IHOP 2012 Annual Report Download - page 35

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A failure to address cost pressures, including rising costs for labor, food commodities and utilities used by our and our
franchisees' restaurants, and a failure of the Co-op to effectively deliver cost management activities and achieve economies of
scale in purchasing, may compress our franchisees' operating margins and adversely affect our and our franchisees' business
results. Our and our franchisees' business results depend highly on the ability to anticipate and react to changes in the availability
and pricing of food commodities, utilities, and other related costs over which we may have little control. Operating margins for
our and our franchisees' restaurants are subject to increases in labor costs mandated by health care laws, employment laws,
immigration reform, union organizing efforts and labor market conditions. In addition, our and our franchisees' operating margins
are subject to changes in the pricing and availability of beef, pork, eggs, cheese, coffee and produce. We attempt to leverage our
size to achieve economies of scale in purchasing through the Co-op, but there can be no assurances that we can always do so
effectively. We are subject to the general risks of inflation. Restaurant operating margins are also affected by fluctuations in the
price of utilities such as electricity and natural gas, whether as a result of inflation or otherwise, on which the restaurants depend
for their energy supply. Our inability to anticipate and respond effectively to any of these cost pressures could have an adverse
effect on our business results.
We may experience shortages or interruptions in the supply or delivery of food and other products from third parties or
in the availability of utilities. Our franchised and company-operated restaurants are dependent on frequent deliveries of fresh
produce, food, beverage and other 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. 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. In addition, interruptions to the availability of gas,
electric, water or other utilities may adversely affect our operations.
A failure to develop and implement innovative marketing and guest relationship initiatives, ineffective or improper use of
social media or other marketing initiatives, and increased advertising and marketing costs, could adversely affect our business
results. If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses
increase, or if our advertising and promotions become less effective than those of our competitors, we could experience a material
adverse effect on our business results. A failure to sufficiently innovate, develop guest relationship initiatives, or maintain adequate
and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.
As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests.
These efforts may not be successful, resulting in expenses incurred without the benefit of higher revenues or increased employee
engagement. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of
proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, or out-of-
date information. The inappropriate use of social media vehicles by our franchisees, guests or employees could increase our costs,
lead to litigation or result in negative publicity that could damage our reputation. These efforts may not be successful, and pose
a variety of other risks, as discussed above under the heading: “We rely heavily on information technology in our operations, and
insufficient guest or employee facing technology, or any material failure, inadequacy, interruption or breach of security of any of
our technology, could harm our ability to effectively operate our business.”
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.
We face a variety of risks associated with doing business with franchisees and vendors in foreign markets. Our expansion
into international markets could create risks to our brands and reputation. We believe that we have selected high-caliber international
franchisees with significant experience in restaurant operations. However, the ultimate success and quality of any franchise