Wendy's 2009 Annual Report Download - page 18

Franchised Restaurants
As of January 3, 2010, ARG’s franchisees operated 2,549 Arby’s restaurants in 47 states, Canada and 3
other countries.
ARG offers franchises for the development of both single and multiple “traditional” and “non-traditional”
restaurant locations. The initial term of the typical “traditional” franchise agreement is 20 years. As compared
to traditional restaurants, non-traditional restaurants generally occupy a smaller retail space, offer no or very
limited seating, may cater to a captive audience, have a limited menu, and possibly have reduced services, labor
and storage and different hours of operation. Both new and existing franchisees may enter into a development
agreement, which requires the franchisee to develop one or more Arby’s restaurants in a particular geographic
area or at a specific site within a specific time period. All franchisees are required to execute standard franchise
agreements. ARG’s standard U.S. franchise agreement for new Arby’s traditional restaurant franchises currently
requires an initial $37,500 franchise fee for the first franchised unit, $25,000 for each subsequent unit and a
monthly royalty payment equal to 4.0% of restaurant sales for the term of the franchise agreement. ARG’s
non-traditional restaurant franchise agreement requires an initial $12,500 franchise fee for the first and all
subsequent units, and a monthly royalty payment ranging from 4.0% to 6.2%, depending upon the non-
traditional restaurant category. Franchisees of traditional 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.
ARG currently does not offer any financing arrangements to franchisees seeking to build new franchised
units.
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 Incentive (“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, the
Arby’s U.S. Conversion Incentive (“CI”) program was introduced. The CI program applies to freestanding
properties, and calls for an initial $13,500 franchise fee for a new franchisee’s first franchised unit, $1,000 for
each subsequent unit, $1,000 for each existing franchisee’s unit, and a graduated scale monthly royalty
payment equal to 1% for the first twelve months the unit is open, 2% 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 royalty rates of less than 4% are still in effect under certain older franchise agreements, the
average royalty rate paid by U.S. ARG franchisees was approximately 3.6% in each of 2009, 2008 and 2007.
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 4, 2010 and through March 31, 2010, ARG and most domestic Arby’s franchisees must pay 1.2% of
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