IHOP 2012 Annual Report Download - page 34

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share of Applebee's and IHOP in each of their respective categories. Such increased competition could have a material adverse
effect on the financial condition and results of operations of Applebee's or IHOP restaurants in affected markets. Applebee's and
IHOP restaurants also compete with other restaurant chains for qualified management and staff, and we compete with other
restaurant chains for available locations for new restaurants. Applebee's and IHOP restaurants also face competition from the
introduction of new products and menu items by other restaurant chains, as well as substantial price discounting, and are likely
to face such competition in the future. The future success of new products, initiatives and overall strategies is highly difficult to
predict and will be influenced by competitive product offerings, pricing and promotions offered by competitors. Our ability to
differentiate the Applebee's and IHOP brands from their competitors, which is in part limited by the advertising monies available
to us and by consumer perception, cannot be assured. These factors could reduce the gross sales or profitability at Applebee's or
IHOP restaurants, which would reduce the revenues generated by company-owned restaurants and the franchise payments received
from franchisees.
Our business strategy may not achieve the anticipated results. We expect to continue to apply a business strategy that
includes, among other things, (i) operation of a 99% franchised restaurant system; (ii) the maintenance of a purchasing cooperative
that procures products and services for our Applebee's and IHOP restaurants; (iii) the possible introduction of new restaurant
concepts; and (iv) the continued implementation of a shared service model across the brands for various functions, including legal,
human resources, communications, finance and centers of excellence in development and operations support. However, the
Applebee's business is different in many respects from the IHOP business. In particular, the Applebee's restaurants are part of the
casual dining segment of the restaurant industry whereas the IHOP restaurants are part of the family dining segment, and the
Applebee's business is larger, distributed differently across the United States and appeals to a somewhat different segment of the
consumer market. Therefore, there can be no assurance that the business strategy we apply to the Applebee's business will be
suitable or will achieve similar results to the application of such business strategy to the IHOP system. The actual benefit from
the refranchising of the Applebee's company-operated restaurants is uncertain and may be less than anticipated. Finally, our
operational improvement initiatives or purchasing initiatives may not be successful or achieve the desired results. In particular,
there can be no assurance that the existing franchisees or prospective new franchisees will respond favorably to such initiatives.
Our performance is subject to risks associated with the restaurant industry. The sales and profitability of our restaurants
and, in turn, payments from our franchisees may be negatively impacted by a number of factors, some of which are outside of our
control. The most significant are:
• declines in comparable-restaurant sales growth rates due to: (i) failing to meet customers' expectations for food
quality and taste or to innovate new menu items to retain the existing customer base and attract new customers;
(ii) competitive intrusions in our markets; (iii) opening new restaurants that cannibalize the sales of existing
restaurants; (iv) failure of national or local marketing to be effective; (v) weakening national, regional and local
economic conditions; and (vi) natural disasters or adverse weather conditions.
• negative trends in operating expenses such as: (i) increases in food costs including rising commodity costs;
(ii) increases in labor costs including increases mandated by minimum wage and other employment laws, immigration
reform, the potential impact of union organizing efforts, increases due to tight labor market conditions and the Patient
Protection and Affordable Care Act; and (iii) increases in other operating costs including advertising, utilities, lease-
related expenses and credit card processing fees;
• the inability to open new restaurants that achieve and sustain acceptable sales volumes;
• the inability to increase menu pricing to offset increased operating expenses;
• failure to effectively manage further penetration into mature markets;
• negative trends in the availability of credit and in expenses such as interest rates and the cost of construction materials
that will affect our ability or our franchisees' ability to maintain and refurbish existing restaurants;
• the inability to manage our company-owned restaurants due to unanticipated changes in executive management, and
availability of qualified restaurant management, staff and other personnel; and
• the inability to operate effectively in new and/or highly competitive geographic regions or local markets in which
we or our franchisees have limited operating experience.
A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current
restaurants may adversely affect our sales and results of operations. The success of our restaurants depends in large part on
their locations. As demographic and economic patterns change, current locations may not continue to be attractive or profitable.
Potential declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those
neighborhoods could result in reduced sales in those locations. In addition, desirable locations for new restaurant openings or for
the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a
new restaurant or relocation. Additionally, restaurant revitalization initiatives may not be completed as and when projected.