Boston Chicken Case Study
1.What is Boston Chicken’s strategy? What are its key success factors and risks?
At the end of the 20th century, the economy shifted, and food consumption altered, and people demanded high-quality food. Boston Chicken Inc. took advantage and introduced affordable rotisseries. Moreover, the organization offered other home-cooked meals for more than $ 5 per person. The management ensured that consumers who came back and asked for more had value. Additionally, stores were available as the company adopted franchisees to attract more customers to the service (Schwartz). Due to this, the firm could benefit from royalties and high-interest rates on its franchising activities.
As Roger Lipton of Litton Financial Services said, Boston Chicken Inc.’s franchise was too high and therefore reported sales were too low for each company. In the long run, franchises suffered a loss due to the very poor quality of profits. Low franchise revenues posed a significant risk to the firm as it reduced the fees, loyalty, and interest payments of affiliates funded by the franchise.
2. Using ratio analysis, analyze how Boston Chicken is performing.
Ratios 1994
ROE (average 94-93) 9.12%
= Profit before tax/Sales 21.3%
* Asset turnover 0.36
* Leverage (average 94-93) 1.51
ROA 6.02%
Ratios 1994
NOA (average 94-93) 227,440
NOPAT 19,275
RNOA 8.47%
The RNOA/ ROA/ ROE is rather low (the new company’s cost of capital is likely to be 10%), but the firm is profitable.
The restaurant’s turnover assets are very low since the banknote receivable is a big chunk of the Boston Chicken balance sheet who operates as both a restaurant and a bank. This means it is riskier than the traditional restaurant industry.
It is more beneficial to apply the average capital since the company has raised 94 new capitals.
3.What are the key assumptions behind its accounting policies, and do they reflect the risks? What adjustments would you make?
Assuming there is an allowance for loan losses of 2% (~ bank allowance for small business loans), the one-time allowance will be 0.02 * 202500 = 4050.
Boston Chicken receives compensation of 45,000 for each franchise service opened. Did Boston Chicken earn this payout? Or the franchise will continue to use the name over time.
Note Receivables on franchisees amount to 16,906 + 185,594 from developers in large areas who use their assets from 2x to 4x. However, the company does not take credit losses into account. Are all member companies able to pay their debts? What if some franchise owners assume how much will be reimbursed to Boston Chicken?
Suppose there is a revenue of $ 45,000 in 10 years, which means they only get $ 4,500 per new store rather than $ 45,000. This reduces sales (45,000 to 4,500) * 268 with new stores = 10,854.