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By BRADLEY J. SUGARS
The McGraw-Hill Companies, Inc.Copyright © 2006 Bradley J. Sugars
All rights reserved.
PART 1 Humble Beginnings—The Birth of a New Way of Doing Business
Did you know?
The town of Evanston, Illinois, was known as being so religious-minded in the late nineteenth century that it was nicknamed Heavenston. They passed an ordinance forbidding the sale of ice cream sodas on Sundays. Not wanting to be shortchanged or to break the law, enterprising businessmen then started serving the ice cream with syrup instead of soda. These Sunday sodas, as they became known, were so popular that people started demanding them on other days of the week as well, and not just on Sundays. The town fathers then objected to the product being named after the Sabbath, so the businessmen changed the spelling to sundae.
The simple ice cream and milk shake may have a lot to answer for. You see, not only did they evolve into some of the most quintessential of all American icons, but also they had a lot to do with the birth of a whole new way of doing business. You see, they were at the center of the evolution of a new business system that became known as franchising.
This amazing story began back in 1925 with a man named Howard Johnson.
Who was Howard Johnson? Howard Dearing Johnson was one of those rare human beings who see their destiny, and have the drive, the talent, and the imagination to seize it. He set out to make a name for himself, and didn't rest until that name had become one of the world's great brands, and one of the best- known landmarks in travel.
He not only built one of the first great restaurant chains and one of the first midprice hotel chains, but also he pioneered many of the most successful food service and hospitality innovations. The franchisee ownership concept, the turnpike restaurant concept, the super premium ice cream concept, the "theme" restaurant concept, the commissary food distribution concept, the "America's Menu" concept, the quality motor lodge concept, the "Kids-Go-Free" family travel concept—they are all classic examples of the business and marketing genius of Howard Johnson.
It's a great American success story, and it all began at a small-town soda fountain.
In 1925, Howard Johnson borrowed $2000 to buy a small corner drugstore in Wollaston, Massachusetts. It sold candy, newspapers, and patent medicine, but Howard quickly noticed that the real action was at his old marble soda fountain. He figured that if he could invent a better-tasting ice cream cone, the world (or at least Wollaston) would beat a path to the Howard Johnson store.
He came up with a "secret formula" for vanilla and chocolate ice cream. The secret was, in fact, based on his mother's recipe for ice cream—with all natural ingredients and twice the normal butterfat content. It was an immediate sensation, so he quickly added other flavors. He had invented a super premium ice cream.
When summer came, he opened a beachfront ice cream stand, and that first summer he sold $60,000 worth of ice cream cones—at a nickel a cone. By 1928 he was selling $240,000 worth of ice cream cones. He kept adding flavors until he reached 28 varieties.
"I thought I had every flavor in the world," Howard remarked. "The 28 flavors became my trademark." He advertised it, truthfully, as "New England's Best Ice Cream," and his success reinforced what became the guiding principle of his business life: Quality sells.
Over the next few summers he added more beachfront stands, and decided to do for the lowly hot dog what he had done for the ice cream cone. Instead of using the normal hot dog stand method of slapping them on a greasy grill, and then wrapping them in stale buns, he invented the idea of clipping the frankfurters at both ends, notching them lengthwise, and then cooking them in pure creamery butter that would infuse into the meat. He used only the highest-quality meats (unheard of in those days) and lightly toasted, buttered fresh rolls. He had elevated the hot dog to connoisseur status, and it was to become one of the unforgettable joys of visiting Howard Johnson's restaurants for generations. Again, that little extra drive for quality would pay enormous dividends in the years to come.
His success was beginning to be noticed by others, and so he was able to convince some skeptical bankers to lend him enough money to open a restaurant in Quincy, Massachusetts. It was located in Quincy's first skyscraper—a 10-story granite art deco building that still looks magnificent today. This first Howard Johnson's restaurant featured fried clams, baked beans, chicken pies, those elegant frankfurters, and, of course, the now locally famous Howard Johnson's ice cream. He was restless to expand, but the stock market crashed, the Depression began, and the banks weren't lending money.
Then Howard had a remarkable idea, one that would change the course of American business enterprise. In 1935, he persuaded an acquaintance to open another "Howard Johnson's" restaurant in Orleans on Cape Cod under a franchise. Howard Johnson would design the space, create the menu, set the standards, and deliver the food and ice cream. The franchisee, under a license, would own the property and receive the bulk of the revenues. Howard, always a stickler for quality, demanded that the restaurant be run by his quality standards, or the contract was void and the franchisee would have to remove the Howard Johnson sign.
Seemingly overnight, out of the depths of the Depression, a phenomenal business success was born. By the following summer there were 17 Howard Johnson's restaurants. All were successful beyond anyone's wildest expectations. Paul Herbert, for instance, opened a 70-seat restaurant in Cambridge, putting up $10,000 as one-third the cost, the remainder to be financed over three years. Mr. Herbert hoped he would gross $60,000 a year, but he actually grossed $200,000 during the first 12 months. It was something of an understatement when he declared, "You're in a good business when you own a Howard Johnson franchise."
That sentiment was to be repeated by many hundreds of happy and wealthy franchisees. By the end of 1936 there were 39 more franchised restaurants.
Howard Johnson moved with lightning speed, for he had seen that the growing popularity of the automobile was sending millions of hungry Americans out on the road, and there were no decent places to satisfy their needs. He created the highway landmark concept, featuring the bright orange roof and the Simple Simon and the Pie Man road sign. By 1939 there were 107 Howard Johnson restaurants along East Coast highways generating revenues of $10.5 million.
All were run according to the "Howard Johnson Bible"—a set of strict standards of cleanliness, service, recipes, menu items, and quality (as well as interior and exterior design) that were developed and rigidly enforced by Howard Johnson himself. It was quite a voluminous bible, and it left nothing to chance. The author meticulously wrote every instruction on everything and anything that had to do with the running of his restaurants. He would allow no variation from one restaurant to the other. One chapter was devoted to the "Howard Johnson Waitresses—Your Appearance from Head to Toe." An entire page covered the subject of being courteous, including instructions on how to "assist customers with their wraps."
As the vast American highway system began to span the continent, millions of travelers, in their Ford "woody" station wagons and Chevy coupes, eagerly searched for the familiar orange roof and the big Howard Johnson sign with Simple Simon and the Pie Man on top.
They searched, and the kids clapped and cheered when they saw it, for they all knew exactly what they would find inside—the best fried clams anywhere, hot dogs grilled in butter and served on toasted rolls, old-fashioned chicken pot pie, generous turkey dinners with mashed potatoes, moist, rich brownies, games and puzzles for the kids, high chairs for the tots, and 28 flavors of the world's best ice cream. All served family style, by smiling waitresses in their prim, starched blue and orange dresses, all to be enjoyed in spanking clean, colorful surroundings.
Here was the nation's "Host of the Highway," where everyone invariably found a warm welcome, a familiar experience, and a special feeling that became part of growing up in America.
In less than 14 years, the dreamer who aspired to create a better ice cream cone now directed a mammoth franchise network of over 10,000 employees, with 170 restaurants, many serving a million and a half people a year.
And the heady beat went on.
The Pennsylvania, Ohio, and New Jersey turnpikes were built, and Howard Johnson bid and won exclusive rights to serve the hungry turnpike multitudes. There were 200 Howard Johnson restaurants on the morning that America woke up to three huge black letters on the front page: WAR!
With World War II came gas rationing, food stamps, and the end of pleasure trips. One by one, the restaurants were forced to close. By the summer of 1944, only 12 remained in business. Howard managed to stay barely afloat by serving commissary food to war workers and army recruits. But by the time America was celebrating V-J Day, Howard Johnson was working late into the nights getting ready for the travel boom and the highway expansion that he knew had to be coming.
He was about to make one of the biggest comebacks in business history. After the war, America turned its incredible energy to building houses in a new world called "suburbia," building big, powerful cars that seemingly everyone could afford, and building the endless interstate highway system that connected the cities and the people, coast to coast. It was a world custom-made for our "pioneer of the highways" Howard Johnson. And he didn't waste a minute.
By 1947, construction was under way or about to begin on 200 new Howard Johnson restaurants that would stretch across the Southeast and Midwest. These were slightly smaller buildings than the prewar originals, but Howard Johnson still provided over 700 items, including his famous fried clams, saltwater taffy, and 28 flavors of ice cream. By 1951, Howard Johnson sales totaled $115 million.
By 1954, there were 400 Howard Johnson restaurants in 32 states. About 10 percent were company-owned turnpike restaurants that were extremely profitable. The orange roof just kept spreading until it rivaled Coca-Cola's trademark as the most familiar icon in America. And countless memories of family travel were born under every orange roof.
In 1959, the company founder, who still made his headquarters in Wollaston, Massachusetts, decided it was time to turn the reins over to his son, 26-year-old Howard Brennon Johnson, who succeeded him as president. Young Howard, a graduate of Andover and Yale, told a reporter, "I knew from the age of five that I wanted to join the company. It was all we talked about at home. And my father was the kind of person you almost couldn't let down." The senior Howard Johnson remained as chairman and treasurer, though he was now able to enjoy his 60-foot yacht and his growing art collection. He died in 1972, at the age of 76.
According to the International Franchise Association, most analysts estimate that franchising companies and their franchisees accounted for $1 trillion in annual U.S. retail sales from 320,000 franchised small businesses in 75 industries.
Today, franchising is a highly regulated industry offering a great opportunity to people who truly want to realize their dreams and go into business for themselves.
Franchising is evolving; it's getting better conceptually and in reality. There are greater opportunities for wealth creation among both franchisees and franchisors today then ever before.
The United States has experienced an explosion in franchising in the last two decades. The primary reason for this explosion is that franchising is the most efficient business model for distributing goods and services, and advanced free-market economies reward efficiency above all.
The growth of franchising is inevitable, because franchising clearly offers aspiring, new business owners the best possible chance of succeeding with the least risk. It is estimated that within a decade or less, franchising will comprise over 50 percent of the retail economy and will enable hundreds of thousands to realize the dream of successful business ownership.
As world economies and the move toward free-market economies grow, new franchise concepts will come on the scene and the solid, well-managed, existing franchise companies will continue to grow.
In the United States, franchising generates $1.53 trillion in economic output, and one of every seven jobs in the nation's private-sector economy. A study conducted by PricewaterhouseCoopers for the International Franchise Association on the economic impact of franchised businesses found there are more than 765,000 franchised small businesses in the United States, generating more than 18 million jobs.
What Is Franchising?
Did you know?
Pizza Hut opened its first company-owned restaurant in Wichita, Kansas, in 1958.
Pizza Hut opened its first franchise unit in Topeka, Kansas, in 1959.
Pizza Hut opened its first restaurant in Australia in 1970.
Mention the word franchising to anyone and chances are they'll immediately think of names such as Subway, KFC, and McDonald's. Funny how the "big guys," the internationals, always seem to spring to mind first. Then, after some reflection, names like Harvey Norman, Kwik Kopy, and VIP Home Services will roll off their lips. These are the larger, home-grown, true blue, Aussie success stories that everyone is familiar with. And then, of course, there is the local lawn mowing service that is truly a part of the local suburban scene.
But franchising goes far deeper than that. It is alive and well and operating in almost every business category in the economy, from banking to petroleum supplies, and from legal services to dog washing. One could almost be forgiven for thinking that franchising is the very cornerstone of the economy!
So what is franchising? Does a succinct definition exist?
A franchise can be defined as:
Authorization given to somebody to sell or distribute a company's goods or services in a particular area.
A business or group of businesses set up or operated specifically in accordance with an authorization.
The territory or the limits within which the right to operate a business exists.
A professional sports team.
Well, modern-day sporting teams are big business, aren't they?
The word franchise is actually a very old one, originating back in the fourteenth century, believe it or not. It meant free, or to make free. Isn't that interesting? If you think about it, the meaning has changed over time. It could be argued that today, it has acquired almost the opposite meaning!
Franchising is not a business itself, but a way of doing business. It is essentially a marketing concept—an innovative method of distributing goods and services. It is also an extremely successful and rapidly growing aspect of the small business sector of many countries.
But like everything in life, it's not as simple as it first appears. Franchising can be used to describe a number of business models, the most common being business format franchising. But there are other models that are also dependent on franchise relationships. These include:
1. Manufacturer-Retailer: where the retailer as a franchisee sells the franchisor's product directly to the public, such as new motor vehicle dealership.
2. Manufacturer-Wholesaler: where the franchisee, under license, manufactures and distributes the franchisor's product, such as in soft drink bottling arrangements.
3. Wholesaler-Retailer: where the retailer as a franchisee purchases products for retail sale from a franchisor wholesaler, such as in hardware and automotive product stores.
4. Retailer-Retailer: where the franchisor markets a service or a product under a common name and standardized system through a network of franchisees. This is the classic business format franchise.
In essence, franchising is a relationship between the franchisor: (the company selling the franchise) and the franchisee: (the person buying the franchise). Franchisees usually pay a franchise fee as well as royalties for their franchise, but more about this later.
Because franchising is a unique way of doing business, and it covers a very diverse range of businesses—some big and some small—the only way of ensuring the system doesn't self-destruct is to create a peak industry body to oversee virtually every facet of its operation. In Australia, this body is the Franchise Council of Australia, which represents franchisees, franchisors, and service providers to the sector. Its objectives are:
To establish standards of international best practices in business format franchising for Australian franchise systems.
To provide information and education about franchising to existing and potential franchisees and franchisors.
To lobby state and federal governments on issues relevant to the sector.
To develop a vital, strong, and financially viable franchising sector.
To advance the interests of members in Australia and in special interest markets such as the International Franchise Community, Franchise Advisory Councils, Small Business Forums, and property leasing organizations (particularly shopping centers).
To continually foster among consumers, governments, and the business community, a broad-based understanding of the economic importance of having a strong franchising sector in Australia
To design efficient, identified, value-added services to members and assist them to be more effective in franchising.
As the peak body for franchising in Australia, the Franchise Council of Australia continues to add value to the businesses of its members by providing a range of services relevant to franchising and which represent good value. It is closely affiliated with franchising associations around the world, and is a founding member of the Asia Pacific Franchise Confederation. It is also a member of the World Franchise Council.
A Code of Conduct regulates the affairs of the industry, which is a mandatory industry code that regulates the conduct of participants in franchising towards other participants in franchising. In relation to franchise agreements concerning the retail marketing of motor fuel, it operates concurrently with the Petroleum Retail Marketing Franchise Act 1980. The Code covers everything from disclosure to conditions for franchise agreement and dispute resolution. The Australian Federal Government amended the Franchising Code of Conduct by introducing the Trade Practices (Industry Code Franchising Amendment) Regulations 2001. The Regulations were made by the Governor General on the 28th of June 2001 and commenced on the 1st of October 2001.
So now you have a general idea of what franchising is all about. And you should also realize that it is a complex field that has many variations and permutations—no two franchise systems are exactly the same.
Let's now take a closer look at the scope and scale of franchising and what it means to the economy. I'm talking big picture here. This should put franchising in perspective.
Excerpted from SUCCESSFUL FRANCHISING by BRADLEY J. SUGARS. Copyright © 2006 by Bradley J. Sugars. Excerpted by permission of The McGraw-Hill Companies, Inc..
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