Wendy's 2008 Annual Report Download - page 25

Our success depends on franchisees’ participation in brand strategies.
Wendy’s and Arby’s franchisees are an integral part of our business. Each brand may be unable to
successfully implement brand strategies that it believes are necessary for further growth if franchisees do not
participate in that implementation. The failure of franchisees to focus on the fundamentals of restaurant
operations such as quality, service, food safety and cleanliness would have a negative impact on our business.
Our financial results are affected by the operating results of franchisees.
As of December 28, 2008, approximately 79% of the Wendy’s system and 69% of the Arby’s system were
franchise restaurants. We receive revenue in the form of royalties, which are generally based on a percentage of
sales at franchised restaurants, rent and fees from franchisees. Accordingly, a substantial portion of our financial
results is to a large extent dependent upon the operational and financial success of our franchisees. If sales
trends or economic conditions worsen for franchisees, their financial results may worsen and our royalty, rent
and other fee revenues may decline. In addition, accounts receivable and related reserves may increase. When
company-owned restaurants are sold, one of our subsidiaries is often required to remain responsible for lease
payments for these restaurants to the extent that the purchasing franchisees default on their leases.
Additionally, if franchisees fail to renew their franchise agreements, or if we decide to restructure franchise
agreements in order to induce franchisees to renew these agreements, then our royalty revenues may decrease.
Each brand may be unable to manage effectively its strategy of acquiring and disposing of
restaurants, which could adversely affect our business and financial results.
Each brand’s strategy of acquiring restaurants from franchisees and eventually “re-franchising” these
restaurants by selling them to new or existing franchisees is dependent upon the availability of sellers and
buyers, the availability of financing, and the brand’s ability to negotiate transactions on terms deemed
acceptable. In addition, the operations of restaurants that each brand acquires may not be integrated
successfully, and the intended benefits of such transactions may not be realized. Acquisitions of franchised
restaurants pose various risks to brand operations, including:
•diversion of management attention to the integration of acquired restaurant operations;
•increased operating expenses and the inability to achieve expected cost savings and operating
efficiencies;
•exposure to liabilities arising out of sellers’ prior operations of acquired restaurants; and
•incurrence or assumption of debt to finance acquisitions or improvements and/or the assumption of
long-term, non-cancelable leases.
In addition, engaging in acquisitions and dispositions places increased demands on the brand’s operational
and financial management resources and may require us to continue to expand these resources. If either brand is
unable to manage the acquisition and disposition strategy effectively, its business and financial results could be
adversely affected.
ARG does not exercise ultimate control over advertising for its restaurant system, which could harm
sales and the brand.
Arby’s franchisees control the provision of national advertising and marketing services to the Arby’s
franchise system through the AFA, a company controlled by Arby’s franchisees. Subject to ARG’s right to
protect its trademarks, and except to the extent that ARG participates in the AFA through its company-owned
restaurants, the AFA has the right to approve all significant decisions regarding the national marketing and
advertising strategies and the creative content of advertising for the Arby’s system. Although ARG has entered
into a management agreement pursuant to which ARG, on behalf of the AFA, manages the day-to-day
operations of the AFA, many areas are still subject to ultimate approval by the AFA’s independent board of
directors, and the management agreement may be terminated by either party for any reason upon one year’s
prior notice. See “Item 1. Business—The Arby’s Restaurant System—Advertising and Marketing.” In addition,
local cooperatives run by operators of Arby’s restaurants in a particular local area (including ARG) make their
own decisions regarding local advertising expenditures, subject to spending the required minimum amounts.
ARG’s lack of control over advertising could hurt sales and the Arby’s brand.
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