In a world of anthropomorphic animals, an optimistic koala Buster Moon is the owner of a music theater, having been interested in show-business ever since his father took him to his first music show when he was a child. His assistant is a slightly senile green iguana named Ms. Karen Crawley, who has a glass eye (which pops out at times). Lately, Buster's theater is in financial trouble due to showing productions that have bombed, and his theater is in danger of closing down. Buster tells his friend, a suffolk sheep, Eddie, that he will try and save his theater from closure by hosting a singing competition, with the prize being $1000 dollars, despite having only random stuff in his briefcase.
Buster isn't the only one in a crisis, as other animals in the city have issues of their own. Rosita is a talented singer, but has given up her dreams of performing to raise 25 unruly children and is constantly neglected by her workaholic husband, Norman. Meena has a great singing voice, but has severe stage fright, causing her pushy grandfather to pressure her to face her fear. Mike doesn't make easy money, prompting him to threaten people into giving him cheap profits. Johnny is the son of mobster, Big Daddy, who wants him to follow in his criminal footsteps, but Johnny aspires to be a singer. Punk-rocker Ash is in a band with her boyfriend Lance who is critical of her rocking style.
While printing fliers for the competition, Ms. Crawley's glass eye causes her to accidentally print $100,000 instead of $1,000. Before the fliers can be checked, they are accidentally blown out of Buster's office and make it to many animals around the city including Johnny, Meena, Ash, Rosita, and Mike. After holding auditions with a turnout greater than expected, Buster picks Mike, Johnny, Rosita, Ash, and a few others to be in the contest. Meena's stage fright causes her to bomb her audition, Lance is dismissed from the contest when he auditions with Ash, and Rosita is partnered with another pig contestant named Gunter to be in a dancing routine. Soon enough, Buster discovers Ms. Crawley's error when Eddie shows him the flier, but instead of telling the contestants of the mistake and of the true prize of $1,000, he tries to get enough money for the promised reward.
Convinced by her grandfather, Meena tries to get Buster to give her another audition, but due to some technical difficulties, she is hired as a stage hand instead. After some of the animals quit, Rosita, Mike, Johnny, Gunther, Ash, and (eventually) Meena are the only ones left in the show. However, their individual problems begin to hinder rehearsals, such as Rosita floundering in her dance routine with the glory hog Gunther, Ash suffering from immense heartbreak when she thinks Lance cheated, Johnny inadvertently letting his dad be arrested during a heist in the shipping lanes, Meena's stage fright, and Mike owing money to a mob of bears when he cheats in a card game. Buster visits Eddie to convince him to get his grandmother Nana Noodleman to host the reward money for the show.
When they visit Nana, she accepts their offer, but in a snobbish manner. On the day Nana Noodleman comes, the bear mob who Mike earns the ire from come and demand the money from Buster, but his suitcase is full of junk, leading the others to turn on Buster for his deception. Before Buster can face anyone's wrath, a glass tank full of luminescent squids shatters and floods the theater, evicting everyone from it. After Nana leaves in a huff, the theater literally comes crashing down.
Homeless and crestfallen, Buster takes up residence at Eddie's house. News of what transpired at the theater hits the airwaves and Buster is ridiculed, further diminishing his confidence. The contestants visit him and try to cheer him up, but Buster is too despondent to listen to them, so they leave. Buster tries to earn his keep by opening a car wash, using the same bucket that his dad used to pay for Buster's theater. Eddie, unwilling to see Buster so miserable, reminds him of what Buster had told him before: "Once you hit rock bottom, there's nowhere else to go but up."
After hearing Meena sing in the remains of the theater, Buster's confidence is renewed and he reinstates the show, leading everyone (including Rosita and Meena's families) to come. Mike bails out when he learns that the prize money is omitted, but soon returns to show his stuff. Throughout their acts, Johnny, Rosita, and Meena amaze their families with Big Daddy breaking out of jail to see Johnny and Lance getting a crush on Ash again after seeing her on TV. The show becomes a success and Buster gains the money to rebuild the theater.