Howard Johnson International, Inc.

views updated May 18 2018

Howard Johnson International, Inc.

339 Jefferson Road
Box 278
Parsippany, New Jersey 07054-0278
U.S.A.
(201) 428-9700
Fax: (201) 428-6057

Wholly Owned Subsidiary of Hospitality Franchise
Systems Inc.
Incorporated: 1961 as Howard Johnson Co.
SICs: 6794 Patent Owners and Lessors; 7011 Hotels and Motels

Howard Johnson International, Inc. is the 15th largest lodging chain in the United States, with 523 properties and 57,200 rooms at the end of 1995. Most of these hotels and motels also feature swimming pools, restaurants, and gift shops, catering to the leisure-travel market and, to a lesser extent, the business traveler. The company is a subsidiary of Hospitality Franchise Systems Inc. (HFS), which runs Howard Johnson as a franchise operation. Interestingly, Howard Johnson was once the largest restaurant chain in the world, but such fast-food outlets as McDonald’s came to replace “HoJo” in America’s affections, and a 1985 sale of the company essentially divided it into separate lodging and dining operations. By 1994 there were only about 100 Howard Johnson restaurants left.

Inception and Growth Before World War II

A World War I veteran with only a grammar-school education, Howard Dealing Johnson started out as a salesman for his father, a Boston cigar jobber. As smokers increasingly turned to cigarettes, however, the business fell into debt and, after his father died, Johnson closed it. Looking for a better enterprise, he bought a store selling candy, newspapers, and patent medicines in Wollaston, a Boston suburb, in 1925 for $500 he borrowed, picking up also its debts of at least $28,000. Johnson revived the store’s moribund soda fountain and, seeking a quality product that would bear his name, introduced chocolate icecream with a “secret” formula—a butterfat content almost twice the standard. It proved a hit, so he added other flavors and opened a beachfront stand where he sold $60,000 worth of icecream cones in a single summer. By 1928 his gross sales of ice cream had risen to $240,000.

When Johnson opened his first restaurant, in neighboring Quincy in 1929, he made fried clams and broiled swordfish the specialties and also included homemade baked beans, brown bread, and pastries. But he was frustrated in his desire to expand by lack of capital before 1935, when he persuaded an acquaintance to open a restaurant in Orleans, on Cape Cod, and sell his ice cream under a franchise. By the following summer there were four Howard Johnson franchised restaurants—called “Howard Johnson’s”—and 13 small Johnson-owned roadside stands being converted into restaurants. By the end of the year 39 more franchised restaurants had been opened.

Howard Johnson’s phenomenal growth was based on the application of two relatively new and untried concepts. Its founder, unable to obtain loans from bankers, was a pioneer in the franchising field. Licensees, rather than the chain, bore the start-up costs, which included an initiation fee paid to the company, which then made more money by selling food and other supplies to the licensees. And Howard Johnson foresaw that the growing popularity of the automobile would send millions of hungry Americans out on the road.

By the end of 1939 there were 107 Howard Johnsons along the eastern seaboard as far south as Florida, mostly along highways. Gross receipts came to $10.5 million, and profit to $207,000. The following year the company won a contract to locate 24 restaurants on the newly completed Pennsylvania Turnpike, holding a monopoly on the heavily traveled route until 1979. Generally situated along major highways and drafted by Johnson’s staff of 27 architects, Howard Johnson’s were easily distinguished by porcelain roof tiles of a special orange color, scientifically determined as the best shade for attracting a motorist’s attention. A New England-style blue cupola was mounted on the roof. “Site engineers” determined the locations, and supervisors hired and trained cooks, waitresses, and counter clerks. Quality control from headquarters assured that the 28 flavors of ice cream, fried claims from the company’s own clam bed off Ipswich, Massachusetts, pies baked on the premises according to company recipes, and other items would meet the standards of the Howard D. Johnson Co. The company lured the family trade with children’s portions.

The Booming Fifties

With America’s entry into World War II gasoline rationing took such a toll on the Howard Johnson chain that the number of restaurants fell in little more than a year from about 200 (75 of them company-operated) to about 75. By the summer of 1944 only 12 remained in business. The company took up part of the slack by turning some of the restaurants into jam factories and by operating cafeterias for workers in war plants. Once the war had ended, Howard Johnson adopted a policy of smaller units in place of big, showy “roadside cathedrals.” By the summer of 1947, construction was under way on the first of 200 new branches to stretch across the Southeast and Midwest. Still owned exclusively by its founder, the Howard D. Johnson Co. was providing its restaurants with some 700 items, including the saltwater taffy always found on the counters. Gross sales totaled $115 million in 1951 (25 percent from ice cream), and net income came to $656,000.

By 1954 there were about 400 Howard Johnson restaurants in 32 states, of which about 10 percent were highly profitable company-owned units on turnpike locations. That year Howard Johnson entered the motel business. In 1959 the company founder, who had accumulated three homes, a 60-foot-long yacht, an art collection, and four wives, turned the reins over to his son, 26-year-old Howard Brennan Johnson, who succeeded him as president of the company. The junior Howard Johnson, a graduate of Andover, Yale, and Harvard Business School, quipped, “My father felt that I should start at the top and work my way down.” Years later, in a more serious vein, he told a New York Times reporter, “I knew from the age of five I wanted to join the company. It was all we talked about at home. I saw my father working so hard. He was the kind of person you almost couldn’t let down.” He established executive offices in New York City’s Rockefeller Center, although corporate headquarters remained in Wollaston. The senior Johnson remained chairman and treasurer of the company until 1964. He died in 1972.

Going Public in the Sixties

When Howard Johnson Co. went public in 1961, it consisted of 605 Howard Johnson restaurants (265 operated by the company and 340 by licensees), ten Red Coach Grill company-owned restaurants (a chain started in 1938 and specializing in steak and lobster), and 88 Howard Johnson’s Motor Lodges, all of them franchised, in 33 states and the Bahamas. There were 17 manufacturing and processing plants in 11 states. Net sales came to $95 million in 1960 (compared to $31.8 million in 1951), and net income to $2.3 million. Both annual sales and earnings per share increased every year between 1959 and 1966. Between 1961 and 1967 the company’s founder, his son, and his daughter sold nearly two million shares of stock for a sum estimated in the neighborhood of $1 billion.

In 1963, when the firm’s profit margin rose to an all-time high for the fourth straight year, the number of company-owned Howard Johnsons exceeded the franchised units for the first

time. “It’s simple,” Howard B. Johnson explained to a Forbes reporter in 1962. “Last year our own 279 stores [i.e., restaurants] had sales of nearly $79 million, on which we got both the wholesale and the retail profit. Naturally, we’d like more of these double-barreled profits.” The number of motels reached 130 in 1964, each with a Howard Johnson restaurant on the site or adjacent to it. Popular Howard Johnson staples were now being frozen and distributed through supermarkets in the Northeast. In the mid-1960s Howard Johnson became a coast-to-coast chain for the first time by opening California outlets. Ground Round, a limited-menu, pub-style suburban chain with banjo-strumming entertainment, was initiated in 1969.

Challenges of the Seventies

Marked by occasional gasoline shortages and frequent gas price hikes, the 1970s were a difficult decade for companies catering to motor traffic, but especially for Howard Johnson, which depended on highway operations for 85 percent of its business. Yet except for 1974, the first full year of the energy crisis, Howard Johnson continued every year to post record sales and earnings per share. It reacted to the challenge by instituting around-the-clock service in more than 80 percent of the company-owned restaurants, installed cocktail lounges in place of soda fountains in about 100 of these locations, increased seating capacity, and stepped up special menu promotions. New HoJos, the company’s leader pronounced, would be concentrated in population centers rather than along highways. By the end of 1975 the HoJo empire had grown to 929 Howard Johnson restaurants (649 company-operated), 32 Red Coach Grill restaurants, 63 Ground Round restaurants, and 536 motor lodges (125 company-operated) in 42 states, the District of Columbia, Puerto Rico, the Bahamas, the British West Indies, and Canada.

Nevertheless, in the competitive struggle for the traveler’s dollar, Howard Johnson was falling behind fast-food franchisers like McDonald’s and Burger King and growing lodging chains like Holiday Inns, Ramada Inns, and Marriott. The classic orange-roof Howard Johnsons especially were perceived as past their prime. Customers complained of agonizingly slow service and overpriced, bland, predominantly frozen food that gave rise to the gag, “Howard Johnson’s ice cream comes in 28 flavors and its food in one.” HoJo outlets accounted for 78 percent of the restaurant group’s sales volume in 1977 but only 57 percent of pretax profit. By contrast, the company’s motels, although also cited as increasingly behind the times, accounted for only 16 percent of the company sales in 1978 but more than 43 percent of its earnings.

Criticized for choosing to stand pat and hoard company cash, Howard Johnson told a Forbes reporter in 1978, “My expansion plans got stalled in the 1974 oil embargo. I overreacted. I stopped all expansion, and once you stop, you know how hard it is to get the monster going again.” Others, however, blamed management’s tight-fisted concentration on the balance sheet for the company’s lack of dynamism. One of its former executives said, “HoJo always seemed to have ideas to upgrade the restaurants and hotels. But they never wanted to spend the money.” By the late 1970s the Howard Johnson Co. had a balance sheet more inspiring than its future. It held $90 million in cash and marketable securities and carried no long-term debt aside from $143 million in capital-lease obligations for its company-owned units.

Under British Rule: 1980-1985

Although Howard Johnson had professed no interest in selling his namesake company, in September 1979 he accepted, as too lucrative to pass up, an acquisition bid of $28 a share, or $630 million in all, from Imperial Group Ltd. of Great Britain, a tobacco, food, beer, and packaging conglomerate. For its money Imperial received 1,040 restaurants (75 percent company-owned) and 520 motor lodges (75 percent franchised). Howard Johnson, who had collected $35.2 million for his shares, resigned as chairman, president, and chief executive officer of the company at the end of 1981. He was succeeded by G. Michael Hostage, a manager who had worked his way through business school washing dishes and digging sewers before spending 15 years with the Marriott Corp.

Hostage inherited a declining balance sheet. In 1979 the company had earned $34 million before taxes on sales of $588 million, but earnings dropped to only $14.7 million in 1980 and never fully recovered during the four succeeding years. Sales grew only 22 percent during this period. Hostage vowed to integrate adjacent HoJo restaurants and motels—often under different ownership—by unifying their staffs and offering food-and-lodging package deals and to cut costs by allowing restaurant managers to buy food from a variety of sources rather than exclusively from the company. Some new entrees and a low-cholesterol breakfast were added. The successful Ground Round chain was expanded, growing to 210 units in 1985.

In order to lure business travelers to its motels, which trailed the industry average in occupancy rate and had fallen to sixth place among lodging chains, Howard Johnson initiated corporate discounts and a new reservations system and raised the advertising budget. It gave licensees the choice of accepting low-interest loans to refurbish their properties by mid 1987 or losing their franchises. A new mid-priced Plaza-Hotel chain for the business traveler was opened in 1983, with 90 or more planned over five years at an average cost of $20 million each. These units would include amenities business people expected but were not receiving from the traditionally family-oriented HoJos: restaurants and lounges, banquet and meeting rooms, and executive floors.

Divided Between Marriott and Prime

In September 1985, however, Imperial threw in the towel, selling the Howard Johnson Co. to Marriott Corp. for $314 million. Marriott kept the 418 company-owned restaurants but immediately sold the franchise system and the company-owned lodging units to Prime Motor Inns Inc. for $97 million. Prime also assumed Howard Johnson’s $138 million in debt. For its money Prime received the Howard Johnson trade name and trademark, 125 hotels and motor lodges operated by Howard Johnson, 375 franchised lodges, and 199 franchised restaurants. Imperial kept the Ground Round chain because Marriott was not interested in buying it.

Neither did Marriott have an interest in prolonging the life of a restaurant chain whose name was also held by a lodging operation in competition with its own. The corporation intended to convert these units to Big Boy and Saga restaurants which would in turn be sold. By the end of 1987 only 90 Marriott-owned Howard Johnson restaurants remained, and by mid 1991 only 50. Similarly, Prime wanted to wash its hands of the independently owned units once the franchise agreements expired.

Claiming that their interests were being set aside, about 150 Howard Johnson restaurant franchisees retained former U.S. attorney general Griffin Bell and began threatening a class-action suit against Marriott and Prime. After eight months of negotiations, the parties reached an agreement in May 1986 by which Prime granted to Franchise Associates, Inc., a company established by the franchisees, a perpetual exclusive license to the Howard Johnson name in connection with the operation of Howard Johnson restaurants in the United States, Panama, and the Bahama Islands, and granted Franchise Associates the exclusive right to use the Howard Johnson name or license it to others for Howard Johnson Signature Food Products in these locations. From Marriott the operators won the free use of Ho Jo recipes.

Franchise Associates bought 17 of Marriott’s HoJos in 1991. It even built a prototype restaurant with a toned-down version of the orange roof and required all new franchisees to hew to the design. Oat bran muffins, salads, and garden pizzas were among the health-conscious fare added to the familiar standbys in a new menu introduced in 1990. A stockholders’ company of 65 franchisees, Franchise Associates owned and operated about 85 of the 110 franchised HoJo restaurants in 1991.

Prime was described by a securities analyst as the fastest-growing company in the lodging industry with the highest profit margins. In 1988 it announced a joint venture to build 20 Howard Johnson suite hotels a year for the next five years at an annual construction cost of about $100 million. A Prime subsidiary was to supply the financing, while AAA Development Corp. would build the hotels. Suite hotels were a fast-growing segment of the lodging industry largely favored by business travelers, and Howard Johnson was planning to charge $55 to $90 a night. The following year Howard Johnson initiated a $25-million marketing plan centered on the idea of advertising the chain as “home of the road warrior”—the industry name for frequent travelers. Figures showed that 22 percent of U.S. business travelers were responsible for 56 percent of hotel stays.

New Ownership in the Nineties

In order to reduce its $280 million in bank debt, Prime, which had become the nation’s second-largest hotel franchiser, sold its Howard Johnson and Ramada systems to Blackstone Capital Partners L.P.—an affiliate of Blackstone Group—in 1990 for $170 million. A downturn in the lodging and real-estate industries and problems in the high-yield, high-risk junk-bond market had dried up financing sources for hotels and caused Prime’s stock to lose 75 percent of its value in seven months. Blackstone Group, an investment-banking firm, added the Days Inn chain and renamed the operation Hospitality Franchise Systems Inc. The company went public in 1992, but Blackstone retained 65 percent of the shares.

Hospitality Franchise Systems changed its name to HFS Inc. in 1995 and the name of its Howard Johnson Franchise Systems subsidiary to Howard Johnson International, Inc. in 1996. In February 1996 HFS announced that it would require its Howard Johnson franchisees to upgrade their properties, including establishing a rating system designating properties as either full-service hotels or limited-service units and posting a new sign with a bright blue background. It was also considering discontinuing the distinctive orange roofs that still topped about 30 percent of the lodges. While conceding that the orange roof is “an American icon—as American as apple pie and Chevrolet,” HoJo President Eric Pfeffer declared, “As we change with the times, we’ve got to show the newness.” Pfeffer, who discontinued the franchises of 37 Howard Johnson properties in 1995 for quality shortfalls, said the company would be expanded worldwide.

At the end of 1995. there were 523 properties with 57,200 rooms in the Howard Johnson lodging system, throughout North America and also in Europe, the Middle East, and Central and South America. They were midpriced, averaged 110 rooms each, and most had a swimming pool, gift shop, and restaurant. HFS received monthly marketing and reservation fees from its Howard Johnson franchisees, based on a specified percentage of gross room sales.

Howard Johnson International, Inc.

views updated May 18 2018

Howard Johnson International, Inc.

1 Sylvan Way
Parsippany, New Jersey 07054
U.S.A.
Telephone: (973) 428-9700
Fax: (973) 496-7658
Web site: http://www.hojo.com

Wholly Owned Subsidiary of Cendant Corporation
Incorporated: 1961 as Howard Johnson Company
Employees: 340
Sales: $19.5 million (2004)
NAIC: 721110 Hotels (Except Casino Hotels) and Motels

Howard Johnson International, Inc., franchises approximately 465 hotels in the United States, Canada, Mexico, Malta, Romania, Argentina, Columbia, Guatemala, Dominican Republic, Dutch Antilles, Ecuador, Peru, Venezuela, Israel, Jordan, Oman, United Arab Emirates, China, and India. Each year, over 15 million vacationers and business travelers visit a Howard Johnson hotel. The company is a subsidiary of Cendant Corp., which runs Howard Johnson as a franchise operation. Interestingly, Howard Johnson was once the largest restaurant chain in the world, but such fast-food outlets as McDonald's came to replace "HoJo" in America's affections, and the 1985 sale of the company essentially divided it into separate lodging and dining operations. By 2005, there were only eight Howard Johnson restaurants left.

Inception and Growth Before World War II

A World War I veteran with only a grammar-school education, Howard Dearing Johnson started out as a salesman for his father, a Boston cigar jobber. As smokers increasingly turned to cigarettes, however, the business fell into debt and, after his father died, Johnson closed it. Looking for a better enterprise, he bought a store selling candy, newspapers, and patent medicines in Wollaston, a Boston suburb, in 1925 for $500 he borrowed, picking up also its debts of at least $28,000. Johnson revived the store's moribund soda fountain and, seeking a quality product that would bear his name, introduced chocolate ice cream with a "secret" formula: a butterfat content almost twice the standard. It proved a hit, so he added other flavors and opened a beachfront stand where he sold $60,000 worth of ice-cream cones in a single summer. By 1928, his gross sales of ice cream had risen to $240,000.

When Johnson opened his first restaurant, in neighboring Quincy in 1929, he made fried clams and broiled swordfish the specialties and also included homemade baked beans, brown bread, and pastries. However, he was frustrated in his desire to expand by lack of capital before 1935, when he persuaded an acquaintance to open a restaurant in Orleans, on Cape Cod, and sell his ice cream under a franchise. By the following summer, there were four Howard Johnson franchised restaurants, called "Howard Johnson's," and 13 small Johnson-owned roadside stands being converted into restaurants. By the end of the year, 39 more franchised restaurants had been opened.

Howard Johnson's phenomenal growth was based on the application of two relatively new and untried concepts. Its founder, unable to obtain loans from bankers, was a pioneer in the franchising field. Licensees, rather than the chain, bore the start-up costs. These included an initiation fee paid to the company, which then made more money by selling food and other supplies to the licensees. In addition, Howard Johnson foresaw that the growing popularity of the automobile would send millions of hungry Americans out on the road.

By the end of 1939, there were 107 Howard Johnsons along the eastern seaboard and as far south as Florida, mostly along highways. Gross receipts came to $10.5 million and profit to $207,000. The following year, the company won a contract to locate 24 restaurants on the newly completed Pennsylvania Turnpike, holding a monopoly on the heavily traveled route until 1979. Generally situated along major highways and drafted by Johnson's staff of 27 architects, Howard Johnson's were easily distinguished by porcelain roof tiles of a special orange color, scientifically determined as the best shade for attracting a motorist's attention. A New England-style blue cupola was mounted on the roof. "Site engineers" determined the locations, and supervisors hired and trained cooks, waitresses, and counter clerks. Quality control from headquarters assured that the 28 flavors of ice cream, fried clams from the company's own clam bed off Ipswich, Massachusetts, pies baked on the premises according to company recipes, and other items would meet the standards of the Howard D. Johnson Co. The company lured the family trade with children's portions.

The Booming Fifties

With America's entry into World War II, gasoline rationing took such a toll on the Howard Johnson chain that the number of restaurants fell in little more than a year from about 200 (75 of them company-operated) to about 75. By the summer of 1944, only 12 remained in business. The company took up part of the slack by turning some of the restaurants into jam factories and by operating cafeterias for workers in war plants. Once the war ended, Howard Johnson adopted a policy of smaller units in place of big, showy "roadside cathedrals." By the summer of 1947, construction was under way on the first of 200 new branches to stretch across the Southeast and Midwest. Still owned exclusively by its founder, the Howard D. Johnson Co. was providing its restaurants with some 700 items, including the saltwater taffy always found on the counters. Gross sales totaled $115 million in 1951 (25 percent from ice cream), and net income came to $656,000.

By 1954, there were about 400 Howard Johnson restaurants in 32 states, of which about 10 percent were highly profitable company-owned units on turnpike locations. That year, Howard Johnson entered the motel business. In 1959, the company founder, who had accumulated three homes, a 60-foot-long yacht, an art collection, and gone through four marriages, turned the reins over to his son, 26-year-old Howard Brennan Johnson, who succeeded him as president of the company. The junior Howard Johnson, a graduate of Andover, Yale, and Harvard Business School, quipped, "My father felt that I should start at the top and work my way down." Years later, in a more serious vein, he told a New York Times reporter, "I knew from the age of five I wanted to join the company. It was all we talked about at home. I saw my father working so hard. He was the kind of person you almost couldn't let down." He established executive offices in New York City's Rockefeller Center, although corporate headquarters remained in Wollaston. The senior Johnson remained chairman and treasurer of the company until 1964. He died in 1972.

Going Public in the 1960s

When Howard Johnson Co. went public in 1961, it consisted of 605 Howard Johnson restaurants (265 operated by the company and 340 by licensees), 10 Red Coach Grill company-owned restaurants (a chain started in 1938 that specialized in steak and lobster), and 88 Howard Johnson's Motor Lodges, all of them franchised, in 33 states and the Bahamas. There were 17 manufacturing and processing plants in 11 states. Net sales came to $95 million in 1960 (compared to $31.8 million in 1951), and net income to $2.3 million. Both annual sales and earnings per share increased every year between 1959 and 1966. Between 1961 and 1967 the company's founder, his son, and his daughter sold nearly two million shares of stock for a sum estimated in the neighborhood of $1 billion.

In 1963, when the firm's profit margin rose to an all-time high for the fourth straight year, the number of company-owned Howard Johnsons exceeded the franchised units for the first time. "It's simple," Howard B. Johnson explained to a Forbes reporter in 1962. "Last year our own 279 stores and restaurants had sales of nearly $79 million, on which we got both the wholesale and the retail profit. Naturally, we'd like more of these double-barreled profits." The number of motels reached 130 in 1964, each with a Howard Johnson restaurant on the site or adjacent to it. Popular Howard Johnson staples were now being frozen and distributed through supermarkets in the Northeast. In the mid-1960s, Howard Johnson became a coast-to-coast chain for the first time by opening California outlets. Ground Round, a limited-menu, pub-style suburban chain with banjo-strumming entertainment, was initiated in 1969.

Challenges of the 1970s

Marked by occasional gasoline shortages and frequent gas price hikes, the 1970s were a difficult decade for companies catering to motor traffic, but especially for Howard Johnson, which depended on highway operations for 85 percent of its business. Yet except for 1974, the first full year of the energy crisis, Howard Johnson continued every year to post record sales and earnings per share. It reacted to the challenge by instituting around-the-clock service in more than 80 percent of the company-owned restaurants, installed cocktail lounges in place of soda fountains in about 100 of these locations, increased seating capacity, and stepped up special menu promotions. New HoJos, the company's leader pronounced, would be concentrated in population centers rather than along highways. By the end of 1975, the HoJo empire had grown to 929 Howard Johnson restaurants (649 company-operated), 32 Red Coach Grill restaurants, 63 Ground Round restaurants, and 536 motor lodges (125 company-operated) in 42 states, the District of Columbia, Puerto Rico, the Bahamas, the British West Indies, and Canada.

Nevertheless, in the competitive struggle for the traveler's dollar, Howard Johnson was falling behind fast-food franchisers such as McDonald's and Burger King and growing lodging chains such as Holiday Inns, Ramada Inns, and Marriott. The classic orange-roof Howard Johnsons especially were perceived as past their prime. Customers complained of agonizingly slow service and overpriced, bland, predominantly frozen food that gave rise to the gag, "Howard Johnson's ice cream comes in 28 flavors and its food in one." HoJo outlets accounted for 78 percent of the restaurant group's sales volume in 1977 but only 57 percent of pretax profit. By contrast, the company's motels, although also cited as increasingly behind the times, accounted for only 16 percent of the company sales in 1978 but more than 43 percent of its earnings.

Company Perspectives:

Howard Johnson is a name that people trust, respect and look forward to seeing, wherever they travel. It's a name that stands for honest quality and solid value. It's a name that makes travelers feel at home.

Criticized for choosing to stand pat and hoard company cash, Howard Johnson told a Forbes reporter in 1978, "My expansion plans got stalled in the 1974 oil embargo. I overreacted. I stopped all expansion, and once you stop, you know how hard it is to get the monster going again." Others, however, blamed management's tight-fisted concentration on the balance sheet for the company's lack of dynamism. One of its former executives said, "HoJo always seemed to have ideas to upgrade the restaurants and hotels. But they never wanted to spend the money." By the late 1970s, the future of Howard Johnson Co. was beginning to look better on a balance sheet than its actual operations indicated. It held $90 million in cash and marketable securities and carried no long-term debt aside from $143 million in capital-lease obligations for its company-owned units.

Under British Rule: 1980–85

Although Howard Johnson had professed no interest in selling his namesake company, in September 1979 he accepted, as too lucrative to pass up, an acquisition bid of $28 a share, or $630 million in all, from Imperial Group Ltd. of Great Britain, a tobacco, food, beer, and packaging conglomerate. For its money, Imperial received 1,040 restaurants (75 percent company-owned) and 520 motor lodges (75 percent franchised). Howard Johnson, who had collected $35.2 million for his shares, resigned as chairman, president, and chief executive officer of the company at the end of 1981. He was succeeded by G. Michael Hostage, a manager who had worked his way through business school washing dishes and digging sewers before spending 15 years with the Marriott Corp.

Hostage inherited a declining balance sheet. In 1979, the company had earned $34 million before taxes on sales of $588 million, but earnings dropped to only $14.7 million in 1980 and never fully recovered during the four succeeding years. Sales grew only 22 percent during this period. Hostage vowed to integrate adjacent HoJo restaurants and motels, which were often under different ownership, by unifying their staffs and offering food-and-lodging package deals and to cut costs by allowing restaurant managers to buy food from a variety of sources rather than exclusively from the company. Some new entrees and a low-cholesterol breakfast were added. The successful Ground Round chain was expanded, growing to 210 units in 1985.

In order to lure business travelers to its motels, which trailed the industry average in occupancy rate and had fallen to sixth place among lodging chains, Howard Johnson initiated corporate discounts and a new reservations system and raised the advertising budget. It gave licensees the choice of accepting low-interest loans to refurbish their properties by mid-1987 or losing their franchises. A new mid-priced Plaza-Hotel chain for the business traveler was opened in 1983, with 90 or more planned over five years at an average cost of $20 million each. These units would include amenities business people expected but were not receiving from the traditionally family-oriented HoJos: restaurants and lounges, banquet and meeting rooms, and executive floors.

Divided between Marriott and Prime

In September 1985, Imperial threw in the towel, selling the Howard Johnson Co. to Marriott Corp. for $314 million. Marriott kept the 418 company-owned restaurants but immediately sold the franchise system and the company-owned lodging units to Prime Motor Inns Inc. for $97 million. Prime also assumed Howard Johnson's $138 million in debt. For its money, Prime received the Howard Johnson trade name and trademark, 125 hotels and motor lodges operated by Howard Johnson, 375 franchised lodges, and 199 franchised restaurants. Imperial kept the Ground Round chain because Marriott was not interested in buying it.

Neither did Marriott have an interest in prolonging the life of a restaurant chain whose name was also held by a lodging operation in competition with its own. The corporation intended to convert these units to Big Boy and Saga restaurants, which would in turn be sold. By the end of 1987, only 90 Marriott-owned Howard Johnson restaurants remained and by mid-1991 only 50. Similarly, Prime wanted to wash its hands of the independently owned units once the franchise agreements expired.

Key Dates:

1929:: Howard Dearing Johnson opens his first restaurant.
1961:: Howard Johnson Co. goes public.
1979:: The company is sold to Imperial Group Ltd. of Great Britain.
1985:: Marriott Corp. buys Howard Johnson for $314 million; Marriott keeps the 418 company-owned restaurants but immediately sells the franchise system and the company-owned lodging units to Prime Motor Inns Inc. for $97 million.
1990:: Prime sells Howard Johnson to Blackstone Capital Partners L.P.
1992:: Hospitality Franchise Systems Inc. goes public; Blackstone retains 65 percent ownership.
1995:: Hospitality Franchise Systems changes its name to HFS Inc.
1996:: Howard Johnson adopts the Howard Johnson International Inc. moniker.
1997:: HFS merges with CUC International to form Cendant Corp.
2005:: The company opens its first hotel in Alaska.

Franchise Associates bought 17 of Marriott's HoJos in 1991. It even built a prototype restaurant with a toned-down version of the orange roof and required all new franchisees to use the design. Oat bran muffins, salads, and garden pizzas were among the health-conscious fare added to the familiar standbys in a new menu introduced in 1990. A stockholders' company of 65 franchisees, Franchise Associates owned and operated about 85 of the 110 franchised HoJo restaurants in 1991.

Prime was described by a securities analyst as the fastest-growing company in the lodging industry with the highest profit margins. In 1988, it announced a joint venture to build 20 Howard Johnson suite hotels a year for the next five years at an annual construction cost of about $100 million. A Prime subsidiary was to supply the financing, while AAA Development Corporation would build the hotels. Suite hotels were a fast-growing segment of the lodging industry largely favored by business travelers, and Howard Johnson was planning to charge $55 to $90 a night. The following year, Howard Johnson initiated a $25-million marketing plan to present the chain as "home of the road warrior," the industry name for frequent travelers. Figures showed that 22 percent of U.S. business travelers were responsible for 56 percent of hotel stays.

New Ownership in the 1990s

In order to reduce its $280 million in bank debt, Prime, which had become the nation's second-largest hotel franchiser, sold its Howard Johnson and Ramada systems to Blackstone Capital Partners L.P., an affiliate of Blackstone Group, in 1990 for $170 million. A downturn in the lodging and real-estate industries and problems in the high-yield, high-risk junk-bond market had dried up financing sources for hotels and caused Prime's stock to lose 75 percent of its value in seven months. Blackstone Group, an investment-banking firm, added the Days Inn chain and renamed the operation Hospitality Franchise Systems Inc. The company went public in 1992, but Blackstone retained 65 percent of the shares.

Hospitality Franchise Systems changed its name to HFS Inc. in 1995 and the name of its Howard Johnson Franchise Systems subsidiary to Howard Johnson International, Inc. in 1996. In February 1996, HFS announced that it would require its Howard Johnson franchisees to upgrade their properties, including establishing a rating system designating properties as either full-service hotels or limited-service units and posting a new sign with a bright blue background. It was also considering discontinuing the distinctive orange roofs that still topped about 30 percent of the lodges. While conceding that the orange roof is "an American icon—as American as apple pie and Chevrolet," HoJo President Eric Pfeffer declared, "As we change with the times, we've got to show the newness." Pfeffer, who discontinued the franchises of 37 Howard Johnson properties in 1995 for quality shortfalls, said the company would be expanded worldwide.

At the end of 1995, there were 523 properties with 57,200 rooms in the Howard Johnson lodging system throughout North America and also in Europe, the Middle East, and Central and South America. They were mid-priced, averaged 110 rooms each, and most had a swimming pool, gift shop, and restaurant. HFS received monthly marketing and reservation fees from its Howard Johnson franchisees based on a specified percentage of gross room sales.

Changes in the Late 1990s and Beyond

Howard Johnson experienced changes in its ownership structure once again during the late 1990s. Known for his deal-making prowess, HFS CEO Henry Silverman orchestrated a $14.1 billion merger with CUC International Inc. in 1997. A February 2000 Business Week article explained Silverman's motivation for the deal, claiming, "The CUC merger was to have been Silverman's masterstroke. He saw CUC, a direct-marketing outfit that sold memberships in discount buying clubs such as Shoppers Advantage and Travelers Advantage, as the perfect partner. The idea was to feed the names of all the customers HFS channeled through its hotels and real estate brokerages into the CUC direct-marketing machine." The article went on to report, "CUC would then sell them memberships in its discount-buying clubs and, eventually, financial services such as insurance. Silverman also figured CUC's team, viewed as Internet gurus for creating the online shopping site Netmarket, could help extend his brands to the Web."

Silverman's grand scheme fell short in 1998, however, when it was discovered that CUC had inflated its profits and earnings in the years before the merger. The accounting discrepancies eventually led to $13 billion loss in market capitalization and a $2.8 billion shareholder class action lawsuit settlement. In an attempt to rebuild and stabilize Cendant, Silverman sold off 18 non-core assets by 2000, relying on the hotel and real estate operations to bolster sales and earnings.

While Howard Johnson's parent worked to regain credibility with its shareholders, the hotel chain focused on expanding its presence in both international and domestic markets. In 1998, the company secured a master franchise agreement to develop hotels in China. Howard Johnson also set plans in motion to open new properties in eight European countries with U.K.-based Premier Hotels. At the same time, Howard Johnson began to aggressively target business travelers. Known primarily in the hospitality industry as the place to stay for travelers on a budget, the hotel chain wanted to tap into a larger portion of the business traveler segment. As such, a new television marketing campaign with the tagline "We've got a great name to live up to" was launched 1999. The company also introduced SuperMiles, a frequent-stay program designed to entice business travelers.

By the start of the 2000s, Howard Johnson stood on solid ground. While a slowdown in travel after the September 11, 2001 terrorist attacks on the United States plagued the entire industry, the company remained focused on its growth strategy. It had four different formats in its arsenal, including the full-service Howard Johnson Hotels and the Plaza Hotels; Howard Johnson Inns, which had restaurants but not room service; and limited-service Express Inns. Most of the company's international locations were four-star, full-service hotels. In the years to come, Howard Johnson looked to expand further in international markets as well as in center-city markets. It opened a Plaza Hotel, the first Howard Johnson location in downtown Anchorage, Alaska, in March 2005.

Principal Competitors

Accor SA; Hilton Hotels Corporation; InterContinental Hotels Group plc.

Howard Johnson International, Inc.

views updated Jun 08 2018

HOWARD JOHNSON INTERNATIONAL, INC.

When 27-year-old Howard Johnson (1896–1972) bought a drugstore-newsstand outside of Boston in Wollaston, Massachusetts in 1924, he added more to his debt than to his assets. The $28,000 obligation that the new acquisition brought added to Johnson's already-existing debt of $10,000, which was left over from a failed joint venture in cigars with his father. Two innovations, however, quickly made Johnson's new business a success. First, he devised a home delivery service to peddle newsstand products in Wollaston and surrounding communities. His annual profits for the newsstand reached $30,000 in a few years. Although this money helped Johnson get out of debt, it was his interest in ice cream that had the biggest impact on his business.

An ice cream fanatic, Johnson wanted to use the drugstore's soda fountain to sell the best ice cream in town, which in his opinion was the ice cream being sold by a local pushcart vendor. Johnson paid the vendor $300 for the recipe (which yielded an extremely rich ice cream because it called for twice the butterfat of other commercially produced ice creams). Eventually Johnson began to experiment with other flavors, adding each one he liked to the soda fountain's menu. His 28 flavors were so popular that they became the Howard Johnson trademark.

These relatively small experiments began an early expansion and formed the basis for what would soon become a very big business. Howard Johnson was so pleased with the success of his ice cream that he decided to expand its sale outside of his drugstore. He put up small ice cream stands along the beaches of south Boston suburbs. The stands were a huge success; on one extremely hot August day alone, he sold 14,000 ice cream cones. In 1928 the profits from all Howard Johnson ice cream sales totaled $240,000.

Emboldened, Howard Johnson decided to open a family restaurant in 1928. The restaurant, in Quincy, Massachusetts, enjoyed only a short-lived popularity and closed in 1929 at a loss of $45,000 for Johnson. The Quincy restaurant, however, was not an entire loss. In 1929 a family friend, Reginald Sprauge, wanted to open a restaurant on a nearby highway. Sprauge knew that Howard Johnson's name and ice cream would boost the restaurant's visibility and popularity. The two men entered into an agreement that stipulated the following: Johnson would allow Sprauge to use the Howard Johnson name. In return, Sprague agreed to pay Johnson a cash fee, to sell only Howard Johnson brand ice cream, and to allow Howard Johnson to set the standards for all foods served at the restaurant. It all made perfect sense for Johnson who, in light of his earlier debts and failed restaurant, could not obtain bank loans to start new restaurants himself.

This is generally viewed as the birth of the first U.S. franchise restaurant chain. Under this system, independent businessmen called licensees owned and operated the restaurants, not Howard Johnson or his company. The licensees had the right to use the Howard Johnson name, but they paid the start-up costs for their properties, including an initiation fee paid to the company. They also had to purchase their food and other products from the Howard Johnson company, which was the main method by which the Howard Johnson company made money on these ventures.

Johnson had no trouble finding other takers for his franchise system. By 1935 there were seven Howard Johnson restaurants in Massachusetts. In 1940 there were 135 restaurants that extended down along the East Coast as far as Florida. That same year Howard Johnson won a bid to put 24 restaurants along the Pennsylvania Turnpike, where he would maintain a restaurant monopoly until 1979. Howard Johnson favored well-traveled automobile routes for his restaurants, knowing that the increasing popularity of cars would draw people out of population centers onto the roads. He hired 27 architects to design new properties. The trademark buildings each had bright orange roof tiles (orange being the color most likely to be seen by motorists) and a New England-style cupola in bright blue topped with a weathervane. Howard Johnson maintained high standards—he devoted two days a week to conducting unannounced inspections. He institutionalized novelties like the children's portion to attract families. The company provided the chain restaurants with elements of guaranteed success and it continued to grow.

World War II (1939–1945) brought gasoline rationing, and by 1944 only 12 out of about 200 restaurants were still open. Some restaurants were converted to cafeterias for workers in war plants. After the war Johnson decided to build smaller restaurants, leaving behind the grand roadside mansions of the pre-war years. In the summer of 1947, the company was building 200 of these new restaurants, which would extend into the southeast and Midwest. By 1954 there were 400 Howard Johnsons in 32 states, and the company was also adding a motel business. Some of these were franchises, others were owned directly by the Howard Johnson company.

In 1959 Howard Johnson Senior turned the company's presidency over to his 26-year-old son, Howard Johnson Jr. The company's headquarters remained in Wollaston, but executive offices were moved to Rockefeller Center in New York City. The company continued to expand and in 1961, when its stock went public, there were 605 restaurants, 10 Red Coach Grills, 88 motor lodges, 17 manufacturing and processing plants, net sales of $95 million from 1960, and a net income of $2.3 million. Between 1961 and 1967 Howard Johnson Sr., his son, and his daughter sold around two million shares of stock for $1 billion. When Howard Johnson, Sr. retired as chief executive officer and executive treasurer in 1964, his company was the country's third largest food distributor, behind only the navy and the army.

Although the company continued to grow—becoming a coast-to-coast chain with properties in California in the mid 1960s and adding Ground Round restaurants in 1969, it was now facing new problems and competition. Holiday Inns, Ramada Inns, and Marriott hotels were becoming increasingly popular with people who once stayed at Howard Johnson's motor lodges. Howard Johnson restaurants were increasingly perceived to be out of date in terms of their looks and their frozen food, which compared poorly to McDonalds and Burger King fast food franchises. Management was accused of being too cheap to upgrade the company's image. The company responded by introducing 24 hour service in over 80 percent of company-owned (not licensees') restaurants. Also, soda fountains were replaced with cocktail lounges in 100 company-owned locations. Seating capacity was expanded; special menu promotions were added; and new properties were concentrated in population centers as opposed to major highways. Howard Johnson continued to have record high sales and share earnings.

In 1979 Imperial Group Ltd. of Great Britain bought Howard Johnson for $630 million. It liberated the past controls over restaurants and motels, allowing them to buy food from a variety of sources and not just from the Howard Johnson company. Imperial also offered new food and lodging packages, entrees, and low cholesterol breakfasts. To attract business travelers, Imperial offered corporate discounts. Licensees were given the choice of refurbishing their existing properties by 1987, with low-interest loans from the company, or losing their franchises. Imperial also started a new Plaza Hotel chain in 1983. It was midpriced and also geared toward business travelers, with restaurants and lounges, banquet and meeting rooms, and executive accommodations.

Despite its changes, Imperial was unsatisfied with Howard Johnson's performance and it sold the company to Marriott Corporation in 1985 for $314 million. Marriott divided the company, selling the franchise system and company-owned lodgings to Prime Motor Inns Inc. for $97 million. Prime assumed the company's $138 million debt but also took the Howard Johnson trade name and trademark. Both purchasing companies wanted to get rid of the independently owned properties after their franchise agreements expired.

This opened an interesting chapter in the company's history. To protect their interests, the franchisees threatened a class-action lawsuit against Marriott and Prime. In 1986 Franchise Associates, Inc., a company formed by the franchisees, won a perpetual exclusive license to the Howard Johnson name for restaurants in the United States, Panama, and the Bahamas. Franchise Associates, Inc. also obtained exclusive rights to use the trade name for Howard Johnson Signature Food Products and the free use of Howard Johnson recipes. By 1991 Franchise Associates owned and operated 85 of the 110 Howard Johnson restaurants.

The story of the lodging branch of the company took a different turn. In 1990 Prime sold its Howard Johnson lodging properties to an affiliate of Blackstone Group for $170 million. Blackstone renamed the Howard Johnson Franchise Systems subsidiary to Howard Johnson International Inc. in 1996. By the mid-1990s Howard Johnson lodging was expanding to worldwide locations under the leadership of president and chief operating officer Eric Pfeffer. Its intent was to fill the gap in international lodging between high-priced hotels and youth hostels. The company was operating over 600 hotels worldwide, with international locations in Columbia, the United Arab Emirates, and India.

See also: Franchise