Wendy's 2008 Annual Report Download - page 19

restaurants typically pay a $10,000 commitment fee, and franchisees of non-traditional restaurants typically
pay a $12,500 commitment fee, which is credited against the franchise fee during the development process for
a new restaurant.
In 2007 and 2008, ARG introduced several programs designed to accelerate the development of
restaurants. In 2007, in order to increase development of traditional Arby’s restaurants in selected markets, our
Select Market Initiative (“SMI”) program was introduced. ARG’s franchise agreement for participants in the
SMI program currently requires an initial $27,500 franchise fee for the first franchised unit, $15,000 for each
subsequent unit and a monthly royalty payment equal to 1.0% of restaurant sales for the first 36 months the
unit is open. After 36 months, the monthly royalty rate reverts to the prevailing 4% rate for the remaining
term of the agreement. The commitment fee is $5,000 per restaurant, which is credited against the franchise
fee during the development process.
In 2008, in order to promote conversion of other quick service restaurants into Arby’s restaurants, our
U.S. Conversion Incentive (“CI”) program was introduced. The CI applies to freestanding properties, and calls
for an initial $13,500 franchise fee for the first franchised unit, $1,000 for each subsequent unit, and a
graduated scale monthly royalty payment equal to 1% for the first twelve months the unit is open, 2% for the
for the second twelve months the unit is open, 3% for the third twelve months the unit is open, and the
prevailing 4% for the remaining term of the agreement. The commitment fee is $1,000 per restaurant, which
is credited against the franchise fee during the development process. Another eligibility requirement is that
CI units must be open and operating by November 30, 2010.
Because of lower royalty rates still in effect under certain agreements, the average royalty rate paid by U.S.
ARG franchisees was approximately 3.6% in each of 2006, 2007 and 2008.
Franchised restaurants are required to be operated under uniform operating standards and specifications
relating to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. ARG monitors franchisee operations
and inspects restaurants periodically to ensure that required practices and procedures are being followed.
Advertising and Marketing
Arby’s advertises nationally on cable television networks. In addition, from time to time, Arby’s will
sponsor a nationally televised event or participate in a promotional tie-in for a movie. Locally, Arby’s primarily
advertises through regional network and cable television, radio and newspapers. The AFA Service Corporation
(the “AFA”), an independent membership corporation in which every domestic Arby’s franchisee is required to
participate, was formed to create advertising and perform marketing for the Arby’s system. ARG’s chief
marketing officer currently serves as president of the AFA. The AFA is managed by ARG pursuant to a
management agreement, as described below. The AFA is funded primarily through member dues. As of
January 1, 2009, ARG and most domestic Arby’s franchisees must pay 1.2% of gross sales as dues to AFA.
Domestic franchisee participants in our SMI program pay an extra 1% (currently 2.2% total) of gross sales as
AFA dues for the first 36 months of operation, then their dues revert to the lower prevailing rate.
Effective October 2005, ARG and the AFA entered into a management agreement (the “Management
Agreement”) that ARG believes has enabled a closer working relationship between ARG and the AFA, allowed
for improved collaboration on strategic marketing decisions and created certain operational efficiencies, thus
benefiting the Arby’s system as a whole. Pursuant to the Management Agreement, ARG assumed general
responsibility for the day-to-day operations of the AFA, including preparing annual operating budgets,
developing the brand marketing strategy and plan, recommending advertising and media buying agencies, and
implementing all marketing/media plans. ARG performs these tasks subject to the approval of the AFA’s
Board of Directors. In addition to these responsibilities, ARG is obligated to pay for the general and
administrative costs of the AFA, other than the cost of an annual audit of the AFA and certain other expenses
specifically retained by the AFA. ARG provided AFA with general and administrative services in 2008, a
portion of which was offset by the AFA’s payment of $0.5 million to ARG, as required under the Management
Agreement. Beginning in 2009 and for each year thereafter, the AFA will no longer be required to make any
such offsetting payments to ARG. Under the Management Agreement, ARG is also required to provide the
AFA with appropriate office space at no cost to the AFA. The Management Agreement with the AFA
continues in effect until terminated by either party upon one year’s prior written notice. In addition, the AFA
may terminate the Management Agreement upon six months’ prior written notice if there is a change in the
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