IHOP 2011 Annual Report Download - page 26

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our company-operated restaurant marketing expenditures on local marketing in areas with company-operated restaurants.
We currently require domestic franchisees of Applebee's restaurants to contribute 2.75% of their gross sales to the national
advertising fund and to spend at least 1% of their gross sales on local marketing and promotional activities. Under the current
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.
Supply Chain
Maintaining high food quality, system-wide consistency and availability is the central focus of our supply chain program.
We establish quality standards for products used in the restaurants, and we maintain a list of approved suppliers and distributors
from which we and our franchisees must select. We periodically review the quality of the products served in our domestic restaurants
in an effort to ensure compliance with these standards. Due to cultural and regulatory differences, we may have different
requirements for restaurants opened outside of the United States.
IHOP
We develop, franchise and operate restaurants in the family dining category of the restaurant industry under the names IHOP
and International House of Pancakes. IHOP is the largest family dining brand in the world in terms of system-wide sales (2) . As of
December 31, 2011, there were a total of 1,550 IHOP restaurants of which 1,369 were subject to franchise agreements, 166 were
subject to area license agreements and 15 were company-operated restaurants. Franchisees and area licensees are independent
third parties who are licensed by us to operate their restaurants using our trademarks, operating systems and methods and offer a
broad range of entrées, appetizers, desserts and non-alcoholic beverages specified by IHOP, including our award-winning pancakes.
We own and operate ten IHOP restaurants in the Cincinnati market area primarily for testing new remodel designs, new menu
items and equipment, new operational procedures systems and new marketing, brand and design elements. In addition, from time
to time we may also operate, on a temporary basis until refranchised, IHOP restaurants that we reacquire for a variety of reasons
from IHOP franchisees. There were five such restaurants included as company-operated restaurants as of December 31, 2011,
three of which were subsequently refranchised in January, 2012. IHOP restaurants are located in all 50 states of the United States,
the District of Columbia, Puerto Rico and the United States Virgin Islands and internationally in Canada, Mexico and Guatemala.
IHOP restaurants feature full table service and high quality, moderately priced food and beverage offerings in an attractive
and comfortable atmosphere. Although the restaurants are best known for their award-winning pancakes, omelets and other
breakfast specialties, IHOP restaurants offer a variety of lunch, dinner and snack items as well. IHOP restaurants are open throughout
the day and evening hours. Approximately half of our IHOP restaurants operate 24 hours a day, seven days a week and nearly 200
additional restaurants operate 24 hours a day for some portion of the week.
Franchising
Franchised restaurants include both company-financed and franchisee-financed development. As discussed in greater detail
below, under the Company's business model as it was in effect prior to 2003 (the "Previous Business Model"), the Company
developed a substantial majority of all IHOP restaurants with the intention of leasing them to franchisees. Under the strategy
adopted in January 2003 (the "Current Business Model"), substantially all new IHOP restaurants are developed by franchise
developers with the intention of operating them as franchised restaurants.
Current Business Model
Under our Current Business Model, a potential franchisee first negotiates and enters into either a single-store development
agreement or a multi-store development agreement with the Company and, upon completion of a prescribed approval procedure,
is primarily responsible for the development and financing of one or more new IHOP franchised restaurants. In general, we do
not provide any financing with respect to the franchise fee or otherwise under the Current Business Model. The franchise developer
uses its own capital and financial resources along with third-party financial sources arranged for by the franchise developer to
purchase or lease a restaurant site, build and equip the business and fund its working capital needs. The principal terms of the
franchise agreements entered into under the Previous Business Model and the Current Business Model, including the franchise
royalties and the franchise advertising fees, are substantially the same except with respect to the terms relating to the franchise
fee. Of the 1,535 IHOP restaurants subject to franchise and area license agreements as of December 31, 2011, a total of 453 operate
under the Current Business Model.
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(2) Source: Nation's Restaurant News, "Special Report: Top 100," June 27, 2011 (based on U.S. system-wide sales in the family dining category).