Boston Chicken

Case #2 Boston Chicken (Group Written Response)

Q1. Assess BC's business strategy. What are its critical success factors? Do they face any risks?

A. Economies of Scale

i. Franchise established in networks of 50-100 stores instead of single shops. This can result in more big picture and macro allocation of resources, achieving efficiency in scale. (pg.2 BC Case)

* RISK: Key man risk - over reliance on Franchisee expertise. If there is a failure - probably it will impact at larger scale (50-100 stores) instead of just single shops

ii. Long Term Agreements with key suppliers

Examples of such agreements with Hudson Foods (pg.3) and Progressive Bagels (p.4.) either through contracts or stake would stablise supply of raw materials and cost via economies of scale.

* RISK: Concentrated suppliers increase risk in times of crisis (e.g. food quality scandal with supplier) or sourcing issues, which may choke business line as a result.

B. Operating a financing model with Franchisees

i. Provide franchise developers and area developers with financing. This generates additional interest income, booked under royalties (pg. 3 and pg. 16)

ii. Some loans are even offered in the format of potential loan convertible option (pg. 19) allowing BC to even take up a stake of franchisees.

* RISK: This approach deviates from the traditional restaurant business model as BC is engaged in financing. The financing activity is backed by capital raised via IPO (pg. 2) in 1993 as well as issuance of debentures and debt (pg. 17).

The firm's leverage ratio has gone up significantly since adopting this strategy. In case of default/bankruptcy of a franchisee, BC is under risk of losing capital as well as revenue generator via royalties. Risk management would need to be in place to guard against this risk which may rock the capital stability of the firm.

Also in case when interest rates go up, the cost and availability of capital via debt will be higher, posing...