IHOP 2012 Annual Report Download - page 26

8
We own and operate ten IHOP restaurants in the Cincinnati market area primarily to test new remodel programs, operating
procedures, products, technology, cooking platforms and service models. 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 two such restaurants included as company-operated restaurants as of December 31, 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, the Dominican Republic, Guatemala, Mexico and the United Arab Emirates.
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 approximately
200 additional restaurants operate 24 hours a day for some portion of the week.
Menu
The IHOP menu offers a large selection of high-quality, moderately priced products designed to appeal to a broad base of
customers. These include a wide variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak, sandwiches, salads
and lunch and dinner specialties. IHOP restaurants offer special Under 600 Calories items for children. Most restaurants offer
special items for seniors at reduced prices. In recognition of local tastes, IHOP restaurants typically offer a few regional specialties
that complement the IHOP core menu. Our Food and Beverage Innovation Department works together with franchisees and our
Marketing Department to develop new menu and promotion ideas. These new items are thoroughly evaluated in our test kitchen
and in limited regional tests with consumers, including operational tests, before being introduced throughout the system through
core menu updates. The purpose of adding new items and improving existing items is to broaden the appeal of our food to our
guests and continually give them new reasons to return to our restaurants. These efforts are based on consumer research, feedback
and benchmarking, which help to identify opportunities to improve existing items as well as for developing new items.
The IHOP menu is being redesigned and simplified to capture the essence of our iconic brand. We plan to provide our guests
with the best combination of value that aligns with our mission of being their first choice for breakfast and their destination for
items "only IHOP can make." When the new menu is introduced in 2013, it will feature fewer items overall, and will include core
items, such as our signature pancakes, in addition to platforms comprised of unique offerings that will be updated on a regular
basis, similar to the strategy we successfully applied at Applebee's.
Franchising
Franchised restaurants include both company-financed and franchisee-financed development. 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. Under our business model as it was in effect prior to 2003 (the "Previous
Business Model"), we developed a substantial majority of all IHOP restaurants with the intention of leasing them to franchisees.
More than half of our current franchise restaurants were developed under the Previous Business Model.
Current Business Model
Under our Current Business Model, a potential franchisee first negotiates and enters into either a single-restaurant development
agreement or a multi-restaurant development agreement with us 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 1,404 IHOP restaurants subject to franchise agreements as of December 31, 2012, a total of 495 operate under the
Current Business Model.