
through Saskatoon. Also, Centre Mall is located on another main commuter route 8th
Street which attracts large amounts of traffic due to the many businesses that adore both
sides of the Street. Furthermore, it is in close proximately to many well established
residential areas. Centre Mall contains two theatres which attract a relatively large and
constant amount of families as well as a Safeway grocery store and is in proximity to
many other franchise big name stores. Figure 1.0 is an aerial map of the proposed
location.
- 15 -
Figure 1.0: Aerial Map
- 16 -
Figure 2.0:
3.3 Average Day
Chuck E Cheese’s hours of operations are Sunday-Thursday: 9 am to 10 pm, Fri-Sat: 9
am to 11 pm. The store would be opened to set up starting at 8 am and closed one hour
after closing time for clean-up. (See Schedule 13: Staffing Labour Plan). The average
day would involve preparing the food and setting up the kitchen, stage and play area.
The cashier welcomes the guests as they enter the door, where they will select and pay
for food, tokens or packages. Guests who are eating will be given a table number and
seated according to the availability on the table plan. They are given menus and will go
up to the kitchen to order food where they use the table number as the identifier. When
- 17 their food is ready, it will be brought to their table. Every two hours, there will be a stage
show, where the time of the showings will be posted and a reminder announced 5 minutes
prior to starting. Once kids and parents have tokens, they can start playing the games /
rides. Once each game is finished, tickets will be dispensed. Once a number of tickets
have been accumulated, tickets can be fed into ticket munchers to obtain the ticket count
sheet. These sheets can then be taken to the prize station where kids can trade their
tickets for various prizes based on the number of tickets won. Stage performances will
occur about five times a day, more frequent with greater turnover of customers. Chuck E
Cheese, the mascot will also make appearances. If technical issues do occur, the fulltime technician will provide maintenance services. At the end of the day, the ticket
machines will be emptied, prizes restocked where necessary. Purchase requirements are
tracked for the next round of purchasing. Cash will be counted at the end of each day by
the manager and then verified by a supervisor. The deposit slip will require both of their
signatures. The cash will then be deposited on a daily basis at the bank. The kitchen,
play area and stage will be cleaned. The average week involves weekly scheduling and
tracking supply levels. We will be making purchases from suppliers on a weekly basis to
keep inventory storage levels at a minimum. On a bi-weekly basis, we will run our
payroll. We will prepare quarterly financial statements and have quarterly board
meetings to review the financial results and address any issues. On an annual basis, we
will prepare financial statements and file our income tax. We will have an annual general
meeting to review the annual financial results and strategic direction of the company. We
will modify our business plan as needed to gain a competitive advantage in our strategic
positioning and operations. For instance, we can assess new games / rides to bring in, or
if some games should be removed after their lease term due to less popular demand.
3.4 Working Capital
Chuck E Cheese has no account receivables as customers pay for purchases in cash or
credit card at time of sales. General payment terms with suppliers are 30 days. We aim
to maintain only sufficient inventory of supplies in store satisfy current operational needs.
Receivables include credit card receivables, tax receivables, vendor rebates and
leasehouse improvement incentives.
- 18 -
4.0 Human Resource Plan
4.1 Organizational Structure
Chuck E Cheese will be a corporation based on a franchised structure. Each of the four
shareholders starting the franchise will buy 25% common shares each, where unanimous
consent is required for all business decisions. Each shareholder will be putting in an
equal amount of financing (See 5.0: financial Plan). Thus, unanimous consent will help
protect each investor’s interest and ensure all members are in agreement with the
direction of the company. There will be a clause in the shareholder agreement that
stipulates that if any shareholder wants to sell its interest, the other investors have the first
right of purchase with a purchase price built into the agreement. The reasons for
incorporating are to limit liability, and the capital gains exemption from owning shares.
The reasons for franchising are to capitalize on the established brand, distribution
channels, and the established business / operational concept. This provides leverage to
getting the business started compared to building a brand and business model from the
ground up. The downside to franchising is that we have less flexibility and discretion on
how to set up the business as there are several standardization requirements, including
store layout and suppliers for games, foods and furniture.
4.2 Organizational Chart
The organizational structure has one general manager and two managers who will act as
supervisors on alternating shifts. We will have one full-time electronic specialist given
the importance of the operation of our robotic stage performances, visual screens and
games. We will have 20-45 part-time employees to work as cashiers, in the kitchen,
servers, stage and game operators. The number of employees will depend heavily on
seasonal demand with more employees in the summer.
- 19 -
General Manager
Manager 1
Electronic
Specialist
Manager 2
20-45 Part-Time Employees
4.3 Board of Directors
Our board will consist of the four founding investors with the addition of two external
investors. Among the 4 founding investors, we have collective experience in a variety of
food service and retail industries that will produce sound financial decisions in critical
stages of our investment.
4.4 Management
Rami Elhakim, one of our investors will be the general manager of Chuck E Cheese. He
has had previous restaurant experience and has helped alongside his family businesses.
He also has focused training in tax.
4.5 Job Descriptions
1. General Manager
The general manager’s main responsibilities will include general operational oversight,
approval and recording and analysis of financial information. The general manager will
be performing bookkeeping, to keep track of financial information and to compile the
quarterly and annual financial statements. This will also involve financial analysis and
budgeting to ensure profits are aligned with our goals and objectives. He will also be
performing bank reconciliations and overall review of cash and payroll to ensure
reasonableness. He will also maintain relationships with suppliers. He will also be in
charge of approving purchases as determined by the managers to ensure purchases are
- 20 reasonable given operational needs. He will be responsible for approving schedules on a
bi-weekly basis and overall hiring and firing. Annual salary for general manager will be
80,000.
2. Managers
Managers are in charge of ensuring daily operations are running smoothly, overseeing
daily shifts. Our team will consist of two managers, where one manager will supervise
each shift. They will deal with all customer relation issues. They will also be
determining weekly staff scheduling to ensure they are appropriate given demand. They
will also count cash at the end of the day and making bank deposits on a daily basis.
3. Electronic Specialist
They are responsible for repair and maintenance of robotic characters, games and rides.
They will remain onsite to ensure timely running of operations. Having this member of
our team is crucial as our games and stage performances are key to our dining and
entertainment experience.
4. Cook
The cook is responsible for preparing and cooking food as well as cleaning the kitchen
and doing the dishes.
5. Part-Time Employees
All other part-time workers will multi-task the daily operational tasks to run the kitchen,
stage and games. Part-time employees will fill the responsibilities of food Servers, stage
operations, cashier, Chuck E Cheese mascot, cleaning tables, washrooms, other janitorial
tasks and other operational tasks. Wages will be based on a slight premium on minimum
wage to provide an incentive to work for Chuck E Cheese. Staffing of part-time
employees will vary seasonally, with the greatest numbers during the summer months
- 21 4.6 Training Programs:
Per Franchise Agreement, both the General Manager and Technician must attend the
initial training provided by the Franchisor. A copy of the Operational Policies will be
provided at this time and must be returned to Franchisor upon termination of the
Franchise Agreement. Additional training for additional managers and/or other
employees can be facilitated through other programs, seminars and materials, by the
Franchisor at a reasonable fee. Although operational training is required of new
employees when hired, it is not mandatory for the Franchisee to use Franchisor resources
to facilitate these efforts.
5.0 Financial Plan
5.1 Initial Investment
We estimate an initial investment in the range of $1.4 to $1.8 million. We have used
$1.65M as an average initial investment including $1.5M for capital costs and $150,000
M for working capital and other start-up costs such as training and advertising. See
Schedule 5 – Capital Budget for a detailed breakdown of our initial capital investment.
Capital investment consists of primarily our leasehold improvements, kitchen equipment,
the purchase of the arcade style games, and the play area / stage equipment. We have
included an annual capital investment on an annual basis for arcade games to ensure we
have up to date entertainment and are tuned to the market preferences. From the Chuck E
Cheese franchise agreement, many of these games are custom-made per the Chuck E
Cheese trademark and must be bought. Other ones would likely be purchased or leased
to buy. We have used conservative estimates based on purchasing the games.
5.2 Revenue
See Schedule 2 – Revenues. Our revenues have been projected based on a function of the
number of days open, the average number of people per day and an average price per
person. The restaurant, with the exception of its opening year, will be open 360 days per
year which is common within industry. On average, we have a conservative estimate that
each guest will spend approximately $12 per visit by combining the revenues from both
- 22 the food and beverage along with entertainment. Chuck E. Cheese will be approximately
14,000 square feet with a maximum capacity of 425 people. A conservative estimate is
that we will turnover 450 guests per day (volume), which is just over one turn. We have
incorporated a conservative 5% growth rate to volume with prices increasing by inflation
of 2.5. These estimates are conservative as special birthday party pricing ranges from
$17 to $23 per guest and we are only using just over one turn of our restaurant capacity.
As per Chuck E. Cheese’s financial statements, it is common for food and beverages to
account for 52% of total revenues while the remaining revenues are generated from
games and entertainment.
5.3 Cost of Good Sold
We have approximated cost of good sold based on a percentage of revenues. Per the
Chuck E Cheese 2008 annual report, food and beverage cost was 23% of revenue and
entertainment and merchandise cost was 8.7%. Given Saskatoon is a more remote
location with less competition than other more densely populated cities, we have used
30% for food and beverage and 10% for entertainment and merchandise. The profit
margin over the period of the business plan is 80% which is consistent with various
Chuck E. Cheese stores.
5.4 Operating Expenses
See Schedule 4 – Expenses for our operating expenses. Our most significant expense is
wages, increasing in proportion to revenue. Our building will be “built to suit” using
Colliers International on an already negotiated lease rate of $24 per square foot on a ten
year lease term with two five year renewal options. Thus, our annual rent will be based
on this lease agreement. We anticipate construction to begin in 2009 and our building
and leasehold improvements complete by mid 2010. Part of our expense will be fees
remitted to Chuck E Cheese, which include 3.8% for royalty fees, 0.4% for advertising
fund, 0.2% for entertainment fund and 2.5% for media fund
- 23 5.5 Financing
Our capital investment will be financed through a bank loan, our four founding
shareholders and two external investors. We have total investment requirements of
approximately $1.65M. We have approximately $500,000 of semi-liquid capital assets
which combined with a $50,000 personal guarantee for each of the four shareholders has
created enough collateral to allow for a bank loan of $577,500. The bank loan will be
paid off within a 15 year period at an interest rate of 5%. The remaining $1,072,500 will
be financed from the shareholders and two external investors at $178,750 each investor
for a 16.66% ownership for each investor. As a group, the four founding investors will
have control with 66.66%. See Schedule 12 – Sensitivity table for “Optimal Capital
Structure Example.” The purpose of this table is to determine the optimal level debt and
equity using the weighted average cost of capital (WACC). While the optimal amount is
50% debt and 50% equity, we have chosen to use a 35% debt and 65%. This is because
the difference in WACC from 35% to 50% debt is only a 3.5% difference in WACC. For
this marginal benefit, we do not believe it is worthwhile to take proportionally more
business risk and require personal guarantees to obtain additional debt.
5.6 Expected rate of return
We are aiming for a required rate of return of approximately 20 % as this is common
within industry given the level of risk. This is a proven business model, with a moderate
level of risk. Thus, a 20% rate of return is deemed reasonable. With our base case
scenario, we obtain a 24% rate of return, exceeding our required rate of return.
5.7 Sensitivity Analysis / Assumptions
We have performed a sensitivity analysis based on the following key variables (1) Sales
Price and (2) Sales Volume. See Schedule 12 – Sensitivity Analysis. Our best case
scenario uses an average price per person of $14 and volume of 675, which is 1.6 turns of
our capacity. This is not unrealistic given prices on the menu range on average from $7$18. This would provide us with a very favourable NPV of $3.9M. Our worst case
scenario uses an average price per person of $10 with volume of 300 people per day,
which is 70% of our full capacity of 425. This scenario is unlikely given families will on
- 24 average at least order a meal and a drink which is greater than $10, before factoring
games played. This would provide a negative NPV of ($2.3M). Our realistic scenario
uses a conservative $12 average price per person including food and games with volume
based on 450, just over one turn of our restaurant capacity of 425. This generates an
NPV of $203,206 and an internal rate of return of 24%.
5.8 Break-Even
See Schedule 12 – Sensitivity Analysis “Yearly Break-Even.” Our economic break-even
based on an average price per person of $12 per person is 413 persons served per day on
an annual basis. This is just less than one turn of our restaurant capcity at 425. Given
that the greater Saskatoon area population is approximately 400,000 with 17.7% of that
population representing youth 15 and under, we have an available market of 70,800.
With our break even of 413, we only require a market penetration of 0.58%, which is
easily achievable our aggressive marketing and positioning within the industry.
5.9 Ratio Analysis
See Schedule 11 – Ratio Analysis. Given our current financial projections, we have
strong and growing liquidity, investment utilization and profitability ratios. As we do
require a significant initial investment, which will include a bank loan, our D/E ratio
ranges from 0.50-0.64.
6.0 Conclusion
Throughout the business plan, we have utilized conservative figures in comparison to
other Chuck E. Cheese stores in order to provide a realistic expectation of our franchise.
We are confident that Chuck E. Cheese can successful penetrate the niche market of
family-oriented dining and entertainment in Saskatoon. With the growing demographics
of children under 15, along with its GDP growth rate, this is a perfect time to execute this
type of business in Saskatoon. Chuck E. Cheese, (NYSE: CEC), has proven to be
profitable in each of the last five years and has continued to grow despite the financial
crisis.