Boston Chicken Case Study
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BOSTON CHICKEN, INC.:
CASE STUDY AND ANALYSIS
Assess Boston Chickens business strategy. What are its critical success factors and risks?
Boston Chicken Inc (abbreviate as BCI as follow). is chain of fast food restaurants, and also in the business of take-out home cooked food. Boston Chicken restaurants mainly sell rotisserie-cooked chicken, fresh vegetables, salads and other side dishes available for take-out.
Because Boston Chicken is fast food restaurants chain, its strategy is also simple and straight. Its KSFs (Key Successful Factors) are listed as below:
â—‹1. Cheap and Fast. The BCI originally sell meals cost less than $5 per person, and it continuously to sell meal at very low price to make the product attractive. The fast-service is also emphasized. 62 stores in 18 states had drive-thru windows in 1994 and 65 more were planned to build in 1995, which means 70% of the stores would be converted to drive-thru.
â—‹2. Quality and Service. BCI products are chosen for its fresh, clean and quality, especially by those dual-income families who dont have enough time to have a quality lunch.
â—‹3. Franchise expanding. The companys expanding is a area developer franchise model, which means largely massive expanding. The franchise fee is a main resource of the companys revenue. But this factor must base on the stable profitability and sustainability of all three kind of restaurants —- company-owned, financed area develops, and non-financed area develops and others.
â—‹4. Technical and Computer bases is a another special advantage of BCI. The company used certain software to get the costumers feedback immediately. And between the subsidiaries the software helps interorganizational transfer, which means the internal information is exchange on time.
According to the KSFs, the Boston Chicken, Inc. has 4 risks because of its aggressive expand:
Shortage of experienced personnel and company culture missing. (Affectâ—‹1â—‹2, the quality and service is no longer guaranteed).
High franchise fee (5%+3%+2.75%), which bring down the profitability of the franchisees. (Affectâ—‹1â—‹2â—‹3, the franchisees struggled to survive, and the quality in those restaurants were suffered.)
Large volume of stocks. The companys stock is oversubscribed in the early year, and the company easily tripled the offer. (There would be arbitrages and ventures, which didnt mean always such easy to raise funds. If earnings per share is lower than expect or the stock price is down, the companys market value would have a big loss) (Affect â—‹3)
Large volume of loan and note receivables. The BCI provided loans for the franchisees. In 1994, the note receivable is 47% of the total asset and 2 times of the revenue. This would be a huge leverage when the company grew too large. (Affect â—‹3)
Another risk which should be mentioned: In 1995, the firm invested $20 million in PBCI to learn about potential morning service. By late 1995, the investment was increased to $80million, but no data was available to evaluate the return on this investment.
How is the company reporting on its performance and risks? What are the key assumptions behind these policies? Do you think that the accounting policies reflect these risks?
Boston Chicken is reporting the financial statements based on the performance and risk of the company-operated stores and franchise-related fees and royalties. The key assumption behind this reporting is the continued success of the franchisee-operated stores. The franchisee-operated stores need to provide a return for the investor or investors will not look to purchase an area develop franchise. This policy of not providing the financial data on the individual franchisee-operated stores hides the risk of a regression of royalties due to net income losses at a franchisee-operated level. The policy of not reporting any credit risk or allowance for loan loss for the loans to area developers is also hiding some risk involved in Boston Chickens business models.
What adjustments, if any, would you make to the firms accounting policies? Show computations for adjusted financial statement numbers.
The revenue increased 53.7 million from 42.5 million for 1993 to 96.2 million for 1994. But the remarkable increase in revenues also brought a considerable larger cost into the company. Costs of products sold increased 4.6 million (41%), to 15.9 million for 1994 compared with 11.3 million for 1993. This increase was primarily due to an increase in the number of company-operated stores opened during this period. Salaries and benefit increased 7.2 million from 15.4 million in 1993 to 22.6 million in 1994. This increase resulted from an increase in the number of employees at the companys support center and an increase in the number of employees at company-operated stores due to a higher average number of company-operated stores opened during this period. Let other administrative expenses alone, from the increase in cost of products sold and salaries, we can clearly see that BC should take the higher cost due to expansion the new stores into account when they took the assumption of continued success.
Another risk is the sharp increase in BCs debt volume. The liability increased to 167167 thousands (1000%), from 15158 million for 1993 to 167167 thousands for 1994.
Furthermore, there was a large amount of deferred franchise revenue in the balance sheet for 1994. That means Franchisees had difficulties in paying royalties and other franchise fees. BC needs to take a provision for bad debt to avoid the possible effects of struggled finance situation of area developers.
The total amount of accounts receivable and notes receivable is $209040 thousands (6540+16906+185594), if the company is not able to collect all of these receivables and let us estimate a 5% write down of the receivables, then the companys asset will decreased by $10452 thousands.
BC recognized the revenues from initial franchise fees and area development fees when the franchise store opens. It is a little aggressive for the companys revenue recognition policy and would impose a negative impact on area developer stores financial statement. A much better way is to record an unearned revenue when BC receives the franchise fees. For franchise stores, they can amortize these fees through the whole franchising period rather than record these fees as pre-opening expense in the first year.