Boston Chicken, Inc.

views updated

Boston Chicken, Inc.

14103 Denver West Parkway
P.O. Box 4086
Golden, Colorado 80401-4086
U.S.A.
(303) 278-9500
Fax: (303) 384-5339

Public Company
Incorporated: 1985
Employees: 19,000
Sales: $383.7 million
Stock Exchanges: NASDAQ
SICs: 6794 Patent Owners and Lessors; 5812 Eating Places

Boston Chicken, Inc. operates and franchises food service stores, under the names Boston Chicken and Boston Market, specializing in providing convenient, quick, and complete meals that feature home-style meals, side dishes, and other traditional foods. The company was operating 534 stores at the end of 1994 and planned to open approximately 1,000 more by 1997. Boston Chicken’s short history is characterized by inventiveness and rampant growth.

Boston Chicken was started in 1985 by two young friends eager to launch their own enterprise. Arthur Cores was a 33-year-old graduate of Northeastern University. With a degree in business, he had worked for several years as the manager of a gourmet grocery store and as a manager for top-notch catering companies. Cores’ friend, Steven (Kip) Kolow, was 29 and had experience working in real estate. One day in 1985, they decided to come up with a simple business plan.

Cores’ experience in the gourmet food industry lead him to believe that a market existed for fast, high-quality, home-style food. “I saw the trend in gourmet shops that people wanted to buy plain, simple, everyday foods,” Cores recalled in the August 6, 1990 Boston Business Journal. Building from that insight, the two devised a plan for a restaurant called Boston Chicken. Their concept was simple: provide consumers with an alternative to both the existing fast food offerings and the hassle of having to go home and prepare a fresh meal.

Cores and Kolow borrowed recipes for chicken soup and oatmeal cookies from their grandmothers, and Cores also concocted some of his own dishes, based on traditional side dishes such as mashed potatoes and squash. To their array of vegetable and salad sides they added sweet corn bread. Their various side dishes would complement the centerpiece of every meal; marinated chicken roasted in brick-fired rotisseries. The two men rented a small, vacated store in Newton, Massachusetts, and opened their doors to business in December 1985.

Not long after it opened, Boston Chicken was a smash. Customers began flocking to the take-out chicken store and telling their friends about their discovery. Soon, people were literally lined up at the small store waiting for their orders. During the late 1980s, articles appearing in the Boston Globe raved about Boston Chicken, attracting customers from all over the Boston area. Growing sales kept Cores and Kolow busy between 1986 and 1989. In fact, they had several offers from individuals in the business community interested either in buying the store or partnering with the two entrepreneurs to expand the concept.

Then, the founders of Boston Chicken were approached by George Naddaff, a local businessman with a knack for growing start-up businesses. Naddaff had opened the first Kentucky Fried Chicken stores in the Boston area and had increased his holdings of that franchise to 19 stores within three years. He had also started his own chain of child care centers, which he eventually took public, and had founded a chain of business brokerage offices. Naddaff headed a venture capital company, Business Expansion Capital Corp., that found resources for start-up companies that could be replicated—companies like Boston Chicken.

One evening early in 1989, Naddaff s wife sent him to the Boston Chicken take-out store in Newtonville to pick up dinner. When he saw the long line stretching outside the restaurant, he became fascinated. Naddaff bought dinner and left, but he kept coming back for weeks to watch Kolow and Cores feed the non-stop dinner crowds. Finally, he approached the owners one night and asked them if they would be interested in selling their concept, recipes, and methods of operation. “I’d been watching them for several weeks and they were right on the money,” Naddaff declared in the Boston Business Journal article.

Cores and Kolow had turned down previous suitors because they were concerned about losing control of their creation to someone who might inadvertently destroy it. However, they trusted Naddaff and believed that he could help Boston Chicken successfully flower into a chain. They eventually cut a deal with Naddaff, and New Boston Chicken Inc. was established in March 1989. Cores and Kolow effectively sold their rights to Boston Chicken but retained ownership of the original restaurant. Kolow continued to manage the restaurant, while Cores joined the newly formed corporation as head of product development.

To make sure that the Boston Chicken concept could be successfully replicated, Naddaff got a group of private investors to contribute $1.1 million for two new stores. Both were immediate hits, and Naddaff quickly began gathering more capital. By the middle of 1990, he had expanded the New Boston Chicken chain to a total of 13 restaurants, ten of which had been opened after the start of the year. Furthermore, an additional 15 or more stores were expected to open by the beginning of 1991 in Massachusetts, Connecticut, and New York. Naddaff expected the combined sales to top $7 million annually in 1990. But sales topped projections, jumping past $8.2 million and then rising to nearly $21 million in 1991.

By 1991, individual stores were bringing in $800,000 annually, on average, about 80 percent of which was attributable to takeout business. A major appeal was price. For $5 to $7, a person could buy a relatively healthy, freshly cooked, home-style meal. The same plate would cost $10 to $15 in a nice sit-down restaurant and would take more than one hour to prepare at home. Although growth capital was scarce, New Boston Chicken planned to expand the popular concept internationally to more than 400 stores within four years. Naddaff was even working to have a chicken bred specifically for his chain.

However, in 1991, Boston Chicken caught the eye of another chain-store capitalist—Saad J. Nadhir. Nadhir was an executive with Blockbuster Video at the time. He was driving around Newton, Massachusetts, when he, just like Naddaff a few years earlier, noticed a long line of customers waiting outside of a Boston Chicken outlet. Nadhir brought his colleague, Scott Beck, over to take a look at the restaurant and both were intrigued. They checked out Naddaff and the chain and determined that it had potential. They also believed that they had a better chance than Naddaff to exploit that potential.

Beck, in particular, was in a better position to grow the Boston Chicken chain. Although he was in his early 30s at the time, he had already established himself as a savvy corporate contender. While in his 20s, Beck had talked his father and a family friend into buying several Blockbuster Video stores, and he had spent the next several years whipping the outlets into shape and opening a string of new stores. By the late 1980s, Beck, with the help of his partner Nadhir, had increased his 106-store, midwest operation into the largest blockbuster chain in the United States. He cashed out in 1989, at the age of 31, selling his stake to Blockbuster for $120 million.

Beck and Nadhir bought a controlling interest in Boston Chicken from Naddaff in March 1992. They shortened the chain’s name to Boston Chicken, Inc., moved the headquarters to Beck’s native suburban Chicago, and immediately began assembling a staff comprised largely of young executives formerly of Blockbuster. Importantly, they hired 43-year-old Jeff Shearer as a key strategist. Shearer had served as a partner in their Blockbuster franchise and had been a general manager with the Bennigan’s restaurant organization in the early 1980s. They also recruited restaurant veterans Alan Palmieri, Warren Ellish, and Eddie Palms.

Six months after taking control of Boston Chicken, Beck and company were overseeing a chain of 53 restaurants in ten states. They were planning to open at least 30 just in the Chicago area over the next 12 months. Planning to retain Boston Chicken’s basic strategy of providing fast, fresh, high-quality food, they also made several operational and organizational changes. As they had done at Blockbuster, they would target key markets and try to take advantage of name recognition rather than spreading their resources too thinly over large regions. Beginning by establishing a national buying and distribution network designed to complement their ambitious expansion plans, Beck and his team meticulously tweaked in-store operational elements, such as food display techniques.

By the end of 1992, Boston Chicken had 83 stores operating in its chain and several new outlets under construction. Total restaurant sales rose to nearly $43 million that year as Boston Chicken, Inc.’s revenue from its franchised and owned outlets increased to about $8.3 million. The company’s basic strategy for growth in 1992 and into 1993 was to find well-heeled, experienced restaurateurs in key regional markets who were willing to expand the chain in their area. The degree of financing provided by Boston Chicken varied among the developers. The overall expansion effort would be directed from a centralized, streamlined headquarters office where Beck and his team were based.

Representative of the ’area developers’ that Boston Chicken recruited to expand its chain was New York’s Donald Cepiel. Cepiel started his fast-food industry career at the age of 16, peeling potatoes at a McDonald’s restaurant. By 1993, the 43-year-old entrepreneur owned 21 Burger King outlets, among other holdings. He purchased the rights to Boston Chicken in 1991 and had built three outlets by mid-1993. Interestingly, in October 1993, Cepiel purchased the same site on which the McDonald’s that first employed him had once stood. He began building a new Boston Chicken there and planned to open two more in the area during 1994.

Although Boston Chicken experienced surprisingly strong growth during 1991 and 1992, that expansion was a mere prelude to the explosive gains that Beck and team would achieve in 1993 and 1994. During 1993, in fact, the chain nearly tripled in size to 217 stores. Aggregate restaurant sales rose to $154 million, and Boston Chicken, Inc.’s revenues jumped fivefold to $43 million. To accumulate capital for even more growth, Boston Chicken went public in November 1993. Enthused investors bought heavily as Boston Chicken’s stock price soared.

While Boston Chicken’s rampant growth was largely the result of the ingenious concept devised in 1985 by Cores and Kolow, it was also the result of the savvy operational strategy created by Beck and his experienced management team. Indeed, they had carefully engineered systems for all aspects of the company’s activities, from selecting real estate and constructing stores to tracking customer preferences and preparing food. For example, the company had developed a system by which a store could be completely built and operational within less than 75 days after the start of construction.

One of the chain’s most impressive elements was its advanced computer systems. During the early 1990s, the company developed its own software at a cost of about $10 million. The software was used to drive a company-wide system that integrated all of Boston Chicken’s operations, gathering and processing reams of data. For example, the system would alert store managers to put out more of a certain side dish based on how many had been rung up at the register—the system would even alter its advice according to the seasons and the established preferences of that store’s customer base. Boston Chicken’s store computers could also make up worker schedules, automatically reorder food and supplies from vendors, and update the store’s financial results on an hourly basis. “I’ve never seen systems as impressive and sophisticated as Boston Chicken has,” said stock analyst Michael Moe in the October 9, 1994 Denver Post.

Boston Chicken continued to use its advanced processes and systems to grow during 1994. By mid-1994, in fact, the company was employing 16,500 workers and operating a total of 330 stores, and the chain was expanding at a rate of one new store every business day. As its operations expanded, the company began looking for a new facility to house its burgeoning headquarters. Not surprisingly, Boston Chicken moved its offices to Golden, Colorado, in August 1994, where Beck had moved his family a few years earlier in an effort to improve their quality of life. There, the company opened a 42,000-square-foot, $10 million ’support center’; designed to accommodate future growth, the center housed about 140 employees when it opened.

Boston Chicken posted huge gains during the remainder of 1994, ending the year with 534 stores in its chain and continuing to add about one store each day and to hire 100 new workers every week. As annual restaurant sales rose past the $100 million mark in 1994, and the company posted strong earnings, Boston Chicken continued to seek new funds for expansion into the mid-1990s. In fact, management announced its intent to grow the chain at a rate of more than 325 stores annually at least through the end of the decade; the organization already had about 1,000 nonrefundable commitments from potential outlet operators who wanted a piece of the action. “They have the most aggressive expansion program ever undertaken in the restaurant industry,” surmised analyst Mike Mueller in the April 10, 1994 Restaurant Business.