Wendy's 2010 Annual Report Download - page 18

Acquisitions and Dispositions of Arby’s Restaurants
Arby’s has from time to time acquired the interests of and sold Arby’s restaurants to franchisees, and it is
anticipated that the company may have opportunities for such transactions in the future. Arby’s will continue to sell
and acquire restaurants in the future where prudent.
Franchised Restaurants
As of January 2, 2011, Arby’s franchisees operated 2,505 Arby’s restaurants in 47 states, Canada and 3 other
countries.
Arby’s 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. Arby’s generally grants new Arby’s franchises on a unit-by-unit basis. All franchisees
are required to execute standard franchise agreements. Arby’s standard United States 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. Arby’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 7.0%, 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.
Arby’s currently does not offer any financing arrangements to franchisees seeking to build new franchised units.
In 2007, in order to increase development of traditional Arby’s restaurants in selected markets, our Select
Market Incentive (“SMI”) program was introduced. Arby’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. The SMI
program remains in effect and does not have a stated expiration date. However, Arby’s has the right to discontinue
offering the program at any time.
Because royalty rates of less than 4% are still in effect under certain older franchise agreements, the average
royalty rate paid by United States Arby’s franchisees was approximately 3.6% in each of 2010, 2009 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. Arby’s monitors franchisee operations and inspects restaurants
periodically to ensure that required practices and procedures are being followed.
See Note 5 and Note 23 of the Financial Statements and Supplementary Data included in Item 8 herein, and
the information under “Management’s Discussion and Analysis” in Item 7 herein, for further information regarding
reserves, commitments and contingencies involving franchisees.
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 (“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. Arby’s Chief Marketing Officer currently serves as
president of AFA. AFA is managed by Arby’s pursuant to a Management Agreement, as described below. AFA is
funded primarily through member dues. From January 2010 and through March 2010, Arby’s and most domestic
Arby’s franchisees paid 1.2% of sales as dues to AFA. Beginning in April 2010 and for the remainder of 2010, the
AFA Board approved a dues increase based on a tiered rate structure for the payment of the advertising and marketing
12