Boston Chicken

Boston Chicken Case

Boston Chicken’s business strategy comes from a different franchising structure in which BC, instead of selling store franchises to multiple franchisees, sells franchises to 22 regional area developers across the 60 largest U.S. metropolitan markets. This 22 are developers are committed to open 50 - 100 other stores. Therefore, its strategy is focused in rapid growth and reaching economies of scale.

The critical success factors come from how efficient Boston Chicken can be at finding key locations to expand and develop their brand name. In addition, their improvements in communication is a key factor for success since optimize their supply chains. Other operational changes like long-term agreements with suppliers, the structure of the flagship stores, the computerized customer feedback system, the implementation of drive-thru lines and adding menu items during holiday seasons are critical success factors.

On the other hand, rapid growth is considered a risk because such growth implies the need for cash for investment. In addition, the use of royalties and fees as a main part of their revenues represent a risk since more than 57% of their revenues come from royalties and fees. The troubles arise when those royalties and fees come from loans given to the franchisees.

The royalties and fees that the company reports as revenue seemed to be controversial because the most of the fees paid comes from the loans given to the franchisees. Since the loans provided by Boston Chicken can be converted into common stock, the fees should be deferred. As a result, the company seems to be overstating revenues. For the year of 1994, if those fees are taken off from the Operating revenue of 17.4 million, and initial franchise fees for new stores were 13 million. Deferred financing costs are amortized over the period of the related financing. Revenue derived from initial franchise fees and area development fees is recognized when the franchise store opens.  By...