Broken Wing 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 hadpeople salivating. Soccer moms, working singles and familiesnationwide flocked to the stores to buy this healthy alternative tofried chicken. Wall Street investors ate up Boston Chicken, too,buying its stock at ever-increasing prices. By 1993, 10 years afterthe company started, franchises were hatching across the country atbreakneck speed. With the restaurant chain's name changed toBoston Market, company officials and many industry publicationspredicted a rosy future.

But within five years, the Chicken had been fried.

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

Franchise and restaurant industry experts cite a number ofreasons for the fall, but most lay the blame at the feet of afranchising system that pushed overly rapid expansion whileignoring same-store sales. Those same experts say most businessowners-especially those involved with franchises-can learn somelessons from what happened to Boston Market.

Solid Concept

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

"I happen to be a good customer of Boston Market,"says David Kaufmann, a franchising consultant and attorney with NewYork 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 wasterribly flawed, but my family and I still eat there."

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

After profits started to sag, the company added a line ofsandwiches. Some critics contend that action hurt more than ithelped because it diluted what Boston Market was about. Companyofficials expected the "Boston Carver" line of sandwichesto help restore sagging profits in 1997, but, by their ownadmission, that plan didn't work as well as they'dhoped.

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

Kurt Helin is the editor of two weekly newspapers in LongBeach, California, and the former editor of Inland EmpireBusiness Journal.

Core Problems

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

But Boston Market didn't use a standard franchisingmodel.

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

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

The FADs were lent the money to open all these restaurants byBoston Market itself. The company, in turn, got its money from WallStreet.

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

But the company was opening too many sites too quickly,according to Kaufmann. What's more, he adds, BostonMarket's openings were spread across the nation in disparatemarkets, rather than focused on a region where advertising andword-of-mouth can help develop an identity. "The reason youconcentrate on one area is to get a proper return on youradvertising curve," says Kaufmann. "Boston Marketdidn't do that."

Wall Street investors saw a company that reported profits aslate as the first half of 1997 ($41.1 million). But what BostonMarket was counting as profits included royalty fees and loanpayment interest from the FADs-money that was essentially recycledfrom those same investors.

Meanwhile, the restaurants were losing money-lots of money. Intotal, the FADs lost $51.3 million in 1994, $148.3 million in 1995and $156.5 million in 1996, Restaurant Finance Monitorreported. While restaurant-level profits were falling, the FADsstayed in because the money they were making on the stockoutweighed their losses, says Richard Papiernik, financial editorof Nation's Restaurant News and author of a series ofreports on the Boston Market debacle.

In 1997, the stock started to fall, and Boston Market announcedit would convert the FADs to company-owned locations. However, theFADs still owed the company $754 million-of which Boston Marketcould recover very little. With no new financing coming in, it wasonly a matter of time before Boston Market's house of cardscame crashing down.

Store Economics

People may have liked the food, but they weren't comingthrough the doors of Boston Market fast enough to keep therestaurants in the black.

Why? The key reason, our experts say, was probably therestaurants' high overhead-they needed too many people to comethrough the door to stay afloat.

"They had an expensive box," Papiernik says."They had an expensive software system, and their cost of foodwas also high." Food and paper costs at Boston Market arearound 38 percent, which most restaurants want at least 6 percentlower, Papiernik says.

Boston Market's high overhead started from the ground up.Literally. Boston Market was well-known for overpaying for realestate, according to Papiernik. "In a restaurant industryprofessional roundtable we had, one of the people there was gladwhen Boston Market filed [for bankruptcy] because he said therestaurant real estate market might start to return tonormal," Papiernik says. Landlords would play Boston Marketoff other people interested in their land, he adds, thus driving upthe rent.

Competition was another factor cutting into Boston Market'spatrons. When the home-meal-replacement market started to take off,the bandwagon started getting crowded, and no one jumped on itfaster than grocery stores. Newer, larger grocery stores startedoffering precooked chicken as well as other prepackaged meals.Companies such as Kenny Rogers Roasters and the also-struggling KooKoo Roo entered the fray as well.

"[Boston Market] didn't expect grocery stores to comearound as quickly as they did," Papiernik says. "BostonMarket's idea of competition was to go into a market andsaturate it."

Kaufmann adds that the problem extended to such details asrestaurant design. Each Boston Market had a single customerline-which easily turned into a very long one.

"My wife was in Boston Market one night ordering food forour family, and there were about 15 people in one line and itwasn't moving, while the girl next to the to-go phone was juststanding there doing nothing," Kaufmann says. "My wifetook out her cell phone and called in a pick-up order, switchedlines and picked up the [food]. It was clever of my wife, but itslowed down the regular line even more while our order wasmade."

Lessons To Be Learned

Besides closing 178 of its stores, Boston Market has found $70million in debtor-in-possession financing. Company officialswon't talk about the past, but they will say BostonMarket's best days are still to come.

For anyone looking to become a franchisee or a franchisor, thereare lessons to be learned from the Boston Market fall. Start withgetting good advice, something Boston Market obviously didn'tdo, Kaufmann says. And in the beginning, think micro, notmacro.

"If you're not making money on the unit level,don't franchise out," Kaufmann warns.

The lesson for people buying a franchise is simple: Do yourhomework. Although Boston Market's stock made potentialfranchisees salivate, it was a poor indication of how therestaurant units themselves were doing. Had franchisees lookeddeeper into the actual results, they might have avoided a costlymistake.

"I'd want to check out the real economies of the[restaurant] I'm going to be running," Papiernik says."I don't want to be told I'm going to wait three orfour years to make a profit."

Kaufmann says there's a quick way to get an insider'sview of the franchise--call some franchise owners. Their names andnumbers have to be provided to potential franchisees. "Ifthey're happy, they'll tell you. If they're not,they'll tell you even faster," Kaufmann says. (For more onresearching a franchise, see "NowYou're Cooking", January.)

There are never any guarantees when it comes to making abusiness sizzle, but learning from other people's mistakes canbe a good way to keep from getting burned.

Contact Source

Nation's Restaurant News, (212)756-5205,rpapiern@nrn.com