business

Are We Having Fun Yet?

It had all the ingredients of a bang-up business concept. The company's investors, directors, and key managers included some of the same folks who transformed a bunch of local waste-hauling, video-rental, and rotisserie-chicken operations into hugely successful nationwide businesses. Indeed, in mid-1992 when this crew bought Discovery Zone Inc., an indoor playground chain for kids, from its founders, it seemed to bear all of the hallmarks of Waste Management, Blockbuster Entertainment, and Boston Chicken. The strategy was similar, too: Roll out scores of company stores and buy up rivals to become dominant in a hot new business.

The similarities end there. Ever since late last year, when Discovery Zone confidently predicted "an outstanding" 1995, the company has seemed like a bewildered kid lost in a maze of tunnels and colored balls. Awash in red ink that PaineWebber Inc. figures may hit $126 million on revenues of $267 million this year, Discovery Zone stock, at about 5, languishes 75% below its 52-week high. On Sept. 18, the company said it is in default with its banks, led by NationsBank Corp., on about $100 million in a revolving credit deal. For investors such as H. Wayne Huizenga, John J. Melk, and former Discovery Zone Chief Executive Donald F. Flynn, this episode so far is "enormously embarrassing," says one friend of all three.

Now, a new management team is trying to fulfill the company's promise. Huizenga and Melk have left as directors. Flynn no longer has executive duties, although he remains a director. Entertainment giant Viacom Inc. has become Discovery's largest shareholder, with 49%, as a result of its acquisition of the formerly Huizenga-led Blockbuster Entertainment Group, which itself had become Discovery Zone's largest shareholder by acquiring much of the Flynn family stake in mid-1994.

In May, Blockbuster began replacing most senior managers and relocating the company from Chicago to its own base in Fort Lauderdale, Fla. In July, Blockbuster CEO Steven R. Berrard named as president Donna R. Moore, a veteran retailer with experience at Motherhood Maternity Shops, Laura Ashley, and Walt Disney stores. Berrard remains CEO.

HELL-BENT EXPANSION. Moore is readying a marketing overhaul that aims to use Discovery Zone's ties to Blockbuster and Viacom to liven up the chain's 340 U.S. branches. Even McDonald's Corp. will get a hand in the remake. McDonald's sold its competing Leaps & Bounds chain in mid-1994 to Discovery Zone for $100 million in stock--now valued at just $27.5 million--and a 10% stake in the company. Moore says senior executives are consulting with McDonald's on how to upgrade breakfast and lunch offerings--a major shortcoming. "If you can't find good coffee and muffins, parents may find another place to entertain their child," says Moore.

She has had no shortage of other difficulties to address. Discovery Zone's main failing, say several sources close to the company, was hell-bent expansion with lax controls, capped by simultaneous acquisitions of the 49-branch McDonald's unit and 60 Blockbuster-controlled Discovery Zone franchises. Moore says she found 17 separate pricing systems in use nationwide. Computer and accounting systems were only recently combined. Worse, says former Las Vegas franchisee Stephen W. Littig, Discovery Zone seemed tired. "The kids got bored, and the parents got bored," he says. And on weekdays, business dies: Anywhere from 53% to 68% of traffic is on weekends.

To try to recover, Discovery took a second-quarter write-off of $72 million to account for severances, flashy but disappointing new light and sound equipment, and lease commitments on closed units. Blockbuster is leading the debt restructuring talks, and executives say they are confident of a deal. Store openings are slowing--to about 10 a year this year and next, about one-third of the aggressive earlier pace.

Moore has big plans. On Oct. 1, she will introduce an annual $49.95 weekday pass, seeking to build midweek visits. She also wants to develop activities for single parents while their kids play. Expect cross-promotions with Blockbuster, featuring discounts at Discovery for video rentals, and advertising on Viacom's Nickelodeon cable-TV network pushing Discovery Zone. There are also likely to be tie-ins with the children's division of Viacom's Simon & Schuster book unit. A key aim, says Moore, is simply to avoid disappointing kids and parents. "Our favorite line around here now is, you can't refund a child's birthday," says Moore. If Discovery Zone can live up to that motto, it may yet prove a profitable adventure.

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