IHOP 2010 Annual Report Download - page 37

We may experience shortages or interruptions in the supply or delivery of food. Our franchised and
company-operated restaurants are dependent on frequent deliveries of fresh produce, groceries and
other food and beverage products. This subjects us to the risk of shortages or interruptions in food and
beverage supplies which may result from a variety of causes including, but not limited to, shortages due
to adverse weather, labor unrest, political unrest, terrorism, outbreaks of food-borne illness, disruption
of operation of production facilities or other unforeseen circumstances. Such shortages could adversely
affect our revenue and profits. The inability to secure adequate and reliable supplies or distribution of
food and beverage products could limit our ability to make changes to our core menus or offer
promotional ‘‘limited time only’’ menu items, which may limit our ability to implement our business
strategies. Our restaurants bear risks associated with the timeliness of deliveries by suppliers and
distributors as well as the solvency, reputation, labor relationships, freight rates, prices of raw materials
and health and safety standards of each supplier and distributor. While the supply of pancake and
waffle dry mixes is generally available, we currently obtain our pancake and dry mixes from a single
supplier. Other significant risks associated with our suppliers and distributors include improper
handling of food and beverage products and/or the adulteration or contamination of such food and
beverage products. Disruptions in our relationships with suppliers and distributors may reduce the
profits generated by company-operated restaurants or the payments we receive from franchisees.
Changing health or dietary preferences may cause consumers to avoid Applebee’s and IHOP’s products in
favor of alternative foods. The food service industry as a whole rests on consumer preferences and
demographic trends at the local, regional, national and international levels, and the impact on
consumer eating habits of new information regarding diet, nutrition and health. Our franchise
development and system-wide sales depend on the sustained demand for our products, which may be
affected by factors we do not control. Changes in nutritional guidelines issued by the United States
Department of Agriculture, issuance of similar guidelines or statistical information by federal, state or
local municipalities, or academic studies, among other things, may impact consumer choice and cause
consumers to select foods other than those that are offered by Applebee’s or IHOP restaurants. We
may not be able to adequately adapt Applebee’s or IHOP restaurants’ menu offerings to keep pace
with developments in consumer preferences, which may result in reductions to the revenues generated
by our company-operated restaurants and the franchise payments we receive from franchisees.
Factors outside our control may harm our brands’ reputation. The success of our restaurant business
is largely dependent upon brand recognition and the strength of our franchise systems. The continued
success of our company-operated restaurants and our franchisees will be directly dependent upon the
maintenance of a favorable public view of the Applebee’s and IHOP brands. Negative publicity
(e.g., crime, scandal, litigation, on-site accidents and injuries or other harm to customers) at a single
Applebee’s or IHOP location can have a substantial negative impact on the operations of all
restaurants within the Applebee’s or IHOP system. Multi-unit food service businesses such as ours can
be materially and adversely affected by widespread negative publicity of any type, but particularly
regarding food quality, food-borne illness, food tampering, obesity, injury or other health concerns with
respect to certain foods, whether or not accurate or valid. The risk of food-borne illness or food
tampering cannot be completely eliminated. Any outbreak of food-borne illness or other food-related
incidents attributed to Applebee’s or IHOP restaurants or within the food service industry or any
widespread negative publicity regarding the Applebee’s or IHOP brands or the restaurant industry in
general could harm our reputation. Although the Company maintains liability insurance, and each
franchisee is required to maintain liability insurance pursuant to its franchise agreements, a liability
claim could injure the reputation of all Applebee’s or IHOP restaurants, whether or not it is ultimately
successful.
We and our franchisees are subject to a variety of litigation. We and our franchisees are subject to
complaints or litigation from guests alleging illness, injury or other food quality, food safety, health or
operational concerns. We and our franchisees are also subject to ‘‘dram shop’’ laws in some states
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