Wendy's 2010 Annual Report Download - page 19

service fee ranging between 1.4% and 3.6% of sales. As a result, the average Arby’s advertising and marketing service
fee percentage from April 2010 to the end of the 2010 fiscal year was approximately 2.3%. In addition, Arby’s
partially subsidized the top two rate tiers in 2010 thereby decreasing franchisees’ effective advertising and marketing
service fee percentages. This subsidy required payments by Arby’s of approximately $2.6 million to AFA in 2010.
Beginning in January 2011 and for the remainder of 2011, the AFA Board approved a modified tiered rate structure
for the payment of the advertising and marketing service fee ranging between 1.25% and 3.5%. Arby’s will partially
subsidize the top two rate tiers in 2011 thereby decreasing franchisees’ effective advertising and marketing service fee
percentages. This subsidy is expected to require payments by Arby’s of approximately $2.9 million for
2011. Domestic franchisee participants in the SMI program pay an extra 1% premium on the advertising and
marketing service fee (2.2% total through March 2010 and based on the tiered rate structure, an extra 1% on the
advertising and marketing service fee through December 2011) up to a maximum of 3% as AFA dues for the first 36
months of operation; their AFA dues then revert to the standard advertising and marketing service fee rate without the
1% premium.
Effective October 2005, Arby’s and AFA entered into a management agreement (the “Management
Agreement”) pursuant to which Arby’s assumed general responsibility for the day-to-day operations of AFA, including
preparing annual operating budgets, developing the brand marketing strategy and plan, recommending advertising
and media buying agencies, and implementing all marketing/media plans. Arby’s performs these tasks subject to the
approval of AFA’s Board of Directors. Under the Management Agreement, Arby’s is obligated to pay for the general
and administrative costs of AFA, other than the cost of an annual audit of AFA and certain other expenses specifically
retained by AFA. Under the Management Agreement, Arby’s is also required to provide AFA with appropriate office
space at no cost to the AFA. The Management Agreement with AFA continues in effect until terminated by Arby’s
upon one year’s prior written notice or by AFA upon six months’ prior written notice. See Note 24 of the Financial
Statements and Supplementary Data included in Item 8 herein, for further information on AFA.
In addition to their contributions to AFA, Arby’s and its domestic franchisees are also required to spend a
reasonable amount, but not less than 3% of sales of their Arby’s restaurants, for local advertising; however, with the
new AFA tiered rate structure discussed above, any AFA dues paid above 1.2% will be credited against the local
advertising spend requirements. Most existing franchise agreements now require, and new franchise agreements will
require, domestic franchisees to spend a minimum aggregate advertising amount of 4.2% of sales for national and
local advertising, which includes the advertising and marketing fee. The amount of expenditures for local advertising
is divided between (i) individual local market advertising expenses and (ii) expenses of a cooperative area advertising
program. Contributions to the cooperative area advertising program, in which both company-owned and franchisee-
owned restaurants participate, are determined by the local cooperative participants and are generally in the range of
3% to 5% of sales. Domestic franchisee participants in our SMI program are not, however, required to make any
expenditure for local advertising until their restaurants have been in operation for 36 months.
Canadian Arby’s franchisees contribute to the Arby’s Franchise Association of Canada (“AFAC”), an
independent membership corporation in which every Canadian Arby’s franchisee is required to participate, which was
formed to create advertising and perform marketing for the Arby’s system in Canada. Effective May 2006, Arby’s and
AFAC entered into a management agreement (the “Canadian Management Agreement”) pursuant to which Arby’s
assumed general responsibility for the day-to-day operations of AFAC, including preparing annual operating budgets,
developing the brand marketing strategy and plan, recommending advertising and media buying agencies, and
implements all marketing/media plans. Arby’s performs these tasks subject to the approval of AFAC’s Board of
Directors. Under the Canadian Management Agreement, Arby’s is obligated to pay for the general and administrative
costs of AFAC, other than the cost of an annual audit of AFAC and certain other expenses specifically retained by
AFAC. AFAC is funded primarily through member dues. Through August 2010, most Canadian franchisees paid 3%
of sales as dues to AFAC. Beginning in September 2010, most Canadian franchisees pay 1.25% of sales as dues to
AFAC.
In addition to their contributions to AFAC, Canadian Arby’s franchisees were required through August 2010 to
contribute 2.25% of sales for local advertising. Beginning in September 2010, Canadian Arby’s franchisees are now
required to contribute 4% of sales for local advertising. However, Canadian franchisees participating in the Canadian
Incentive Program (“CIP”) are not required to contribute to local advertising for the first 36 months after a restaurant
is opened.
See Note 26 of the Financial Statements and Supplementary Data included in Item 8 herein, for further
information regarding advertising.
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