Boston Chicken, Inc.

Assess Boston ChickenÐ'ÐŽÐ'Їs business strategy. What are its critical success factors and risks?

Boston Chicken wanted to be a home meal replacement. Its main strategy includes (1) focus on franchising to larger regional developers who will open new stores in the region; (2) focus on home cook taste food and keen on introducing new varieties of food choices; (3) rapid expand to open new stores; (4) keen on operation and process improvement.

Such a strategy made the business expand fast in term of the business scale and number of Boston Chicken stores, either company owned stores or franchised stores.

The main risk was also clear. As Boston Chicken financed most of its areas developers and competition of the fast-food market was quite fierce, Boston ChickenÐ'ÐŽÐ'Їs business closely related to the business of its franchising stores. Besides, over 50% of the total revenue was the franchising related in 1994 fiscal year, including initial franchising fee and continuing franchising fees. Besides, the financial supports from Boston Chicken was very crucial to the system-wide business. As per the companyÐ'ÐŽÐ'Їs managementÐ'ÐŽÐ'Їs anticipation, both Boston Chicken and its area developers would have need for additional financing during the 1995 fiscal year.

What are the major accounting policies that have a significant impact on the companyÐ'ÐŽÐ'Їs financial statements? What are the financial statement consequences of these policy choices? What are the key assumptions behind these policies? Are these assumptions justified given the companyÐ'ÐŽÐ'Їs strategy and prospects?

1. The policy of revenue recognition has a significant impact on the companyÐ'ÐŽÐ'Їs financial statements.

Presently more than half of Boston ChickenÐ'ÐŽÐ'Їs revenue came from royalties & franchise-related income (such as interest income, software revenue and etc.) However, some of the revenue recognition rules are aggressive. For example, every new franchise store contributed $35,000 one time franchise fee at its opening. Upon current accounting policy, the amount is recognized as revenue once it is paid, so therefore Boston Chicken showed a rapid growth in revenue in 1994. However, such a policy is not in line with accrual basis, given that there was specific franchising period agreed between Boston Chicken and the franchising stores. Instead, one time franchising revenue should be recorded as unearned revenue upon receipts and amortized over the franchising period. Considering the fact that the total number of franchise stores was more than 500 by Dec 25, 1994, the potential growth in the future years might not be as big as in fiscal year 1994.

2. Disclosure of franchising stores operating results

The operating results of the franchising stores were not disclosed in the companyÐ'ÐŽÐ'Їs financial statements, except for the system-wide store revenue. From the data of annual report, we understand that the total of all franchising stores increased significantly from $152 million in 1993 to $383 million in 1994. However, we have no ideas whether such stores were making profits or not. The profitability of the franchising stores was directly related to the recoverability of Area Developer Financing (Ð'ÐŽÐ'oADFÐ'ÐŽÐ'±). The total of amount of ADF was $201 million, for which Boston Chicken made no allowance as of Dec 25, 1994.