July, 2000

From the Editor

Boston McMarket

It’s baaack! Just when you thought the deli industry was safe from the ambitions of Boston Market, the news comes out. Yes, McDonald’s has completed its previously announced acquisition of Boston Market in a distress sale right out of the bankruptcy court. Now, however, the story has a twist. When the acquisition was first unveiled in the fall of 1999, the plan was for McDonald’s to convert most of the locations to other concepts, particularly the McDonald’s owned Chipotle Mexican Grill or Donatos Pizza.

But as the acquisition wound its way through the chapter 11 proceedings, McDonald’s reassessed the situation. First the company had the bankruptcy court close down about 100 locations. These mostly had leases on terms that made it impossible to ever make money. One of the powers of bankruptcy proceedings is the right to reject a lease, so McDonald’s took the opportunity to get out from obligations that would be burdensome.

In the course of this store-to-store evaluation, as well as greater evaluation of the total business, McDonald’s began to see greater potential in the Boston Market concept. Now, the exception is that McDonald’s will try to grow the Boston Market brand and concept.

Much as we used to speculate on who was rising and falling at the Kremlin by looking at the positioning of people on parade stands, the notion that Boston Market is going to be important to McDonald’s can be imputed by the fact that McDonald’s has appointed two of its own executives to run the new division. Jeffrey Kindler, who had been executive vice president at McDonald’s, has stepped in as chairman and chief executive officer of Boston Market, and Michael D. Andres, who had been senior vice president of McDonald’s, is now president and chief operating officer of Boston Market.

Why the change of heart? Well, in a way we are back to the beginning. The concept still does not deliver an adequate return on investment if one is looking at the cost of building a new restaurant. And operationally there are still problems insuring availability and freshness.

However, as Kindler said at McDonald’s recently held annual meeting: “As we’ve gotten into the deal we’ve found out there is a strong brand there and a very loyal following.”

On its own, Boston Market’s fundamental problem was that it correctly perceived a market but had no viable concept to profit from it. Yet since it had no other business, its source of funds had to be either from operations or from investors. Once the decision was made to go public as the way of attracting investment capital, Boston Market had little choice but to place a premium on growth and expansion – because that was the only thing Wall Street would pay for. If, instead, Boston Market had said that its concept was not yet refined and it wanted to work it out with 25 restaurants for a few years, the money would have dried up instantly.

The whole saga is worthy of a book. Could the operations people refine the concept into profitability before the finance people lost patience? In the end, operations failed, and the company went bankrupt.

But in the hands of McDonald’s the dynamic changes, McDonald’s has over 27,000 restaurants in 119 countries. It doesn’t need to rush anything regarding Boston Market. It can experiment and refine the concept.

Menus will be reworked. I would expect a lot more emphasis on drive-throughs, and perhaps a breakfast program will be experimented with. Much more emphasis on employee training – McDonald’s did establish Hamburger University.

Once the concept is profitable, it is very likely McDonald’s will start to sell off company owned restaurants to franchisees and to establish new ones through franchises. Unlike the old Boston Market, though, which franchised by offering massive multi state territories to corporations and then financed these corporations, McDonalds’s is likely to follow the pattern that it has been so successful with in its hamburger restaurants. The company will likely franchise out to owner/operators who have their own money on the line and can be expected to keep the bathrooms clean.

Combine this approach with McDonald’s economies of scale in food purchasing and its status as a “first offer” on prime real estate around the world and there is potential for a real revival of the Boston Market chain.

And in response, the deli industry ought to…do nothing. Back when Boston Market was coming into steam, I remember hearing some supermarket operators at industry conventions decrying the chain for “stealing” their rotisserie chicken markets.

Of course customers and markets aren’t property to be stolen; they are there to be served, indeed to be wooed. If supermarkets do the job of serving conveniently and economically they needn’t worry about what McDonald’s does with Boston Market.

If they accept running out of chicken, having crusty side dishes and some lone disgusting bird left languishing on the shelves late into the night…if they accept forcing customers into stores and traffic patterns to sell them other items rather than serving conveniently what the customer wants…then if McDonald’s doesn’t get the customer someday, somehow, somebody else will.  DB