| || |
Supply Chain Management of Howard Johnson International, Inc. -
January 10th, 2011
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.
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.
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 HoJo 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 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.