Rainforest Cafe, Inc. History

Address:

720 South Fifth Street
Hopkins, Minnesota 55434
U.S.A.

Telephone: (612) 945-5400
Fax: (612) 945-5492

Public Company
Incorporated: 1994
Employees: 5,000
Sales: $108.1 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: RAIN
SICs: 5812 Eating Places

Company Perspectives:

Rainforest Cafe, Wild Place to Shop and Eat, is a dynamic restaurant and retail environment which recreates a tropical rain forest. Imagine a tropical wonderland with cool mists that permeate through cascading waterfalls; crescendos of thunder and lighting; continuous tropical rain storms; huge mushroom canopies; animation featuring Tracy the Talking Tree, whimsical butterflies, crocodiles, snakes and frogs, trumpeting elephants and entertaining gorillas; all moving within the surroundings of larger than life banyan trees, with the sounds and aromas of a tropical rain forest.

Company History:

Rainforest Cafe, Inc. owns, operates, and licenses large, high-volume, themed restaurants/retail shops under the name "Rainforest Cafe--A Wild Place To Shop and Eat." The company has received industry recognition for its family-oriented restaurant and themed entertainment achievements. The retail area included in each unit offers items ranging from cooking sauces and personal accessories to children's toys and clothing. A majority of the merchandise carries the Rainforest Cafe brand name. The restaurants are located in the United States and abroad.

Creative Urge Drives Founding in 1994

Steven Schussler demonstrated his marketing flare in a number of undertakings prior to the creation of the Rainforest Cafe. Boxed in a crate, he had himself delivered to the general manager of a Miami radio station in a successful ploy for a sales job. After a stint in electronic media marketing in his hometown of New York City, he established a vintage jukebox retail shop. The venture led to the development of JukeBox Saturday Night, a chain of eight restaurant/nightclubs, including one in Minneapolis. But when interest in the 50s-style concept faded in the late 1980s, business fell off. He was forced into bankruptcyin 1991.

But the idea man already had another plan in the works. In 1989 Schussler transformed his suburban Minneapolis home into a prototype for a rainforest motif restaurant. Erick Schonfeld wrote in a 1996 Fortune magazine article, "Three years ago, Steven Schussler was headed for either restaurant heaven or the psychiatric ward."

Parrots, 150-pound tortoises, and a baboon were among the animals that at one time or another lived among the artificial waterfalls, greenery, and huge fish tanks that filled his home. But that was not the half of it--he spent more than half a million dollars in developing a simulation of the sensory experience of the rainforest.

Schussler pitched the concept to stream of potential investors, including Lyle Berman, a successful casino developer and former leather retailer. Although he repeatedly declined to invest, Berman eventually hired Schussler to develop a restaurant for Grand Casinos, Inc. Backers gained during his work with Grand Casinos plus a favorable lease with the Mall of America in Bloomington, Minnesota, finally brought Berman aboard.

The Rainforest Cafe was incorporated in February 1994; Berman led the private stock placement that allowed Schussler to bring his dream into reality. The doors opened for business in October 1994. Within a week the wait for a table was as much as three hours.

Going Public: 1995

Just six months later the Rainforest Cafe made its initial public offering (IPO). The IPO consisted of one share of common stock with a warrant to purchase one additional share. The company raised $9.5 million from the IPO and an additional $14.2 million from the warrants. The newly issued stock climbed from its asking price of $6 to the mid-teens by October, when a second, larger restaurant opened in the Woodfield Mall in suburban Chicago.

Martin O'Dowd came on board in May 1995 to guide the store expansion. The new president and chief operation officer was a veteran of the industry, having served as director of food and beverage services with Holiday Inn Worldwide and as store manager for the Hard Rock Cafe. Berman continued in his capacity as chairman and CEO. Schussler held a position as executive vice-president.

The Mall of America unit earned $10 million in 1995; operating margins were 23 percent for the second half of the year. The restaurant, expanded three times since opening, seated 295 customers. "The appeal is really in the space, which was designed to wow children and those adults with a child-like worldview. It has live birds, bright fish tanks, and mechanical animals. Every 25 minutes, the lights dim, and a rain storm sweeps through the place. Nothing on the menu is particularly noteworthy (the most popular dish is called Rasta Pasta, a white-sauce dish with chicken and spinach), but the plates are full and the service is brisk," wrote Lee Schafer in an October 1995 Corporate Report Minnesota article.

A secondary common stock offering brought in $73.7 million in January 1996 to fuel expansion. Rainforest stock was trading in the $45 to $50 range in June of 1996, about the time a third store, again in suburban Chicago, began operation. Jennifer Waters, in June 1996 Minneapolis/St. Paul CityBusiness wrote, "To be sure, the pricey stock is based on some pretty high expectations, many analysts said."

Expansion Accelerates: 1996

Expectations for Rainforest Cafe were elevated by the sites for new restaurants. A new unit was set to open at Walt Disney World Resort in Orlando, Florida, and a second 500-seat unit was being planned for the new Animal Kingdom opening in Epcot Center in 1998. Both were expected to do well in the high-profile areas. Other heavy-traffic sites on tap included the Trump Taj Mahal Casino and Hotel in Atlantic City and the Stratosphere in Las Vegas. More regional mall sites also were staged to open.

Some analysts thought an even greater earnings potential lay on the retail side of the store. About a quarter of sales already came from the cafes' adjacent retail areas. A line of proprietary animal characters was in the works to help heighten brand identification. Analyst Rob Nicoski said in the Waters article, "The Rainforest theme is a good one for kids, and once they start developing Disney-like characters for that side of the business, there will be opportunity."

The family-oriented Rainforest Cafe operated in a restaurant industry segment dominated by businesses catering to adults, such as the Hard Rock Cafe, which reached the quarter century mark in 1996. Rainforest Cafe liquor sales, for example, were comparatively low. Passersby in the malls could watch the daily on-site educational presentations, which included resident parrots, and an outreach program conducted in schools and for other community groups focused on vanishing habitats and wildlife.

Rainforest Cafe, like the other theme restaurants, drew a horde of customers with the promise of entertainment. Planet Hollywood's Disney store was pulling in more than $40 million a year. Altogether, the restaurant niche reported an estimated half billion dollars a year in sales and was expected to climb to $5 billion by the year 2000, according to a 1996 Star Tribune article by Ann Merrill.

Capitalizing on the strength of the market, the Rainforest Cafe made another secondary stock offering, in September 1996, and raised an additional $96 million. Four new restaurants opened during the year, including the Disney unit. But two sites were scratched. One of them was in the struggling Stratosphere Tower--Berman held a 42 percent interest in the Las Vegas casino-hotel complex.

The first stand-alone site was planned for downtown Chicago in an entertainment district already home to Planet Hollywood, the Hard Rock Cafe, and Rock 'n' Roll McDonald's. But the locale presented the company with some new problems. The Rainforest Cafe had relied on a "tag-and-release" system that allowed customers to shop or sightsee to ameliorate long waits for a table. The system was less conducive for the downtown location.

Revenue for 1996 was $48.7 million, more than triple the previous year. Net income was $5.9 million. In addition to racking up earnings and profits the company brought in awards from various industry groups: Retailer of the Year Award from the National Retailer Federation, an Outstanding Achievement award from the Themed Entertainment Association, and a winner of Nation's Restaurant News 1997 Hot Concepts.

Growing Pains: 1997

Although the Rainforest Cafe began the year with strong sales and operating margins, some glitches had appeared on the screen. Another large project stalled, this time the Trump Taj Mahal. A $1.9 million write-off was taken to cover that development and the previously scratched Stratosphere unit. In May, President and Chief Operating Officer Martin O'Dowd resigned, citing personal reasons. When he came on board analysts had touted his arrival as crucial to the future growth of the business. Two months later the company's largest institutional investor, Putnam Investments Inc. of Boston, dropped its holdings from nearly 13 percent to just less than two percent.

In spite of the difficulties, expansion continued. By the end of the year 13 domestic restaurants were in operation. The company opened seven during the year, including one at the MGM Grand Hotel in Las Vegas. The first international sites also opened, one each in London, Cancun, and Mexico City.

Rainforest stock dropped 40 percent when the company announced in early 1998 that fourth quarter earnings would fall short of expectations. The three units that had been open more than 18 months were down by 11 percent compared with the previous year's fourth quarter earnings. A number of class action lawsuits were filed against the company, claiming management had known of but not reported in a timely manner a declining trend in sales figures while selling their own stock at the higher price. The company withdrew plans for a proposed public offering of convertible subordinated stock.

But overall net income and revenue doubled for the year. Revenues were $108 million and net income amounted to $12 million. The original Mall of America store increased sales by three percent on the year. And the Disney World unit was among one of the nation's busiest restaurants, with sales of $33 million, according to a January 1998 Twin Cities Business Monthly article. The company expected to proceed with its plans for 13 to 15 new restaurants in 1998. Costs ranged from $7 million for a mall-based unit to $16.5 million for a major tourist site.

Rainforest Cafe was not alone in its earnings woes in 1997. Publicly traded Planet Hollywood stock nose-dived when they reported fourth quarter losses of $44 million. The company had opened more than 30 outlets during the year. "Fueled by the faddish success of just a handful of outlets, theme restaurant chains have a history of pursuing breakneck expansion plans. For a while, all the new openings create strong earnings momentum. In most cases, though, customer fascination wears off, repeat business disappears, and market saturation dooms further growth," wrote Nelson D. Schwartz in a March 1998 Fortune magazine article. Unlike Planet Hollywood, with only 16 outlets, the Rainforest Cafe still had room to grow.

In May 1998, Kenneth Brimmer, involved in the financial aspects of the business since the development stage, was named president. He had served in that capacity on an interim basis since O'Dowd's departure. Stock price continued to remain well off its peak. "It has yet to rebound much, despite a generally strong financial performance. Rainforest's stock price likely is being influenced by negative news from others in the segment, too," Ann Merrill wrote in a June 1998 Star Tribune article.

Prospects for the Future

The Rainforest Cafe competed on an increasingly crowded field. Although "eatertainment" ventures held only a single-digit percent of the overall restaurant market, the segment was growing 20 percent per year or more, twice the pace of the industry in general. Established theme restaurants were trying to pull in crucial repeat business by revising menus, accepting reservations, and promoting group sales. With nearly 90 outlets in the marketplace, Planet Hollywood began experimenting with other concepts and joint ventures.

The Rainforest Cafe hoped to build future revenue from its growing children's retail line as well as from added restaurants. Small units outside major tourist areas were being considered for the domestic front, while the company continued to search for high traffic locations overseas. Five exclusive international licensing agreements allowing a total of 24 units were already in place in the United Kingdom and Ireland, Mexico, Canada,and Asia.

Rainforest Cafe, Inc. History

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