IHOP 2014 Annual Report Download - page 25

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We have the contractual right, subject to state law, to terminate a franchise agreement for a variety of reasons, including, but
not limited to, a franchisee’s failure to make required payments when due or failure to adhere to specified Company policies and
standards.
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, 2014, approximately 4.70% 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 NAF”). 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.
During 2014, we and franchisees whose restaurants contribute a large majority of total annual contributions to the IHOP
NAF entered into an amendment to their franchise agreements that increased the advertising contribution percentage of those
restaurants' gross sales. Pursuant to the amendment, for the period from June 30, 2014 to December 31, 2014, 2.74% of each
participating restaurant's gross sales was contributed to the IHOP NAF and 0.76% was contributed to local advertising
cooperatives. For the period from January 1, 2015 to December 31, 2017, 3.50% of each participating restaurant's gross sales
will be contributed to the IHOP NAF with no significant contribution to local advertising cooperatives. The amended
advertising contribution percentage is also applicable to IHOP company-operated restaurants.
Franchise fees designated for the IHOP NAF 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.
During 2014, the advertising fee contribution provisions of the Florida area license agreement were amended for the period
through December 31, 2017 on substantially similar terms as the franchise agreement amendment described above. 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.
As of December 31, 2014, 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 13 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 88% of franchise segment revenue for the year ended December 31, 2014 consisted of Applebee's and
IHOP royalties and IHOP advertising revenue. Most of the remaining 12% consisted of sales of proprietary products (primarily