Broken Wing

Entrepreneur, Feb, 1999 by Kurt Helin

Boston Market was supposed to be the McDonald's of the '90s. So why did the home-meal-replacement pioneer end up laying an egg?

From the time its rotisserie first turned, Boston Chicken had people salivating. Soccer morns, working singles and families nationwide flocked to the stores to buy this healthy alternative to fried chicken. Wall Street investors ate up Boston Chicken, too, buying its stock at ever-increasing prices. By 1993, 10 years after the company started, franchises were hatching across the country at breakneck speed. With the restaurant chain's name changed to Boston Market, company officials and many industry publications predicted a rosy future.

But within five years, the Chicken had been fried.

On October 5, Boston Market entered bankruptcy court to file for Chapter 11 reorganization; the closing of 178 locations soon followed. Franchise purchasers were plucked, profits were down, and the company could not get out from under its debt.

Franchise and restaurant industry experts cite a number of reasons for the fall, but most lay the blame at the feet of a franchising system that pushed overly rapid expansion while ignoring same-store sales. Those same experts say most business owners - especially those involved with franchises - can learn some lessons from what happened to Boston Market.

SOLID CONCEPT

Boston Market's supporters and critics generally agree on one thing: Its food is good.

"I happen to be a good customer of Boston Market," says David Kaufmann, a franchising consultant and attorney with New York City law firm Kaufmann, Feiner, Yamin, Gilden and Robbins, whose clients include the holding companies for Arby's, KFC, Pizza Hut and Taco Bell. "I knew the franchise program was terribly flawed, but my family and I still eat there."

Boston Market hung its hat on whole rotisserie chickens, with side dishes such as mashed potatoes and steamed vegetables. Marketing teams latched onto the phrase "home meal replacement," selling it as something healthy you would be proud to serve at the family dinner table. The company sold itself as the dominant force in a category that was well on its way to being the norm for most people dining out in the '90s.

After profits started to sag, the company added a line of sandwiches. Some critics contend that action hurt more than it helped because it diluted what Boston Market was about. Company officials expected the "Boston Carver" line of sandwiches to help restore sagging profits in 1997, but, by their own admission, that plan didn't work as well as they'd hoped.

So while the quality of its food was rarely an issue, the quality of Boston Market's franchising program was.

CORE PROBLEMS

Growing restaurant chains through the sale of franchises has been a commonly accepted practice for decades. From McDonald's to today's juice bar craze, franchising is alive and well in the restaurant industry.

But Boston Market didn't use a standard franchising model.

"It was a Harvard Business School example of what not to do with a franchising program," Kaufmann says. "They set up a franchising program that ignored the cardinal rule of franchising: Start on the unit level. If you can't make money on the unit level, you'll die."

Instead, Boston Market brought in Franchise Area Developers (FADs), people responsible for opening a number of outlets in a given market, usually at least 10. Fees for opening these stores were not cheap - a $35,000 franchise fee, a $10,000 grand opening fee and another $15,000 for a sophisticated software program. After a franchise was up and running, there were more fees: a 5 percent royalty, a 4 percent local advertising charge and another 2 percent for national advertising.

The FADs were lent the money to open all these restaurants by Boston Market itself. The company, in turn, got its money from Wall Street.

The company set a market record when its stock jumped 143 percent the first day it went public in 1993. For three years, Boston Market's stock stayed above $40 per share. Between stock and debt financing, about $2 billion was put into Boston Market, according to Restaurant Finance Monitor. That money allowed the opening of more than 1,200 locations between the summer of 1996 and early 1997.

But the company was opening too many sites too quickly, according to Kaufmann. What's more, he adds, Boston Market's openings were spread across the nation in disparate markets, rather than focused on a region where advertising and word-of-mouth can help develop an identity. "The reason you concentrate on one area is to get a proper return on your advertising curve," says Kaufmann. "Boston Market didn't do that."

Wall Street investors saw a company that reported profits as late as the first half of 1997 ($41.1 million). But what Boston Market was counting as profits included royalty fees and loan payment interest from the FADs - money that was essentially recycled from those same investors.

Meanwhile, the restaurants were losing money - lots of money. In total, the FADs lost $51.3 million in 1994, $148.3 million in 1995 and $156.5 million in 1996, Restaurant Finance Monitor reported. While restaurant-level profits were falling, the FADs stayed in because the money they were making on the stock outweighed their losses, says Richard Papiernik, financial editor of Nation's Restaurant News and author of a series of reports on the Boston Market debacle.