The latest on McDonald's purchase of Boston Chicken.
May 26, 2000
McDonald's Is Now Happy
With Home-Style Meals
By JENNIFER ORDONEZ
Staff Reporter of THE WALL STREET JOURNAL
McDonald's Corp.'s appetite has changed.
When the fast-food giant agreed in December to buy debt-ridden Boston
Chicken Inc., it considered converting all Boston Market restaurants into either
McDonald's hamburger joints or outlets for one of its two other chains,
Chipotle Mexican Grills and Donatos Pizza.
But now, McDonald's sees tremendous potential in home-style meatloaf and
roasted-chicken dinners. Friday it plans to announce a plan to revitalize and
even expand the Boston Market concept.
"The more we looked at [Boston Market], the more we learned and the more
we liked it," says Jeffrey B. Kindler, executive vice president and general
counsel of McDonald's.
One indication of McDonald's new commitment to the Boston Market brand is
the establishment of a management team pulled from its own ranks.
McDonald's Friday appointed Mr. Kindler, 45 years old, as Boston Market's
new chief executive. Mr. Kindler, who joined McDonald's four years ago, was
previously senior vice president and general counsel of General Electric Co.
McDonald's $173.5 million acquisition of Boston Market takes effect Friday,
making the restaurant chain the company's second largest with 750 stores.
McDonald's, whose 27,000 hamburger restaurants make it the largest
restaurant company in the world, has decided to keep open a "significant
majority" of the Boston Market restaurants, Mr. Kindler says.
McDonald's says its change of plan reflects its realization that it was Boston
Market's $900 million debt, rather than the chain's restaurant operations, that
ultimately drove parent Boston Chicken into Chapter 11 bankruptcy
proceedings in October 1998. The company was still in bankruptcy
proceedings when McDonald's agreed to buy it, and McDonald's subsequently
helped craft a reorganization plan calling for the closure of 100 of the chain's
850 stores and the renegotiation of some leases.
But minus that big debt load, the remaining stores are keepers, says Mr.
Kindler. "As we got to know the business, we discovered that they actually
were doing reasonably well."
According to McDonald's, Boston Market's 1999 revenue was $670 million,
and the average store had more than $800,000 in sales.
The turnabout may surprise analysts who followed Boston Market's five-year
downward spiral.
"Having lived the horror of Boston Market ... I just don't believe that
[McDonald's is] going to make a lot of money running Boston Market," says
Howard Penney, an analyst with Morgan Stanley Dean Witter.
Roasting and carving chickens and hams, and scooping out numerous side
dishes, is more labor intensive than grilling hamburgers and fries. McDonald's
acknowledges its average restaurant with 50 employees has higher sales per
worker than the average Boston Market with 20 employees. In addition,
restaurant-industry labor costs are growing at 6% a year, and with the tight job
market, McDonald's will have to scramble to maintain Boston Market's 15,000
employees, Mr. Penney says.
Mr. Kindler says to cut costs, Boston Market can take advantage of
McDonald's marketing and real-estate muscle and its purchasing and supply
chains. He also cites the projected success of a line of Boston Market frozen
entrees that H.L. Heinz & Co. has been testing. Rolled out nationwide this
month, Heinz says the frozen entrees are on track to rack up $100 million in
sales by May 2001.
Boston Market, whose original name was Boston Chicken, began as a purveyor
of chicken cooked the healthy way: roasted, not fried. The concept proved so
popular that new outlets opened at a rapid clip. The company went public in
1993 and had a market value of more than $800 million its first day as a public
company.
But chicken proved to be too narrow, so the company changed its name and
added ham, turkey and meatloaf to its menu. Primarily a dinner purveyor, it
began offering sandwiches to attract the lunch crowd. But its operation proved
to be too complicated. Service and sales suffered.
The company took on substantial debt in order to provide financing to
franchisees who in turn launched an extraordinary expansion. In less than a
decade the chain shot past 1,000 units. When hard times hit, the company took
back its restaurants, effectively forgiving franchisee debt but still carrying a
huge load of its own.
McDonald's believes that management can make a big difference in turning
Boston Market around. "McDonald's knows how to run a multi-unit restaurant
business better than anyone in the world," says Mr. Kindler. He said he plans to
start opening new Boston Markets this year and to take the concept overseas.
Mr. Kindler said the company hadn't decided whether to let McDonald's
franchisees -- who are prohibited from owning competitors' restaurants --
open or operate Boston Markets. "We're going to run this brand autonomously
and separate," he said.
Boston Market will keep its headquarters in Golden, Colo., although its CEO
will stay at McDonald's headquarters in Oak Brook, Ill. Also working from Oak
Brook will be the chain's new chief operating officer, Michael D. Andres, 42, a
20-year McDonald's veteran.
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