Well before noon on a recent weekday, the line at a downtown Boston Market is already jammed with young Loop office workers with plenty of lunch money.
Most of the restaurant’s seats are taken, and customers spill over into the adjoining, also-busy Einstein Bros. Bagels, just to sit long enough to wolf down a chicken sandwich or a Caesar salad.
Stop into most Boston Markets at mealtime and business seems pretty good for parent company Boston Chicken Inc. Boston Market stores are averaging roughly $1 million in sales per year and are packed with enough adults to make a McDonald’s operator wince.
But pull the curtain back, and it’s an altogether different story. Beset by a confusing marketing plan, a slowdown in sales and a landmark fast-growth expansion financing system that has begun to scare off investors, this beauty has turned into an investor’s beast over the past few months.
Boston Chicken’s stock plunged to $9 a share Friday from a high of $41 a share last December, a fall of 78 percent. Key executives have left, including its president in May, and a coupon promotion launched to boost lunch sandwiches cut into its more profitable dinner meals.
For a company well-known for how well it treats it workers, Boston Chicken, which is also the majority shareholder of Einstein/Noah Bagel Corp., was forced to take the painful step of reducing its headquarters staff by 23 percent, or 115 people, last June–the first layoff in its four-year history as a public company.
Though Boston Chicken’s downfall had been months in coming, the bottom fell out on the day before Halloween when the company announced third-quarter earnings fell 37 percent. It also announced that the board recommended the company radically change its system to become a 100 percent company-owned chain. The change will likely mean a net loss in 1998, Boston Chicken said.
Golden, Colo.-based Boston Chicken is a different company than the one that exploded onto Wall Street in November 1993 as one of the hottest initial public offerings ever.
The chain, named Boston Chicken then, took off a year earlier when three ex-Blockbuster Entertainment executives–Chicagoan Scott Beck, Saad Nadhir and Jeffry Shearer–looking to expand on a hot concept, took a majority stake in the East Coast company and moved its headquarters to west suburban Naperville. (It was relocated to Colorado in 1994.)
In going public, the company raised $54 million overnight on euphoria of a brand new restaurant concept that seemed as fresh as the rotisserie chicken it was selling.
What is unclear to investors right now is whether the worst is over.
Boston Chicken executives say the company’s biggest problems are behind it and that it is now headed in the right direction.
“We are clearly on the road to a turnaround,” said Mark Stephens, Boston Chicken’s vice chairman and chief financial officer. “We basically got the business off strategy in the course of 1996. We found ourselves drifting away from the home-meal replacement strategy that’s the hallmark of our success. But the sales at the end of the quarter began to pick up. It feels that we are on track again.”
And despite the recent stumbles, not all analysts are ready to throw in the towel. The company still virtually owns the home-meal replacement business and ranks high in two key quality tests among consumers–taste and freshness. While supermarkets have made inroads in the area, Boston Market still reigns when it comes to convenience.
Analysts and company officials say its move to own all of its stores will reassure Wall Street that its true financial health won’t be hidden behind the complex lending and fee arrangement it has had with its major franchisees.
The new ownership setup will also show just how profitable the Boston Market concept really is, and lately that trend line has been going down, analysts say.
“The most significant concern is the fact that same-store sales (sales at stores open at least a year) are down,” said Ron Paul, president of Chicago-based restaurant consultant Technomic Inc., which has worked on recent projects with the chain. “They have to get customers. Forget everything else.”
Boston Market’s financing system sparked a few shareholder lawsuits this year, with plaintiffs claiming that the company masked the actual profitability of its 14 main franchisees, which currently own 74 percent of the company’s stores.
Boston Chicken executives say the suits are groundless.
The financing system essentially works like this: To fuel expansion quickly, Boston Chicken broke down the country into regions that would be built up by what it called area developers. Each developer/franchisee would be lent money by the parent to build stores, and in turn the developer would pay Boston Chicken interest and royalty fees.
The problem, according to some analysts, was that the company was in some cases lending more money to franchisees to continue paying fees and interest on the loans. In essence, while the parent was making money, many individual stores were actually losing money, analysts say.
Last year, according to company reports, royalties and interest from franchisees represented 68 percent, or $180.6 million, of the company’s $264.5 million in revenue.
Yet even with the sales slowdown, Boston Chicken’s Stephens said, the company has profit margins of 14 to 15 percent, putting it on par with the best performers in the industry right now.
Stephens concedes that changes needed to be made. Because the chain does the bulk of its business selling dinners, last year it launched a promotion to beef up its lunch sales by offering discount sandwiches with its full-meal menu. To compete with fast-food chains, the company also distributed lots of sandwich coupons.
The problem was the sandwiches took off, and people began to order them instead of more-profitable dinners. Store profits began to sink.
“What we didn’t appreciate was that we were heading into the fast-food arena,” said Stephens. “It was way off our strategy. Trying to compete with the tens of thousands of stores in the lunch business didn’t make a lot of sense.”
In May, the company reversed itself. It dumped the discounts and pulled back on advertising. Larry Zwain, a former PepsiCo fast-food executive brought in as president/CEO of Boston Market in 1996, resigned, and two original founders of the company, Nadhir (co-chairman) and Beck (co-chairman/CEO), took over. The company also slowed its expansion.
“Dinner will be the centerpiece, with lunch as a sideline as opposed to lunch as the centerpiece, with dinner as the sideline,” Beck said in announcing the changes in the spring.
Stephens said the changes are beginning to work. Average weekly sales climbed steadily the last few weeks of the summer, due mainly to its core offerings at dinner.
More encouraging to Stephens is a test-market store in Charlotte, N.C. For the first time, through a test with its Progressive Food Concepts subsidiary, the company is offering fresh, chilled prepared salads and meals to take home, as well as a line of desserts.
Stephens said the sales at the outlet have jumped 60 to 70 percent since July and have stayed up since then. The company is now planning to expand the test throughout Charlotte.
“I don’t think (the new concept) is essential to the turnaround, but it will help grow our business,” he said. “The key to the turnaround is the base business and staying on strategy.”
And analysts agree that the core business still has opportunities.
“Talk to consumers. They really like the Boston Market brand,” said Mitchell Pinheiro, an analyst with Janney Montgomery Scott Inc. “It is held in high esteem. The concept and the brand, fortunately, have not been harmed.”
