Chili's 2013 Annual Report Download - page 19

The success of our franchisees is important to our future growth.
We have significantly increased the percentage of restaurants owned and operated by our franchisees. While
our franchise agreements are designed to maintain brand consistency, this increase reduces our direct day-to-day
control over these restaurants and may expose us to risks not otherwise encountered if we maintained ownership
and control of same. These risks include franchisee defaults in their obligations to us arising from financial or
other difficulties encountered by them, such as payments to us or maintenance and improvements obligations;
limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings; inability to
participate in business strategy changes due to financial constraints; inability to meet rent obligations on leases
on which we retain contingent liability; and failure to comply with food quality and preparation requirements
subjecting us to litigation even when we are not legally liable for a franchisee’s actions or failure to act.
Additionally our international franchisees and joint venture partners are subject to risks not encountered by
our domestic franchisees. These risks include:
• difficulties in achieving consistency of product quality and service as compared to U.S. operations;
• changes to recipes and menu offerings to meet cultural norms;
• challenges to obtain adequate and reliable supplies necessary to provide menu items and maintain food
quality; and
• differences, changes or uncertainties in economic, regulatory, legal, social and political conditions.
Our sales volumes generally decrease in winter months in North America.
Our sales volumes fluctuate seasonally and are generally higher in the summer months and lower in the
winter months, which may cause seasonal fluctuations in our operating results.
Unfavorable publicity relating to one or more of our restaurants in a particular brand may taint public
perception of the brand.
Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality,
illness or health concerns or operating issues stemming from one or a limited number of restaurants. In particular,
since we depend heavily on the Chili’s brand for a majority of our revenues, unfavorable publicity relating to one
or more Chili’s restaurants could have a material adverse effect on the Chili’s brand, and consequently on our
business, financial condition and results of operations. The speed at which negative publicity (whether or not
accurate) can be disseminated has increased dramatically with the capabilities of electronic communication,
including social media. If we are unable to quickly and effectively respond to such reports, we may suffer
declines in guest traffic which could materially impact our financial performance.
Litigation could have a material adverse impact on our business and our financial performance.
We are subject to lawsuits, administrative proceedings and claims that arise in the regular course of
business. These matters typically involve claims by guests, team members and others regarding issues such as
food borne illness, food safety, premises liability, compliance with wage and hour requirements, work-related
injuries, discrimination, harassment, disability and other operational issues common to the foodservice industry,
as well as contract disputes and intellectual property infringement matters. We could be adversely affected by
negative publicity and litigation costs resulting from these claims, regardless of their validity. Significant legal
fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in
excess of insurance coverage could have a material adverse effect on our financial position and results of
operations.
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