International Franchising Agreements for Theme Restaurants
Theme restaurants are now among the single fastest growing sectors of the restaurant industry, and much of this growth has taken place outside of the United States under the provisions of international franchising agreements. Planet Hollywood, for example, already has more than 50 restaurants located in at least 16 countries, and many of these locations were opened by franchisees pursuant to Planet Hollywood international franchise agreements.
Among the reasons why theme restaurants owners have turned to franchising their restaurant concepts abroad are the steep costs often associated with the development and construction of theme restaurants. By franchising to a third party, the franchisor can capture a portion of the revenues associated with opening another theme restaurant location with little or no risk.
Theme restaurant franchise agreements should be written in broad terms, giving the franchisor a large amount of discretion in determining the obligations of the franchisee. The provisions of the franchise agreement governing the architecture and design of the theme restaurant become among the most important aspects of the agreement. The franchise agreement should contain extensive and specific provisions that require the franchisee to submit its conceptual design, along with its plans and specifications, to the franchisor for review, inspection and approval.
Whether the theme of the restaurant is movies, music, sports or fashion, the restaurant's success, in large part, is based on its ability to excite the sensations and inspire the imaginations of its customers. In other words, theme restaurant architecture and design have turned into big business and it is no longer unheard of to spend between $6 million and $25 million to build a single location of a theme restaurant. For example, Rainforest Cafes have their own rainforest, complete with waterfalls, intermittent thunderstorms, live parrots, a robotic gorilla and talking trees!
The franchise agreement should also contain a provision that requires the franchisor's approval of franchisee's selected site in the foreign country, including requiring the franchisee to, among other things, submit to the franchisor a demographics study for any proposed site. To a large degree, the revenue of a theme restaurant is derived from tourism, and repeat business from locals is often considerably lower than for other restaurants. Therefore, it is important that the franchisee select a major tourist destination. In the U.S., for example, a number of theme restaurants (including the Motown Cafe, Black Entertainment Television's Soundstage, and Planet Hollywood's Marvel Mania) are located or locating in Orlando, Fla., adjacent to Orlando's Universal Studios and Disney World theme parks.
To the extent that the franchisee does not buy its furniture from the franchisor, the franchisee should be required to get the franchisor's approval before buying and installing anything within the franchised restaurant. These provisions will allow the franchisor to ensure that its franchisees deliver the same experience to the franchisees' customers as the customers would have at a franchisor-owned restaurant.
Another important issue to be addressed in the franchise agreement is the manufacture and distribution of theme restaurant merchandise in the foreign country. Franchise agreements typically provide the franchisor with a royalty on the sales of merchandise in the range of 5 to 20 percent, and it is exceedingly important for the franchisor to be sure, especially in foreign countries, that it takes whatever steps are necessary to protect its trademarks in every country in which it seeks to license its restaurant. In fact, as much as 40 percent of the revenue of a theme restaurant often comes from the sale of its merchandise, and each theme restaurant typically contains a retail shop near its exit.
The Rainforest Cafe, which is reported to derive more than 25 percent of its revenue from retail sales in 1995, often contain an extensive 5,000 square-foot retail shop that sells the restaurant's private label merchandise, including stuffed animals, T-shirts, and the spices and sauces used in the restaurant. Merchandising is such a profitable aspect of theme restaurants that Planet Hollywood is apparently planning to open merchandise-only venues within a number of airports both in the U.S. and abroad.
A franchise involves a long-term, evolving contractual relationship, and franchisor supervision of every aspect of the development and marketing of each franchised theme restaurant is essential to promote efficiency and consistency throughout the franchise system. in rapid succession and the companies have reached the IPO phase with little operating history to disclose to the public investor. However, in the strong financial markets of the past few years, this has not proved to be an obstacle. Nonetheless, from a securities law liability standpoint a theme restaurant company at this stage needs to pay particular attention to what is disclosed to the public and how it is disclosed. In addition to disclosing the fact of a limited operating history, the company's prospectus should disclose in detail the risks to the company from competition, from expansion (both operationally and financially) and from rapidly changing public tastes, among many other risks.
Given certain demographic trends, which seem to benefit the restaurant and family-based entertainment industries, and American culture's seemingly endless store of "themes," we are likely to see many more theme restaurant companies develop and reach maturity as public companies in the near future. Each will face many, if not all, of the issues discussed above. When and how they face such issues will be critical to their long-term success.