Boston Chicken Inc.: Strategy, Accounting & Financial Analysis

Introduction and Business Overview

Scott Beck founded Boston Chicken in 1989 with a business concept centered on operating and franchising food service stores that combined fresh, palatable, and appealing meals with the qualities of traditional home cooking, offered at a high level of convenience and value. In essence, the company was attempting to create a setting in which consumers could obtain a home-cooked meal at a reasonable price and in minimal time (Grant, 1993).

This case analysis examines the following aspects: a comprehensive assessment of the success factors and risk factors of the strategy employed by Boston Chicken; an evaluation of the accounting policies used by Boston Chicken; a financial evaluation to determine the performance of the company; an outline of the assumptions being made by the market regarding the company's future performance and risks; and a discussion of subsequent events that extend beyond the financial years presented in the case study.

Boston Chicken's Business Strategy: Critical Success Factors

The business strategy employed by Boston Chicken during the period covered in the case study is that of home meal replacement. The home meal replacements consisted of an assortment of foods, including fresh vegetables, rotisserie-cooked chicken, and salads — meals associated with traditional home cooking offered at great value for consumers. From a marketing perspective, this was a strong strategy because consumers wanted to enjoy traditionally home-prepared meals without the effort of cooking themselves. Strategies that contributed to the growth of Boston Chicken included the opening of Boston Market franchises. By the end of 1994, five years after its establishment, the company had 1,100 stores open across the nation and had hired approximately 16,500 employees. The opened franchises also expanded their menus by including new sides, entrées, and desserts in order to reach a broader consumer base (Davis, 1994).

One of the company's key success factors was its location strategy and growth rate in large metropolitan markets. Boston Chicken engaged in three distinct lines of business: opening restaurants or stores, selling franchises, and financing area developers. This enabled the company to achieve substantial diversification. In particular, Boston Chicken leveraged franchising for its growth and development. Rather than retailing franchises to a large number of small operators, the company sold franchises to large regional developers. The purpose of this strategy was to utilize the financing, management expertise, and local knowledge of these developers to grow additional stores within specific regions (Healy, 1997).

Another key success factor was the development of proprietary computer software that linked all of the company's business operations. This system was a significant boost to Boston Chicken because it enhanced operating performance across all stores. For instance, it reduced the likelihood of inventory overstocking and simplified the reordering process. The system also assisted employees with scheduling. This software supported the company's business network and assisted in supply chain management, market analysis, customer feedback collection, and financial reporting. Additional success factors included the execution of long-term agreements with key suppliers to lock in food prices, the development of flagship stores, and the construction of drive-through lanes to enhance sales during off-peak periods (Healy, 1997).

Boston Chicken's Business Strategy: Critical Risk Factors

Boston Chicken's growth was rapid. In the three years between 1991 and 1994, the number of stores increased from 34 to 534. The company had an annual growth rate surpassing 500%, with a new Boston Chicken store opening approximately every two days. Revenue increased from $5.2 million to $96.2 million over that period, and net income improved from a loss of $2.6 million to a profit of $16.2 million (Healy, 1997). Nevertheless, this rapid growth came at a cost. Boston Chicken risked losing control of its business operations due to its concentration on fast expansion. Excessive emphasis on rapid growth could result in reduced quality of operations, increased food waste, and ultimately lower profitability at the franchise level. Additionally, the associated costs of wages, cost of goods, administrative expenses, and other overhead increased substantially. Despite continued profit generation, there was no assurance that the company could sustain profitability at this pace. Rapid growth also implied a shortage of experienced personnel and the absence of a mature organizational culture (Healy, 1997).

Another risk was that the growth strategy placed heavy pressure on cash management, given that significant funds were required to sustain expansion. Boston Chicken's revenue derived from franchising fees, royalties, and interest from the lines of credit it extended to its franchisees. According to Lipton Financial Services, Boston Chicken needed to earn at least $23,000 per week per location to break even (Healy, 1997). However, actual average weekly sales were below this threshold, raising the possibility that the company could not generate sufficient cash flows to sustain day-to-day operating activities, even if revenues from new franchising remained high.

Competition was a further risk factor. KFC, for example, posed a serious competitive threat: when KFC expanded its menu to include a rotisserie chicken line, its sales rose to approximately $160 million. There remained considerable opportunity for rival companies to capitalize on the same market segment. An additional risk arose from Boston Chicken's move into the bagel market, seeking to position itself as a breakfast retailer. The company invested $20 million in Progressive Bagels — a significant risk because it was entering a new market with a different consumer base. Not every consumer would naturally associate Boston Chicken with breakfast offerings. By late 1995, this investment had grown to $80 million, and no data were available to assess the return on that investment (Healy, 1997).