IHOP 2013 Annual Report Download - page 27

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Advertising Fees
We currently require domestic franchisees of Applebee's restaurants to contribute 3.25% of their gross sales to a national
advertising fund and to spend at least 0.5% 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. For the year ended December 31, 2013, approximately 4.75% of Applebee's company restaurant sales was
allocated for marketing activities. This amount includes contributions to the national advertising fund, which develops and
funds the national promotions and the development of television and radio commercials and print advertising materials. We
focus the remainder of our company-operated restaurant marketing expenditures on local marketing in the Kansas City area.
IHOP franchisees and company-operated restaurants allocate a percentage of their sales to local advertising cooperatives
and a national advertising fund. The IHOP franchise agreements generally provide for advertising fees comprised of (i) a local
advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which is typically used to cover
the cost of local media purchases and other local advertising expenses incurred by a local advertising cooperative, and (ii) a
national advertising fee equal to 1.0% of weekly gross sales under the franchise agreement. Area licensees are generally
required to pay lesser amounts toward advertising.
The local IHOP advertising cooperatives have historically used advertising fees for various local marketing programs. The
national marketing fund is primarily used for buying media and national advertising and also for the production of advertising.
The national marketing fund is also used to defray certain expenses associated with our marketing and advertising functions.
Beginning in 2005, and every year thereafter, we and the IHOP franchisees agreed to reallocate portions of the local advertising
fees to purchase national broadcast, syndication and cable television time in order to reach our target audience more frequently
and more cost effectively.
Franchise fees designated for IHOP’s national advertising fund and local marketing and advertising cooperatives are
recognized as revenue and expense of franchise operations. However, because we have less contractual control over Applebee's
advertising expenditures, Applebee’s national advertising fund activity is considered to be an agency relationship and therefore
is not recognized as franchise revenue and expense.
IHOP Area License Agreements
We have entered into two long-term area license agreements for IHOP restaurants covering the state of Florida and certain
counties in the state of Georgia, and the province of British Columbia, Canada. The area license agreements provide the
licensees with the right to develop and franchise new IHOP restaurants in their respective territories and provide for royalties
ranging from 1.0% to 2.0% of gross sales and advertising fees ranging from 0.25% to approximately 2.0% of gross sales. We
also derive revenues from the sale of proprietary products to these area licensees and, in certain instances, to their sub-
franchisees. Revenues from our area licensees are included in franchise operations revenues for segment reporting purposes.
As of December 31, 2013, the area licensee for the state of Florida and certain counties in Georgia operated or sub-
franchised a total of 154 IHOP restaurants. The area licensee for the province of British Columbia, Canada operated or sub-
franchised a total of 14 IHOP restaurants. The area license for British Columbia expires in 2026. The area license for Florida
and Georgia expires in 2102.
Other Franchise-related Revenues and Fees
Approximately 85% of franchise segment revenue for the year ended December 31, 2013 consisted of Applebee's and
IHOP royalties and IHOP advertising revenue. Most of the remaining 15% consisted of sales of proprietary products (primarily
IHOP pancake and waffle dry-mixes), franchise termination, transfer and extension fees, software maintenance and support
fees and licensing fees from third-party retail sales of IHOP-branded products. Depending on circumstances, early termination
of a franchise agreement may result in our being entitled to termination fees; however, not all franchise restaurant closures
necessarily result in our receipt of termination fees.
International Franchising
We continue to pursue international franchising of the Applebee's and the IHOP concepts. To this end, we seek qualified
franchisees that possess the resources needed to open multiple restaurants in each territory and are familiar with the specific
local business environment in which they propose to develop and operate our restaurants. We work closely with our
international franchisees to develop and implement the Applebee's and IHOP systems outside the United States, recognizing
commercial, cultural and dietary diversity. Differences in tastes and cultural norms and standards require that we be flexible
and pragmatic regarding many elements of the Applebee's and IHOP systems, including menu, restaurant design, restaurant
operations, training, marketing, purchasing and financing.