Boston Chicken, Inc.
Boston Chicken developed a new segment of the fast food restaurant business, home-cooked food. To take advantage of this innovation the company sought to grow rapidly by signing franchise agreements with large area developers. However, it also provided sizable loans to the developers to help them finance new restaurants. These loans have, in turn, been financed through public stock and convertible debt issues made by Boston Chicken. The case is used as a comprehensive security analysis case, covering strategy analysis, accounting analysis, financial analysis and valuation.
Questions to Guide/Be Addressed in Your Case Analysis:
1. Assess Boston Chicken's business strategy. What are its critical success factors and risks?
2. How is the company reporting on its performance and risks? What are the key assumptions behind these policies? Do you think that its accounting policies reflect the risks?
3. What adjustments, if any, would you make to the firm's accounting policies?
4. What questions would you ask management about the company's performance?
5. How is Boston Chicken performing?
6. What assumptions is the market making about the company's future performance and risks? Do you agree with those assessments?
Use “Boston Chicken, Inc.” (Harvard Business School case, no. 9-198-032) by Paul M Healy.
1.Boston Chicken's business strategy is differentiation. It provides home cooked food at reasonable prices. This food is available for on premises consumption as well as take home delivery. The critical success factors are the quality of the home food cooked and served. From the perspective of Boston Chicken, the critical success factors are its ability to grow by appointing more franchisees and attracting more customers to the services. Boston Chicken must get more fees, royalties, and interest payments from its franchisees. The risks involved are that the franchisees may not be able to return the credit they have taken from Boston Chicken. The other risks are that customers may avoid Boston Chicken in search of higher value for money outlets.
2.The company is reporting aggressively on its performance and risks. For example, Lipton Financial services claimed that Boston Chicken average franchised store sold $18,900 a week whereas the Boston claimed that the average per week sales of a store was $23,000 a week. The company's financial reports are not reflecting a decline in demand for Boston Chicken's products. It does not say that customers are seeking value based products.
The key assumptions behind these policies are that if the company reports lower sales its appointment of new franchisees may slow down. Some existing franchisees may decide to leave the company. An important assumption is that if lower store revenues or lower store earnings were reported, the stock prices of Boston Chicken would decline. Both these eventualities are not acceptable to Boston Chicken.
To a limited extent accounting policies reflect the risks. The 1994 balance sheet shows a convertible subordinated debt of $130,000. Also there is an increase in additional paid in capital of $252,298. This is an increase from $103.662 in 1993. Also the income statement shows an increase in interest expense from $440 in 1993 to $4,235 in ...
The response provides you a structured explanation of Boston Chicken Case Study . It also gives you the relevant references.