Baskin Robbins 2011 Annual Report Download - page 33

To the extent our franchisees are unable to open new stores as we anticipate, our revenue growth would come
primarily from growth in comparable store sales. Our failure to add a significant number of new restaurants or
grow comparable store sales would adversely affect our ability to increase our revenues and operating income
and could materially and adversely harm our business and operating results.
Increases in commodity prices may negatively affect payments from our franchisees and licensees.
Coffee and other commodity prices are subject to substantial price fluctuations, stemming from variations in
weather patterns, shifting political or economic conditions in coffee-producing countries and delays in the supply
chain. In particular, the cost of commodity inputs for a number of goods, including ice cream and coffee, rose in
fiscal 2011. If commodity prices rise, franchisees may experience reduced sales, due to decreased consumer
demand at retail prices that have been raised to offset increased commodity prices, which may reduce franchisee
profitability. Any such decline in franchisee sales will reduce our royalty income, which in turn may materially
and adversely affect our business and operating results.
Through our wholly-owned subsidiary Dunkin’ Brands Canada Ltd. (“DBCL”), we manufacture ice cream at a
facility located in Peterborough, Ontario, Canada (the “Peterborough Facility”). We sell such ice cream to certain
international franchisees for their resale. As a result, we are subject to risks associated with dairy products and
sugar, the primary ingredients used in the production of ice cream at the Peterborough Facility, including price
fluctuations and interruptions in the supply chain of these commodities. If the prices of these commodities rise,
we may increase the cost of ice cream sold to such international franchisees, but only after a thirty-day notice
period required under our franchise agreements, during which our margin on such sales would decline.
Our joint ventures in Japan and South Korea (the “International JVs”), as well as our licensees in Russia and
India, do not rely on the Peterborough Facility and, instead, manufacture ice cream products independently. Each
of the International JVs owns a manufacturing facility in its country of operation. The revenues derived from the
International JVs differ fundamentally from those of other types of franchise arrangements in the system because
the income that we receive from the International JVs is based in part on the profitability, rather than the gross
sales, of the restaurants operated by the International JVs. Accordingly, in the event that the International JVs
experience staple-ingredient-price increases that adversely affect the profitability of the restaurants operated by
the International JVs, that decrease in profitability would reduce distributions by the International JVs to us,
which, in turn, could materially and adversely impact our business and operating results.
Shortages of coffee could adversely affect our revenues.
If coffee consumption continues to increase worldwide or there is a disruption in the supply of coffee due to
natural disasters, political unrest or other calamities, the global coffee supply may fail to meet demand. If coffee
demand is not met, franchisees may experience reduced sales which, in turn, would reduce our royalty income.
Such a reduction in our royalty income may materially and adversely affect our business and operating results.
We and our franchisees rely on computer systems to process transactions and manage our business, and a
disruption or a failure of such systems or technology could harm our ability to effectively manage our
business.
Network and information technology systems are integral to our business. We utilize various computer systems,
including our FAST System and our EFTPay System, which are customized, web-based systems. The FAST
System is the system by which our U.S. and Canadian franchisees report their weekly sales and pay their
corresponding royalty fees and required advertising fund contributions. When sales are reported by a U.S. or
Canadian franchisee, a withdrawal for the authorized amount is initiated from the franchisee’s bank after 12 days
(from the week ending or month ending date). The FAST System is critical to our ability to accurately track sales
and compute royalties due from our U.S. and Canadian franchisees. The EFTPay System is used by our U.S. and
Canadian franchisees to make payments against open, non-fee invoices (i.e., all invoices except royalty and
-23-