Fall, 1996

From the Editor

All That Glitters Is Not Gold

Boson Market is, in many ways, an astonishing phenomenon. The rapid growth, attractive stores and the sense that it has created a new “higher-class” fast food have combined to catch the attention of supermarket operators nationwide. Throw in the fact that the core of the menu is built around an item – rotisserie chicken – which has long been a staple of supermarket deli departments, and, to retailers, it feels absolutely abusive. This is why so many supermarket operators seem irate as Boston Market is perceived as poaching on the supermarket deli turf, especially in the au courant home meal replacement business.

Still the bottom line – as is illustrated by the brief quote below – is that Boston Market is really an experiment.

Even though the majority of Boston Market stores are cash flow positive at the store operating level reasonably quickly after opening, the Company’s area developers will continue to incur substantial net losses during their expansion phase which is anticipated to result, and in the majority of cases has resulted, in negative net worth.

-- Excerpted from the SEC filings of Boston Chicken, Inc. for the quarter ended April 21, 1996

The organization is built around a series of area developers or franchisees, massive organizations that build and operate hundreds of stores in exclusive territories.

 

Boston Chicken, Inc., the actual corporate entity, has been making its money by franchising, not by profitably operating restaurants. Yet, even these earnings are suspect, because the area developers do not have enough money to open stores, pay fees to Boston Chicken and secure leases. As such, Boston Chicken lends money, sometimes guarantees leases and, in general, will be severely impacted if the stores don’t make enough money to cover all these loans. To put this risk in perspective, Boston Chicken has already lent over half a billion dollars to its area developers and has commitments to provide an additional quarter of a billion dollars.

When evaluating the actions of a company, it is important to understand the true nature of its business. In the case of Boston Chicken, the business is selling stock and other securities on Wall Street. To date, this company has raised over one billion dollars between the sale of common stock, liquid yield option notes and convertible subordinated debt. This is compared to total retained earnings of only 56 million dollars.

Understanding this explains a lot. Boston Chicken had to roll out a concept still in development and unproven to show Wall Street the rapid growth the Street demands if a premium is to be placed on a stock. The company needed to tie up locations fast before someone else blocked its expansion potential. Now, don’t get me wrong, Boston Chicken would certainly like all its developers to be profitable. In fact, it would make it easier to sell more stock at higher prices if this were true. But current profitability is less important than having a “story” that Wall Street buys. Getting Wall Street to buy into the story is less difficult than it might seem because, after all, those Wall Street firms make a lot of money doing the offerings.

The Boston Market story starts with a management team that had credibility as big players. They were involved in the formative years of Blockbuster Video, so they came to the market with instant credibility. So supermarkets looking to compete with Boston Market by emulating should take a deep breath and a careful look to see what is worth emulating. How big a competitor is Boston Market for the supermarket deli? Well, the average unit sold $22,762 per week for the quarter ended April 21, 1996. The company’s goal is to raise this to $24,000-$26,000 by the end of its fiscal 96 year.

When one considers the other restaurant options available to consumers and that a real high volume deli can be doing $80,000 a week without a restaurant – and that there are many times more supermarket delis than there are Boston Market stores – it is not obvious that if every Boston Market store closed, many delis would even notice the added business.

Now, does this mean Boston Market should be ignored? Of course not. Boston Market has shown that a less price-sensitive demand exists for fast food with a perceived higher quality. It has shown that home meal replacement can be driven by “supply-side” in the sense of people taking out food more often if the quality is good, the convenience is there and the price is reasonable. It has pointed out how innovations such as drive-thru windows can be applied to food that is not already wrapped and ready to go.

Ultimately Wall Street will tire of endless promises of future profitability. So the pressure will be on Boston Chicken to make a buck. Already, Boston Chicken has bought out its Philadelphia-area developer, putting the company right into the restaurant operating business in a big way. My guess is that the company wants to figure out how to make money on these stores before Wall Street tells them they can’t come back to the well.

Already we’ve seen the company try to broaden its product line with the addition of ham, turkey and meat loaf. We’ve seen the introduction of a line of sandwiches including value meal pricing. One can be sure the company is experimenting with new procedures, new store designs, new staffing regimens and much more.

Do look carefully, and learn what you can, but don’t fall into the trap of thinking Boston Market or anyone else is the Holy Grail of Home Meal Replacement. Success in this business will not come from the mindless emulation of others, but from those who can build on their own competencies, adapting the best of what others have tried and winding up with a program that is a value for the consumer and profitable for the operator.  DB