Burger King 2012 Annual Report Download - page 19

Table of Contents

The support of our franchisees is critical for the success of our marketing programs and any new capital intensive or other strategic initiatives we seek
to undertake, and the successful execution of these initiatives will depend on our ability to maintain alignment with our franchisees. While we can mandate
certain strategic initiatives through enforcement of our franchise agreements, we need the active support of our franchisees if the implementation of these
initiatives is to be successful. In addition, our efforts to build alignment with franchisees may result in a delay in the implementation of our marketing and
advertising programs and other key initiatives. Our franchisees may not continue to support our marketing programs and strategic initiatives. The failure of
our franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could
materially harm our business, results of operations and financial condition.


We receive revenues in the form of royalties and fees from our franchisees. As a result, our operating results substantially depend upon our franchisees’
sales volumes, restaurant profitability and financial viability. However, our franchisees are independent operators and we cannot control many factors that
impact the profitability of their restaurants. Pursuant to the franchise agreements, we can, among other things, mandate menu items, signage, equipment,
hours of operation and value menu, establish operating procedures and approve suppliers, distributors and products. However, the quality of franchise
restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in
a manner consistent with our standards and requirements, such as our cleanliness standards, or standards set by federal, state and local governmental laws
and regulations. In addition, franchisees may not hire and train qualified managers and other restaurant personnel. While we ultimately can take action to
terminate franchisees that do not comply with the standards contained in our franchise agreements and our Manual of Operating Data, we may not be able to
identify problems and take action quickly enough and, as a result, our image and reputation may suffer, and our franchise revenues and results of operations
could decline.
If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, which could result in, among other things,
restaurant closures, delayed or reduced payments to us of royalties, advertising contributions and rents, and an inability for such franchisees to obtain
financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all. Furthermore, franchisees may not be willing or able
to renew their franchise agreements with us due to low sales volumes, or high real estate costs, or may be unable to renew due to the failure to secure lease
renewals. If our franchisees fail to renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our
business and operating results.

Internationally, we are moving to a business model in which we enter into relationships with “master franchisees” to develop and operate restaurants in
defined geographic areas. Master franchisees are granted exclusivity rights with respect to entire countries or, in some cases, multiple countries. The
termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation of the
development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets. We may not be able to find another
operator to resume development activities in such market or markets. Any such delay, discontinuation or interruption could materially and adversely affect our
business and operating results.

In certain of our international markets, we enter into agreements with master franchisees that permit the master franchisee to develop and operate
restaurants in defined geographic areas. As permitted by our master
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Source: Burger King Worldwide, Inc., 10-K, February 22, 2013 Powered by Morningstar® Document Research℠
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