Howard Johnson Int?l Puts Cap On Franchise Fees

PARSIPPANY, NJ? Howard Johnson International has put a cap on its franchise fees for new licensees, a move that may cause a paradigm shift in the way franchisors do business. The cap works like this. New franchisees that score a ?B? on quality inspection ratings on entering the system become eligible for a capped fee system that starts at $525 per room per year. Once that cap is reached, franchisees pocket the rest of the earnings from those rooms for the rest of the year. The capping system, which has been put in place to spur new business for Howard Johnsonand is being offered to new franchisees only, replaces a system that charges a range of a percentage of gross room revenues per year. ?The program is designed to stimulate an increase in growth,? said Mary Mahoney, president/CEO of Howard Johnson. Mahoney said she hopes the program, which will be in place for the next 12 months, will encourage existing franchisees to sign up additional properties under the Howard Johnson flag, as well as create growth in key feeder markets where Howard Johnson does not have a presence. The goal is to sign 200 new franchisee agreements this year, effectively doubling the number of contracts Howard Johnson executes per year. Howard Johnson currently has over 500 hotels open worldwide. ?This totally changes the way we do business,? she said. Mahoney said the program, designed by the Howard Johnson sales team, with input from franchisees on the Howard Johnson board, is unique to Howard Johnson and is not a Cendant Corp.-wide program. The new program further offers a satisfaction guarantee program to those who maintain that ?B? rating. It allows a franchisee who, at the end of 24 months is not satisfied, to give at least 10 months notice to leave the system at the end of the property?s third year of operation without paying liquidated damages. In most cases, franchisees who leave any franchisor program before the date indicated in the franchise contract, must pay liquidated damages to satisfy the franchise fees for the entire length of the contract. In the new Howard Johnson program, however, the ability to leave the system free and clear goes away if the franchisee does not maintain that ?B? score and rectify it within a certain cure period. In fact, the franchise fee cap not only goes away, a more onerous franchisee fee based on gross room revenue is then instilled. ?If they fall below the 4.25 [B rating], they have 30 days to cure a default,? said Mahoney. ?If they fail to cure the default, franchise fees increase, and they lose their two-year window to leave. Fees go to 7%, 7.5%, to 8%,? she said. ?We have a big hammer in place. We are armed to monitor quality,? she said. Mahoney said the capped system will bring about a big savings for franchisees, in some cases, as much as 40%. ?Every franchise company has a step-up rate that goes up to 8.5%. The typical average is 7.5% to 8.5% of room revenues,? she noted. The program also offers new franchisees who maintain that 4.25 rating interest free loans after six months. It also gives them access to Howard Johnson?s mentor program, which lets franchisees interested in improving their business visit other franchised properties that have achieved high QA ratings. What of existing Howard Johnson franchisees who may want to sign up with this new program? Mahoney said those whose licenses are expiring can also sign up for the new deal, or choose to negotiate points under their existing plan. Or, they can simply re-sign with the deal they currently have in place.