Boston Chicken

Boston Chicken was founded in1989 to sell rotisserie-cooked chicken, vegetables, and other side dishes in line with traditional home cooked meals. Boston Chicken is said to have, “… developed the secret for delivering generous quantities of home cooking at affordable prices, and for transforming the mom-and-pop business into a new category called take-out home-cooked food.”

Boston Chicken’s business strategy

Success factors

Boston Chicken’s strategy is to be a leader in the home meal replacement market. Customers in this market are families looking for an affordable alternative to cooking at home. They also want high quality meal replacements that are healthy and convenient. Boston Chicken meets this demand by conveniently offering fresh, flavorful, meals with a taste of traditional home cooking such as macaroni and cheese, baked chicken, and mashed potatoes.

A key success factor in conveniently offering meal replacements is to locate stores in large metropolitan markets. Boston Chicken used a different franchising strategy than that used by other successful franchisers. Its focus was on franchising to regional developers rather than selling franchises to many small franchisees.

Its franchising strategy led to a network of 22 regional franchises targeting the 60 largest U.S. metropolitan markets. Each franchisee had to open 50 to 100 new stores in the franchise region owned. A second component of the franchise strategy involved selling franchises to owners with 15-20 years of relevant management experience and strong financial resources.

Another goal of Boston Chicken’s was to keep pace with changing consumer tastes. This coincided with its strategy of offering meals that customers view as convenient since offering meals that are not appealing to customers in large metropolitan areas is not all that convenient. Keeping pace with changing consumer tastes was enhanced by its $8 to $10 million investment in computer software, which made adjustments in recommendations of products to serve based on the day of the week, season, and customer preferences at a particular store. Inventory management was improved upon due to the software’s automatic reordering of food supplies.

Operational improvements were part of Boston’s Chicken’s strategy to reduce costs and improve the taste and freshness of its products. The company had a long-term agreement with key suppliers to secure prices for key ingredients. The introduction of flagship stores, where food was washed and vegetables chopped, increased the quality of food later served at the company’s stores. The flagship stores also helped improve quality because deliveries of fresh ingredients were frequently made to those stores.

Boston Chicken viewed its store site selection as a critical part of its strategy and 180 real estate and construction professionals were employed during 1995. This was to ensure that store development occurred at a maintainable pace and that standards for store locations were adhered to.

Underlying risks

At the end of 1991, the company operated 34 stores compared to 534 stores by the end of 1994. The annual growth rate was almost 500% per year and a new store was opened every two days on average. During this time period, revenues increased from $5.2 million to $96.2 million and net income was $16.2 million in 1994 compared to a net loss of $2.6 million in 1991.

It appears that the rapid rate of expansion was a success factor for Boston Chicken. However, costs associated with the expansion increased. Costs of products sold, salaries and benefits, general and administrative expenses and income taxes all increased over 1993 to 1994. Cost increases did not prevent Boston Chicken from turning a net loss into net profit, but this is not a guarantee of future profits. Boston Chicken could be at risk for diminishing profits or a possible net loss if they continue expanding at such a rapid rate.

Acquiring franchises may have put Boston Chicken at risk for not making profits. Lipton Financial Services did not think Boston Chicken’s stock was a strong buy as Michael Moe of Lehman Brothers believed. Weekly sales at a franchise store would have to be $23,000 to break even. Lipton said the franchises lost money because average weekly sales were only $18,900. Average weekly store sales, as reported by management, were $23,388 for the third quarter in 1995 up from $22,227 for the second quarter of that year.

What is more troubling is that Lipton suggests that all of the company’s income is due to franchising fees, royalties, and interest payments from franchisees rather than its normal daily activity of selling home replacement meals. Boston Chicken receives a franchise fee of $35,000 per new store, a grand opening fee of $10,000, and 5% royalties on annual gross revenues. Boston Chicken’s total revenues increased from 1993 to 1994 and so did franchise related fees and royalties. The increases were attributable to store expansion that increased royalties, franchise fees for lease income, software license and maintenance fees for stores’ software systems, and grand opening fees. Boston Chicken may be at risk from not earning sufficient cash flows from its daily operating activities.

Boston Chicken wanted to also enter the bagel market, which was considered a hot area of growth in the United States. The company invested $20 million in Progressive Bagels in 1995. It loaned Progressive Bagels systems supports services, real estate, and administrative help for a term of 8 years. The investment was made with the hope of learning about the morning service business.

It could be risky to loan another company real estate and administrative know-how if that company could be a competitor one day. It may also be a risk for Boston Chicken to try to expand its customer base because some customers may not consider Boston Chicken as an alternative to other morning service competitors. The name of the company “Boston Chicken” may make it difficult for consumers to view them as a breakfast retailer.

Competition is also a risk factor. When a company successfully executes a business idea and makes profits, competitors are likely to enter the market. Kentucky Fried Chicken (KFC) also offered rotisserie chicken in most of its restaurants, and it was the world’s largest rotisserie chicken chain in 1993. Sales of KFC’s rotisserie chicken were $160 million shortly after introducing the new chicken; some of these sales could have come