IHOP 2010 Annual Report Download - page 21

largest casual dining concept in the world, in terms of number of restaurants and market share(1). As of
December 31, 2010, franchisees operated 1,701 of these restaurants and 309 restaurants were company-
operated. The restaurants were located in 49 states, one United States territory and 16 countries
outside of the United States.
Each Applebee’s restaurant is designed as an attractive, friendly, neighborhood establishment
featuring high quality, moderately-priced food, alcoholic and non-alcoholic beverage items, table service
and a comfortable atmosphere. Applebee’s restaurants appeal to a wide range of customers including
young adults, senior citizens and families with children.
Franchising
Generally, franchise arrangements for Applebee’s restaurants consist of a development agreement
and separate franchise agreements for each franchised restaurant. Development agreements grant to
the franchise developer the exclusive right to develop Applebee’s restaurants in a designated
geographical area over a specified period of time. The term of a domestic development agreement is
generally 20 years. The development agreements typically provide for an initial development schedule
of one to five years as agreed upon by the Company and the franchisee. At or shortly prior to the
completion of the initial development schedule or any subsequent supplemental development schedule,
the Company and the franchisee generally execute supplemental development schedules providing for
the development of additional Applebee’s restaurants in the franchise developer’s exclusive territory.
Prior to the opening of each new Applebee’s restaurant, the franchisee and the Company enter
into a separate franchise agreement for that restaurant. Our standard Applebee’s franchise agreement
provides for an initial term of 20 years and permits renewal for up to an additional 20 years upon
payment of an additional franchise fee. Our current standard Applebee’s franchise arrangement calls
for an initial franchisee fee of $35,000 and a royalty fee equal to 4% of the restaurant’s monthly net
sales. We have agreements with a majority of our franchisees for Applebee’s restaurants opened before
January 1, 2000 which provide for royalty rates of 4% and extend the initial term of the franchise
agreements until 2020. The terms, royalties and advertising fees under a limited number of franchise
agreements and other franchise fees under older development agreements vary from the currently
offered arrangements.
We currently require domestic franchisees of Applebee’s restaurants to contribute 2.75% of their
gross sales to a national advertising fund and to spend at least 1% of their gross sales on local
marketing and promotional activities. Under most Applebee’s franchise agreements, we have the ability
to increase the amount of the required combined contribution to the national advertising fund and the
amount required to be spent on local marketing and promotional activities to a maximum of 5% of
gross sales.
We are pursuing a strategy to transition from our current 85% franchised system to an
approximately 98% franchised system. In order to accomplish this strategy we plan to franchise
substantially all of the company-operated Applebee’s restaurants while retaining restaurants in one
company market in Kansas City. This heavily franchised business model is expected to require less
capital investment, improve margins, and reduce the volatility of cash flow performance over time,
while also providing cash proceeds from the franchising of the restaurants for the retirement of debt.
As of December 31, 2010, we had 73 franchise groups, including 30 international franchise groups.
We have generally selected franchisees that are experienced multi-unit restaurant operators. Many
franchisees have operated or concurrently operate other restaurant concepts. Our franchisees operate
Applebee’s restaurants in 49 states in the United States, one United States territory and 16 countries
(1) Source: Nation’s Restaurant News, ‘‘Special Report: Top 100,’’ June 28, 2010 (based on U.S.
system-wide sales in the casual dining category).
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