1. Assess Boston Chicken s business strategy by identifying its critical success factors.

Boston Chicken wants to be an industry leader in the home replacement meal market. It plans to sell products that allow an affordable alternative to home cooking. It also targets the market by selling fresh and healthy products ranging from mashed potatoes, pot pies, baked rotisserie chicken etc. Its key success factor is locating and growing in large metropolitan markets. It leverages the concept of franchising for its growth. However, as opposed to traditional franchising of selling franchises to many smaller franchisees, it focused on franchising to large regional developers. The purpose of this strategy is to use the developers financing, management and local information to grow further stores in that region. Another success factor is its focus on home cook taste food and its constant communication with its customers using technology to develop newer items for its menu. Technology was also leveraged as it invested $8-10 million to build computer software that provided support for its network of stores and helped in supply chain management, market study, collecting customer feedback and financial reporting. Other key factor is implementing long-term agreements with key suppliers to lock-in food price, development of flagship stores and building drive-through lanes to improve off-peak hour sales. 2. What are the critical risks facing Boston Chicken during the period of the case? Boston Chicken grew rapidly. From only 34 stores by the end of 1991 to 534 by the end of 1994, the annual growth rate was over 500% with a new store being opened in every 2 days. The revenue increase during this period was from $5.2 million to $96.2 million, and net income rose to $16.2 million from a loss of $2.6 million. However, this fast growth also comes with a cost. With tremendous, the added costs of salaries, cost of goods, administrative expenses increase manifold. Although Boston Chicken has continued to see profits, there is no guarantee that if it continues to grow at this pace, it will be able to realize profits in the longer term. The firm s revenues come from franchising fees, royalties and also in the form of interest because of the credit line that the firm opens for all of its franchises. Lipton Financial Services argues that in order to break even, Boston Chicken needs to earn at least $23,000 per week. However, actual average weekly sales were less than that. Boston Chicken might not have been able to earn enough cash flows to maintain its daily operating activities although its revenues from new franchising might have been high. Another big risk factor was competition. KFC is just one example. The moment KFC introduced the new rotisserie chicken line up, its profits soared. Sales rose to $160 million. There is still a lot of scope in this market for competitors to prey upon. Boston Chicken is also looking to grow into the bagel market and establish itself as a breakfast retailer. It invested $20 million in Progressive Bagels. This is a big risk because the firm is trying to enter into a new market with a separate customer base and not everyone will be able to associate BC as a breakfast retailer.

The advertising fund has run a deficit of 6. Ideally. The company has committed to 332.000 plus a $10. This is an indication that franchisees are already having difficulties meeting their current obligations and it is possible that some of the notes will be uncollectible.3.5M in loans to its franchisees of which 201. .45% of total revenues.5M that was covered by the company and is listed as due from affiliates on the balance sheet. revenues related to franchise and royalties increase from 29. These leases are treated as operating leases as opposed to capital leases. It is stated in the capital resource section of the results of operations that the company entered into a 75.94 from . The company also pays for national and local advertising and collects 2% and 3% to 3.1M raising the debt to equity ratio to . Reporting the lease as a capital lease has the effect of raising the interest expense on the income statement and hindering the company s interest coverage ratio. revenue derived from initial franchise fees and area development fees is recognized when the franchise store opens. According to Note 2 of Notes to Consolidated Financial Statements.1M had been taken. the company is overstating its balance sheet position For 1994.9M of notes receivable in the year 1995 and has made no allowance for bad debts. From the Income statement. This seems to be aggressive as this methodology can over inflate the revenues every year when BC is in a growing phase and adding to the number of its stores. How well are Boston Chicken s key success factors and risks reflected (or not reflected) in its accounting policies and financial statements? Some of Boston Chicken s revenue recognition is aggressive. this will bring the total assets and equity by $10 million. The company expects to collect 16.9M master lease agreement to provide equipment to certain area developers and certain company operated stores of which 66.000 fee to cover grand opening expense. we know that every new franchise on its opening pays BC $35.64. we can observe that between 1993 and 1994.75% respectively for the advertising campaigns from franchisees. revenue generated from new franchise openings should be spread across the franchising period. total notes receivables is around $202 million.82% of total revenues to 57.3M has been extended up from 44M in 1993. Unearned revenue could be recognized in the first year and then amortized over the franchise period. From the case. Same is the situation with royalties as well. It can be determined that the leases were treated as operating leases because there was no increase to assets or liabilities referring to leases on the balance sheet. By not creating an allowance for bad debts. The reason the company would not want to capitalize its lease expense is because a capital lease would increase the liability and asset sections of the balance sheet 66. Assuming the company cannot collect all the receivables and writes down 5% of the amount.

we can calculate the EBITDA. We also have the gross margin from the income statement. From this approximate remaining 50% of margin. national and local sales advertising campaigns. Considering 52 weeks a year. interest and taxes. that amounts to $1. we might still assume that the franchisees are profitable. Considering 16% EBITDA margin. According to management.888 and EBITDA margins were around 15-16%. depreciation. Help me in your answer to see your assumptions. According to our calculations. Estimate the after-tax effects of having the Allowance for Franchisee Defaults be in turn 1%. This happens to be 39. We can now look at the franchisee profitability data provided by Boston Chicken. if we deduct other expenses like SG&A. We need to subtract depreciation and interest expenses to get final approximate profit per store. (Note: this is difficult. We also happen to know the total deductions as part of royalty. we see that in 1994.4. . and reasoning. This happens to be 61%. and also requires some judgments. BC had total company operated stores revenue of $40. do you think? What is your reasoning? 5.2 million annual sales per store. The average number of stores within that year was an average of total number of company operated stores in the beginning of the year to the number of stores at the end of the year.916 thousands.5. although we do not have any hard number to prove this fact. we can still see that the BC stores are not profitable.) From the Income Statement. judgments. 3% and 5% of Notes Receivable to Franchisees at 12/25/1994. and/or data on franchisee profitability provided by Boston Chicken. average weekly store sales in third quarter of 1995 were $23. Are these effects material or not. Estimate and analyze the profitability of franchisees are they profitable? Your answer should demonstrate the use of data for company-owned stores.

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