IHOP 2010 Annual Report Download - page 28

products to these area licensees and in certain instances their sub-franchisees. We treat the revenues
from our area licensees as franchise operations revenues for financial reporting purposes.
Franchise Operations
IHOP’s Operations Department is charged with ensuring that high operational standards are met
at all times by our franchisees. Operating standards have been developed in consultation with
franchisees and are detailed in the ‘‘IHOP Manual of Standard Operating Procedures.’’ Due to cultural
and regulatory differences we may have different requirements for restaurants opened outside of the
United States.
We highly value good franchisor/franchisee relations and strive to maintain positive working
relationships with our franchisees. We sponsor the IHOP Franchise Board of Advisors, an elected body
of IHOP franchisees formed to advise and assist IHOP management with respect to a broad range of
matters relating to the operation of IHOP restaurants. The group meets with IHOP management at
least three times a year to discuss operational issues, marketing matters, development and construction
issues, information technology and many other topics.
Company-Operated Restaurants
Company-operated IHOP restaurants are essentially comprised of our IHOP-owned restaurants in
the Cincinnati, Ohio market. In addition, from time to time, franchise restaurants may be returned by
franchisees to us and these restaurants may be operated by us for an indefinite period until they can be
refranchised. As of December 31, 2010, there were a total of 11 company-operated restaurants, 10 of
which were located in the Cincinnati market. One was a former franchise restaurant being operated
temporarily by us as of December 31, 2010 that was refranchised in January 2011.
We utilize the company-operated restaurants in the Cincinnati market primarily for testing of new
remodel designs, new menu items and equipment, new operational procedures and new marketing,
brand and design elements.
Restaurant Development
The Current Business Model relies on franchisees to obtain their own financing to develop IHOP
restaurants. We review and approve the franchisees’ proposed sites but do not contribute capital or
become the franchisees’ landlord. Under the Current Business Model, substantially all new IHOP
restaurants are financed and developed by franchisees or area licensees. In 2010, our franchisees and
area licensees financed and developed 64 new restaurants. We do not currently intend to build
additional company-operated IHOP restaurants in the Cincinnati market.
New IHOP restaurants are only developed after a stringent site selection process. All restaurant
development is approved by the Franchise Review Committee comprised of senior management. We
expect our franchisees to add restaurants to the IHOP system in major markets where we already have
a core guest base. We believe that concentrating growth in existing markets allows us to achieve
economies of scale in our supervisory and advertising functions. We also look to have our franchisees
strategically add restaurants in new markets in which we currently have no presence or our presence is
limited.
Future Restaurant Development
In 2010, IHOP entered into 17 franchise development agreements for the development of
67 IHOP restaurants. As of December 31, 2010, we had signed commitments and options from
franchisees to build 332 IHOP restaurants over the next 19 years, comprised of 12 restaurants under
single-store or non-traditional development agreements, 188 restaurants under multi-store development
12