Buffalo Wild Wings 2009 Annual Report Download - page 13

T. Marzetti Company produces our signature sauces, and they maintain sufficient inventory levels to ensure consistent supply
to our restaurants. We have a confidentiality agreement with Marzetti which prevents our sauces from being supplied to, or
manufactured for, anyone else.
Chicken wings are an important component of our cost of sales. We work to counteract the effect of the volatility of chicken
wing prices, which can affect our cost of sales and cash flow, with the introduction of new menu items, effective marketing
promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the
severity of cost increases and fluctuations. We currently purchase our chicken wings at market price. If a satisfactory long-term
pricing agreement for chicken wings were to arise, we would consider locking in prices to reduce our price volatility.
Restaurant Franchise Operations
Our concept continues to attract a strong group of franchisees, many of whom have substantial prior restaurant operations
experience. Our franchisees execute a separate franchise agreement for each restaurant opened, typically providing for a 20-year initial
term, with an opportunity to enter into a renewal franchise agreement subject to certain conditions. The initial franchise fee for a
single restaurant is $42,500. If a franchisee signs an area development agreement, the initial franchise fee is $42,500 for the first
restaurant and $30,000 for each subsequent restaurant. If the franchisee is an existing franchisee who has operated a restaurant for a
minimum of one year and is signing an area development agreement, the initial franchise fee is $30,000 for the first restaurant and
$25,000 for each subsequent restaurant. If the franchisee signs a franchise agreement for a restaurant whose trade area is wholly within
the designated area of another restaurant they own, the franchisee will only reimburse the costs incurred by us in assisting with the
restaurant opening, and need not pay an initial franchise fee.
Franchisees also pay us a royalty fee of 5.0% of their restaurant sales. Franchise agreements typically allow us to assess
franchisees an advertising fee in the amount of 3.5% of their restaurant sales, of which 3.0% was contributed to our Advertising Fund
in 2009 and the remaining 0.5% was spent directly by the franchisee in the applicable local market. Our current form of franchise
agreement permits us to increase the required contribution to the Advertising Fund by 0.5% once every three years. The amount
contributed to the Advertising Fund increased from 2.5% to 3.0% on December 26, 2005 and is not expected to increase in 2010.
All of our franchise agreements require that each franchised restaurant be operated in accordance with our defined operating
procedures, adhere to the menu established by us, meet applicable quality, service, health and cleanliness standards and comply with
all applicable laws. We ensure these high standards are being followed through a variety of means including mystery shoppers and
announced and unannounced quality assurance inspections by our franchise consultants. We may terminate the franchise rights of any
franchisee who does not comply with our standards and requirements. We believe that maintaining superior food quality, an inviting
and energetic atmosphere and excellent guest service are critical to the reputation and success of our concept; therefore, we
aggressively enforce the contractual requirements of our franchise agreements.
The area development agreement establishes the number of restaurants that must be developed in a defined geographic area
and the deadlines by which these restaurants must open. For area development agreements covering three to seven restaurants,
restaurants are often required to open in approximately 12-month intervals. For larger development agreements, the interval is
typically shorter. The area development agreement can be terminated by us if, among other reasons, the area developer fails to open
restaurants on schedule.
We work hard to maintain positive and productive relationships with our franchisees. In 2005, we formed the Buffalo Wild
Wings Leadership Council, which is an advisory board made up of six franchisees elected by their peers that meets three times a year
with our senior leaders.
Information Technology
We utilize a standard point-of-sale system in all of our company-owned restaurants which is integrated to our central offices
through a secure, high-speed connection. Visibility to sales, cost of sales, labor and other operating metrics is provided to restaurant
management through web-based decision support and analysis tools. Franchisees are required to report sales on a daily basis through
an on-line reporting network and submit their restaurant-level financial statements on a quarterly and annual basis. Based on
custom-developed software as well as industry-specific applications, this technology allows us to monitor business performance and
optimizes food and labor costs.
Source: BUFFALO WILD WINGS INC, 10-K, February 26, 2010 Powered by Morningstar® Document Research℠