Yes, President Obama, Howard Johnson “Built” Your Favorite Motels, And Private Equity Saved Them
Over the weekend, President Obama sent a message to all American entrepreneurs and potential entrepreneurs. The message was, “Nothing special about you!”
At a campaign event Friday evening in Roanoke, Va., Obama laid out his contempt for business men and women who somehow thought they earned their wealth. “If you’ve got a business — you didn’t build that,” he proclaimed to the crowd. “Somebody else made that happen.”
That line made the speech even more extreme than the earlier screed against self-made business people by Elizabeth Warren. Warren repeated the line that no one get rich “on his own,” but never went so far as to say that the entrepreneurs didn’t “build” their businesses or “make it happen” for themselves. Obama, by contrast, was basically saying, “Don’t you dare take any credit for your own business success.”
Both Obama’s and Warren’s attacks on entrepreneurs suffer from the same basic flaws. First, the existence of general government programs that future entrepreneurs may benefit from, such as roads and schools (as opposed to specific aid to entrepreneurs selected by the government, i.e. Solyndra), does not take away from entrepreneurs’ achievements or create any kind of individual debt. This is because –putting aside the question of whether these programs are wise — entrepreneurs already paid for them as taxpaying citizens before their success, and will pay even more afterwords, even without the tax hikes Obama is advocating.
And as for their obligation to “give something back,” as Obama put it in his speech,” they would not have gotten rich if they had not “given” their fellow citizens something that made their lives better, sometimes dramatically better. And to give the public these innovations, entrepreneurs take great risk — the risk of losing their wealth, their reputation, and their time and efforts.
Let’s take as an example the entrepreneurs who built and grew what seems to be the president’s favorite hotel-motel chain, Howard Johnson’s. In Virginia, Iowa, and Ohio, the Obama stump speech features a brief commercial for the iconic low-cost lodging chain. In-between bashing rival Mitt Romney’s record at his private equity firm Bain Capital and declaring his opposition to preventing tax hikes for the “wealthy,” Obama speaks fondly of the his childhood stays with his grandparents at the hotels and motels also known as Hojos. You’d think Howard Johnson’s were paying the Obama campaign for product placement from the way he speaks so fondly of staying there.
“We stayed at Howard Johnsons,” Obama recalled in Glen Allen, Va., on July 14, the day after he scolded entrepreneurs. “And the exciting thing for me was if there was any kind of swimming pool — it didn’t matter how big it was. And then after you spend the whole day swimming, then you’d go to the vending machine, get a soda and a bucket of ice.”
Whatever his motives, Obama is right to praise Hojos. Low-cost lodging chains are one of the greatest innovations of the American free-enterprise system, providing American families affordable places to stay during their travels that are also safe, clean and fun. And he isn’t the only one with fond memories of the chain that at its height of success in the 1960s included 265 motels and 770 restaurants. A recent episode of “Mad Men,” the popular AMC drama about an advertising agency in the 1960s, paid tribute to the Hojos lodging and restaurants and their unique flavors of ice cream such as orange sherbert.
But Obama’s praise of Hojos is laced with ironies that go beyond the contrast with the Obama family’s recent stays in luxurious settings, such as Martha’s Vineyard, as the president’s critics have frequently pointed out. The greater irony is that Howard Johnson was just such an entrepreneur who “made it happen” at great personal risk and never apologized for his wealth. And in the 1990s, it was private equity firms similar to Romney’s Bain Capital that rescued Howard Johnson’s and other struggling lodging chains, saving and creating thousands of jobs and preserving these travel options for middle-class families. And that Obama’s planned punitive tax hikes – from letting the tax rate cuts signed into law by George W. Bush expire to imposing a tax on “carried interest” for partnerships – would deal a mighty blow to everyone in the low-cost lodging industry from private equity to small business franchisees.
While Obama cites his childhood stays at the lodging chain as a way to relate to “regular folks,” the real story of Hojos is about the job creators who have made life immeasurably better for regular folks, and the regular folks who rise to be entrepreneurs.
Let’s start with the entrepreneur who founded the chain: Howard Deering Johnson. As noted by a recent “Leaders and Success” profile in Investor’s Business Daily (IBD), Johnson received more than his share of hard knocks. After serving in World War I, Johnson would come home to find the 1920s anything but “roaring,” According to IBD, “For the 20-something Johnson, that decade was bleak. His father, recently dead, had left him $40,000 in debt, which he voluntarily tried to pay off.”
In a move that seemed further digging himself into a hole, Johnson borrowed $500 to buy a drug store with a soda fountain in Quincy, Mass. Noting the recent technology of the continuous process freezer, making possible mass production of ice cream, Johnson added ice cream to the soda fountain, experimenting with multiple flavors. The soda fountain became so popular it edged out the rest of the drug store. By 1929, Johnson had paid off his debt and was making a tidy profit and was about to expand with a chain of restaurants.
Then, the Great Depression hit, greatly curbing Americans’ ability to dine out. But Johnson kept on creating menu items that were both tasty and affordable. He also made up for his lack of cash on hand by creating the first modern franchising system, charging a fee for use of the restaurant’s name, food, supplies and logo first on the East Coast and then across the country. According to the Milwaukee Journal, by 1950 there were 300 restaurants operated or franchised by Hojos.
That’s when Johnson decided to join with other entrepreneurs such as Holiday Inn’s Kemmons Wilson in branching into low-cost hotels and motels. And it was this innovation that created so many enjoyable family vacations etched in memories such as those of the president. Before Holiday Inn, Hojos, and other chains like Best Western, families had to take their chances at roadside inns of varying quality. But once chains like Hojos became widespread, families knew they could travel anywhere and find a clean room in a motel that even had amenities like a pool.
Lodging chains like Hojos didn’t just fill a void for working-class families, as President Obama is leading his audience to believe. Middle-class and even wealthy families would stay at these facilities overnight on the way to destinations like Disneyland or a vacation resort, or as part of a longer trip. As radio talk show host Rush Limbaugh observes of Obama’s childhood vacations, even if he and his grandparents were staying at Hojos, “You have to have some money to take a month-long vacation, leave Hawaii — we think that’s where he grew up — then go to the mainland and travel around on trains and buses and so forth.”
The bottom line is because of the existence of Hojos and similar lodging chains, Obama’s grandparents and others were able to take memorable vacations with their children and grandchildren and in turn create jobs for thousands of Americans in the hospitality industry. But Hojos and other low-cost chains fell on hard times during recent recessions of recent decades. Luckily, new types of entrepreneurs walked in and continued the job Howard Johnson started.
In 1990, years after Hojos had been sold off by Howard Johnson’s family, the parent company was on the brink of bankruptcy, as were other hotel chains. Henry Silverman, head of the leveraged buyout fund at the private equity firm Blackstone, swooped in and bought the franchising rights to Hojos. Grateful franchisees paid Silverman to continue to carry the Hojos names, and he got some new comers as well. As Fortune magazine explained, “in times of trouble, many independent motel owners switch to franchise operations in hopes that a brand name will bring in more business.”
In getting into the low-cost hotel business, Silverman was taking a similar risk to that of Howard Johnson himself decades earlier. “Throwing hundreds of millions of dollars at a bankrupt industry was not popular with most of Silverman’s new partners at Blackstone,” Fortune noted. But soon, “earnings rose sharply,” as Silverman “had created a growth company out of the ruins of a stagnant, cyclical industry.”
Today, there are 475 Hojos hotels and motels in 13 countries. The Howard Johnson’s franchising system is part of the publicly held firm Wyndham Worldwide, which may also bring back some Hojo restaurants with the famed orange sherbert celebrated in “Mad Men.” In the wake of the current recession, Blackstone, the private equity firm that boosted Hojos 20 years ago, has again given a boost to the lodging industry and its thousands of jobs by purchasing hotel chains from Hilton Worldwide (including the mid-priced hotels brand under the firm such as Hampton Inn) and Extended Stay Hotels.
So no, President Obama, government and “society” didn’t build the Hojos you supposedly love. It was built by courageous entrepreneurs Johnson and later Silverman who earned every penny of their riches by providing thousands of jobs and bringing such enjoyable memories to your family and thousands of others. The question is, will your tax and regulatory policy enable entrepreneurs to keep getting rich by enriching all of our lives?