Boston Market: There's Life in the Old Bird Yet

The chain is back from the brink, and it's helping boost McDonald's sagging bottom line

Just five years after its 1993 initial public offering, the chickens came home to roost at Boston Market when the home-style eatery--a victim of overexpansion--declared bankruptcy. Last May, McDonald's Corp. (MCD ) swooped down and snapped up the carcass for only $173.5 million, planning to scrap the chain and convert its 860 sites to more burger places or outlets in McDonald's new pizza and burrito chains.

But a funny thing happened to Boston Market on the way to the scrap heap. Although the man McDonald's brought in to close Boston Market, former General Electric Co. chief litigator Jeffrey B. Kindler, swiftly shut 100 stores and earmarked 50 or 60 more for conversion, he also became convinced that Boston Market had a future.

Internal marketing data showed that the chain had a surprisingly loyal customer base. Plus management had developed good ideas for new entrees, such as grilled chicken. "We were sold on the brand," says Kindler, Boston Market's chairman.

The clincher was a ten-year pact negotiatied with Heinz Frozen Food Co. to put the Boston Market name on a line of frozen dinners for 10 years. Even with the restaurants in bankruptcy, Heinz (HNZ ) discovered in surveys that consumers were 30% more likely to try the new entrees if they carried the Boston Market logo over any other name it tested. The supermarket line is now a $100 million business. "It's a great brand name," says Neil Harrison, Heinz Frozen Food's president.

Now Kindler has bolder plans. He is remodeling stores across the country and even plans to open new ones--a remarkable comeback for a chain written off as dead.

A LITTLE LUCK. Maybe McDonald's has finally found a winner in its search for life beyond burgers. Since 1998, the fast-food kingpin has acquired a handful of restaurant chains to make up for its stalled growth. But the company concedes that its two biggest acquisitions, Donatos Pizza, with 166 outlets, and Chipotle Mexican Grill, with 124, are still losing money. And three other additions--two restaurant outfits in London and a stake in an online meal-delivery site--are too small to matter much to a company with $14.2 billion in annual sales and 28,900 outlets. "Developing new concepts is not something they are necessarily adept at," scolds Timothy M. Ghriskey, a portfolio manager at Dreyfus Corp., which holds 2.8 million McDonald's shares.

Boston Market, however, may be different. With 702 company-owned stores in the U.S., the roasted chicken and meat-loaf chain has since last May posted year-on-year sales increases of 7% to 8% every month, while domestic sales at traditional McDonald's grew only 3% to 4%. Thanks to these outsize increases, Boston Market now grosses more than $700 million a year, says Kindler.

McDonald's is guarded about Boston Market's numbers. Kindler says the chain has been consistently profitable, but he won't give out specifics. And McDonald's has shown its faith in Boston Market by assigning an experienced senior vice-president, Michael D. Andres, to be Kindler's right-hand man and president. Analyst Janice L. Meyer of Credit Suisse First Boston figures Boston Market lifts McDonald's annual per-share earnings by maybe 2 cents. By itself, that can't offset McDonald's earnings slump: First-quarter income fell 16%, to $378 million, or 29 cents a share, from 33 cents. That was on a measly 5% sales increase. But Meyer says: "They could use every penny they can get."

"NOT GREASY." McDonald's execs cite test results at four Tucson stores that reopened in October as proof of Boston Market's potential. Back in business with a warmer decor, expanded menu, and renewed marketing push, monthly sales have grown by 15% or more. McDonald's now plans to refashion the entire chain along those lines by early 2003. It says that it will even consider opening new Boston Markets in a few years, both here and abroad. Beyond that, Kindler's team is trying other ideas to boost earnings, including a greater emphasis on catering and accepting phone orders in some markets. Kindler may also test home-delivery service next year. Add it all up, and he sees double-digit annual sales growth for the next three years.

Swing by one of those new Tucson restaurants, and you see the new Boston Market in action. Schoolteacher Randall Smith stops by once a week to pick up dinner. Tonight, he's happy with his barbecued chicken takeout. "It's inexpensive. It seems healthy. And it's not greasy fast food," he says. Sounds like another convert from the ranks of the burger crowd. But this time, the biggest burger chain of all is more than happy to hear about it.

By Michael Arndt in Tucson

    Before it's here, it's on the Bloomberg Terminal.