Dairy Queen is out to become the world’s best-performing fast-food chain

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Photo by Travis Anderson

On Lexington Avenue in Roseville, just a little north of Larpenteur Avenue, is a remarkable little building sitting in a strip-mall parking lot. There’s a pop panache to it, with its upwardly slanted glass exterior panels and its bright-red flat roof. Atop it all is an old-style Dairy Queen sign, complete with the angled cone topped with swirly soft-serve.

It’s one of Minnesota’s oldest DQ franchises. It may be the oldest, though that’s a matter of some debate: Both this location and a Rochester franchise started in 1947, seven years after the first Dairy Queen opened in Joliet, Ill. After being closed for three winter months, this old store has already opened for its 69th season, dispensing cones, shakes, Dilly Bars and a variety of the chain’s famous Blizzards to patrons who, whatever their ages, think of DQ as the essential flavor of their childhood summers.

Twenty years ago, it wasn’t at all certain that this DQ and its comrades would still be in business. Disgruntled franchisees were suing parent company International Dairy Queen (IDQ), and Dairy Queen’s future appeared cloudy. But the Edina-based franchisor celebrates its 75th anniversary this year on solid footing and steady growth, thanks to a sharpened focus and a new restaurant concept called Grill & Chill.

With the effects of the recession finally subsiding, IDQ is pushing into new markets both in the U.S. and overseas. This year, it’s starting a national television advertising campaign that for the first time will run for all 12 months, as the company positions itself as a franchisor of year-round dining establishments, not just a warm-weather ice-cream destination. Globally, IDQ ranked 16th among all restaurant franchisors, based onFranchise Times’ 2014 numbers; in the U.S. alone, DQ ranked 19th, according to QSR Magazine’s August 2014 Top 50 report.

If IDQ looks set to last for another 75 years, it’s because in the past 15 years, it has undergone a reinvention while remaining true to its roots. And those roots have been, and continue to be, key to its longevity.

Righting the ship

Dairy Queen began as a retailer of soft-serve—a style of ice cream in which air is added during the freezing process to make it creamier and lighter. (It also contains less milkfat than regular ice cream does.) It operated largely informally during the first two decades of its existence. “Some people would say that for a long time, IDQ was a system that did not have a franchisor,” according to Chuck Mooty, CEO and president of IDQ from 2001 through 2008. (Today he leads Jostens.)

By the late 1950s, a number of franchisees decided that a more systematic approach was needed to create more control and consistency over the brand and its products. To finance the new parent company, American Dairy Queen Corp., in 1962, the franchisees sought a bank loan. Northwestern National Bank in Minneapolis (precursor to Wells Fargo’s Minnesota operations) was willing to make that loan, but with this proviso: That the company be headquartered in Minneapolis. Though it would later move its central offices to Edina, Dairy Queen has been headquartered in Minnesota ever since.

That said, local and regional differences remain. For instance, in Texas, the state with the most DQs in the country (574), operators sell the same kinds of treats other DQs do, but they’ve also developed their own distinctive menu items. These include the Dude (a chicken-fried steak sandwich) and a burger with the colorful moniker of Hungr-Buster. Still, the brand became more unified in store design and promotion, and during the next three decades, Dairy Queen grew steadily, introducing a national advertising campaign and becoming a public company in 1972.

In 1987, the company acquired beverage chain Orange Julius as part of a “treat center” strategy that would operate in shopping malls. By the 1990s, however, that concept had run into stiff challenges. Competition was intensifying and “most problematic was the fact that there was a real divide” between franchisor and franchisees, Mooty says. The divide became a chasm in 1994, with the beginnings of a class-action lawsuit in which about a third of the operators would ultimately join. “Quite frankly, the biggest thing was a lack of faith in the direction of the company and its ability to be viable in a highly competitive environment,” he says.

Enter Warren Buffett. The legendary investor and his company, Berkshire Hathaway, had been interested in buying Dairy Queen for a few years, but had been rebuffed. By 1997, however, management and shareholders were ready to sell. The deal closed in 1998; Mooty, who’d been with Dairy Queen since 1987 and its CFO in the most recent years, was named CEO and president three years later. (His father, John Mooty, was chairman of the company prior to Berkshire’s acquisition.)

Despite its troubles, Dairy Queen “was one of those consistent, performing entities that provided steady cash flow for the investor,” Mooty says. “DQ was a product [Buffett] loved, so there was a personal appeal as well as an understanding of the business.” Berkshire Hathaway has left the company pretty much autonomous, as long as it can show a steady return. In turn, the company has “brought great credibility and great resources” to IDQ.

As for Mooty, he was 40 years old when he took the helm at IDQ, and he had his work cut out for him. The company not only lacked good relations with its franchisees, it lacked a clear direction on concepts. So he and his management team reached out to the franchisees to develop new products and marketing concepts that would revitalize the company and its store owners. The company became more transparent about its finances and lowered margins on products it supplied. And the franchisee lawsuit was resolved in what became known as “the Collins settlement,” which lowered the margins the company charged franchisees for ingredients.

As CEO, Mooty brought in new management talent in marketing and operations at headquarters, and began to look for ways to make IDQ more relevant to consumers. They came up with one plan in particular that seemed highly risky, if not overly ambitious: to introduce a new, quick-serve restaurant (QSR) chain within the Dairy Queen system and call it Grill & Chill.

The QSR space is, of course, a crowded one. (QSR is a phrase that has replaced “fast food.”) But IDQ believed Grill & Chill had something that “people could resonate with,” Mooty says. Many DQ franchisees had been serving food for years as part of IDQ’s Brazier concept. But Brazier menus were limited mostly to standard items like burgers, fries and hot dogs. Grill & Chills were to be bigger, with dozens of core menu items, including a variety of sandwiches, salads and chicken items.

What would make the Grill & Chill idea stand out in the crowded QSR market was the quality of its food, and the “heritage” treat side of the business, with the production of cones, Blizzards and other dessert items a central part of the store layout. Promotions such as the “5 Buck Lunch” introduced a couple of years back combine meal items with a dessert offering.

The risk paid off. During Mooty’s tenure, IDQ’s annual revenues grew from $1.8 billion to $3.1 billion. The company’s annual sales in 2014 reached $4.1 billion. Last year, out of a total of 4,517 U.S. franchises (down about 16 percent from 1993), about a third were Grill & Chills. The Brazier name is due to be retired in 2016. “The best thing is, we had franchisees that had gone from a lack of trust and faith in the company to being highly energizing and very team-oriented,” Mooty says.

Expanding at home and overseas

The job of extending that growth in the U.S. falls primarily on the shoulders of Troy Bader, chief operating officer for IDQ’s American Dairy Queen subsidiary. Historically Dairy Queen “started mostly in rural markets,” he says. But in the past decade, it has made inroads into new regions, including New York state and the South. “The brand doesn’t necessarily have a presence in those markets,” he says. “But there are many fans that have had a relationship with the brand over time.” Indeed, Bader says, “some of our highest-volume locations are in these new markets.”

Quick-serve restaurants are increasingly operating under a cloud of customer perception that fast food equals unhealthy food, and that’s something that “anyone in the restaurant category needs to be conscious of,” Bader says. In the past three years, the company has been incorporating Orange Julius smoothies into the DQ menu. Part of the rationale for this was to provide “healthier alternatives,” he says, “and the smoothie category continues to grow.” Besides the Orange Julius products, Grill & Chills have expanded their offerings of salads. The chain is also introducing a product line called DQ Bakes—sandwiches and wraps with turkey and grilled chicken that are baked rather than containing fried food, “which makes a huge difference among those consumers looking for healthier alternatives.”

Bader usually refers to DQ customers as “fans.” That word choice isn’t casual. That “fan connection” with the brand, he says, is the No. 1 reason for its longevity. “It is a different type of relationship than what most customers have with most other QSRs.” In late 2012, IDQ hired Kansas City-based ad agency Barkley to help strengthen its market image. The following June, IDQ rolled out its new promotional platform, “Fan Food, Not Fast Food” that includes posters, information kits to franchisees, social media outreach, and TV ads showing “fans” cheering DQ food.

Barkley vice president and account director Stephanie Parker says that one of her agency’s charges was to pop what she calls “the frequency bubble.” Barkley increased the number of DQ customers’ visits by getting them to think of a DQ not only as a place for special-occasion treats, but as a place both for treats and great food—while building on the DQ brand’s emotional connection with its customers that’s “different and distinctive from their competitors.”

Dairy Queen, she adds, is “the world’s largest hometown brand.” And yes, she means “world.” IDQ is increasing its expansion in foreign markets, particularly the Middle East.

IDQ first entered the Middle East market some 30 years ago. Its first franchisee, who was in Bahrain, initially thought “Dairy Queen” was a cheese manufacturer, says Jean Champagne, chief operating officer for IDQ’s international group. “He connected with us and when he heard what we were about, he said, ‘Oh, I’m very interested.’ ”

Bahrain is now home to 11 DQ franchises, and the Mideast has become one of Dairy Queen’s biggest growth regions, with Saudi Arabia a particularly big opportunity. But the country presents “unique challenges,” Champagne notes. Its ultra-conservative interpretation of Islamic law requires DQ to build stores with two sections: men’s only and families, with separate ordering areas for each. Married men accompanied by their families and single women can dine in the family section; single and unaccompanied men are forbidden to do so. “So in Saudi, our locations are much bigger, square-footage-wise, than what you’d see domestically.”

In the early years, international operations were scattered and few. “I can’t say it was always the most strategic development path,” Champagne says. In the last decade, however, IDQ has been more strategic, expanding in areas where “we can bolt on to our existing supply structure.”

This year, the company plans to open locations in five new countries, including Kuwait, Jordan and the United Arab Emirates. The two other new markets are the Dominican Republic and Poland—the franchisor’s first store in Eastern Europe. IDQ also will be opening its first Grill & Chill in Ho Chi Minh City, adding to its existing 12 treats-only locations in the Vietnamese capital.

So what’s the appeal of Dairy Queen overseas? Champagne says that customers there “want to experience a Western brand.” The challenge, he adds, “is bringing 75 years of history and nostalgia and making it relevant to today’s consumer in that marketplace.” DQ attempts to blend the retro and the trendy in its promotional material, which include photos of old stores in the ’50s and ’60s with images of contemporary customers savoring soft-serve and other DQ delicacies.

Nostalgia is probably not all that relevant to the overseas market, however, at least not yet. According to Champagne, Dairy Queen’s “sweet spot” overseas is a customer age 15 to 25. In the U.S., the demographic is 18 to 49, skewing female, typically with kids. In emerging markets, DQ franchisees make sure to have Wi-Fi connectivity in their stores for the millennial crowd. Champagne says he was once told by a young customer in Shanghai that among her friends, Dairy Queen is “a place for lovers. It’s about dating and being seen socially.”

There’s yet another element to DQ’s overseas appeal—Warren Buffett alone gives the DQ brand “a lot of credibility,” says Champagne. A few years back, while on a global tour with Microsoft founder Bill Gates, Buffett cut the ribbon at a new DQ store in Shanghai. “We had over 250 media outlets present to interview him,” Champagne recalls. “We had to shut the mall [to accommodate the media crush]. That’s just the draw of Warren Buffett.”

Growing pains

American Dairy Queen COO Bader says that overseas, Dairy Queen typically follows a different franchising model than it does domestically, with larger organizations and companies serving as franchisee partners overseas. “We rely on them to build out regions and a number of stores within those areas,” Bader says.

In the U.S. and Canada, franchisees tend to have at most a handful of stores, with many owning just a single location. Since the Collins settlement, relations between the franchisees and their franchisor appear to be much more collegial. “When you talk about the longevity of this brand, it’s due to the franchisees,” Bader says. DQ operators are often local people who’ve owned their franchises for years and are known for their sponsorship of local sports teams and other community outreach.

The total number of DQ franchises has grown from 5,918 in 2005 to 6,601 in 2014, with sales rising from $2.8 billion to $4.1 billion during that period. While international units have grown from 1,007 to 2,084, U.S. units have decreased from 4,911 to 4,517 (though same-store sales have grown for five consecutive years). Stores that closed were mostly smaller and seasonal, Bader says.

One of DQ’s successful and long-time U.S. franchisees is Mike McKinnon, who owns five Grill & Chills in the Olympia, Wash., area (his parents bought their first DQ in 1975). McKinnon recently stepped down as chairman of the Dairy Queen Franchisee Advisory Council (FAC), which represents unit operators across the country. The FAC meets four times a year with company management to discuss new DQ initiatives, advertising and products.

“Typically when you get disputes between franchisors and franchisees, they have to do with the products coming through the back door,” McKinnon says. Before the Collins settlement, franchisees argued that the company was controlling too much of the sources of supply for products, and charging too much for what headquarters was supplying. Since the suit was settled, “we’ve really seen things improve,” he says. “If you’re litigating against your franchisor, it’s pretty hard to work collaboratively.

IDQ has done a good job of lowering the price on products it sells to its franchisees, he says.

As for McKinnon, “I’ve had three years of very strong sales growth—double-digit sales growth, predominantly on the food side of my business.” Grill & Chills’ evening business has always been DQ’s strong point, but “now we’ve started to have a strong lunch and afternoon presence,” McKinnon says. His stores are among the first to offer DQ Bakes, “a line of products that is very different than what you can find at a McDonald’s or a Burger King,” he says.

McKinnon acknowledges that the large Grill & Chill menus are “a sticking point with a lot of franchisees.” That’s one of the big issues for a group of franchisees called the Dairy Queen Operators’ Association (DQOA), based in Chanhassen and founded in 1970. The DQOA is open to all franchisees, though McKinnon thinks it represents “maybe a couple hundred.” Still, he credits the organization for being a driving force pushing for what became the Collins settlement, which helped heal the franchisee/franchisor divide.

Josh Schmieg, DQOA executive director, says that his group continues to work for the reduction of required menu items. The number of products most franchisees have to carry in the past decade has been overly burdensome, he says. “Products are added with the idea that they’ll draw in a new customer base.”

That has required store owners to do additional training and add inventory space. Schmieg adds that the DQOA has had some success in reducing the number of required “core” food-menu items franchisees are required to carry, including the number of Orange Julius products. Some of the new items that Dairy Queen is adding, notably the DQ Bakes, “are good products, but they won’t simplify the operation like we set out to do.”

Other concerns among DQOA members include the new 12-month advertising schedule, which some franchisees worry will cut into the money they spend on local promotional activities. Lower-price national promotions such as the 5 Buck Lunch have boosted business, but in many cases they’ve cut operator profitability. While franchisees aren’t required to participate in promotions and specials, “there’s pressure to do so when customers demand it,” Schmieg says.

Grill & Chills also were “a big area of contention” when they were introduced, Schmieg says, due to the high cost of building and remodeling. But as costs have come down and the company has offered financial help, there has been greater acceptance among DQOA membership. “The Grill & Chill name has resonated well,” he adds. “Certainly better than ‘Brazier,’ as very few consumers know what that means anyway.”

Schmieg says that despite concerns his members have, there remains a strong loyalty to DQ. “Dairy Queen franchisees, regardless of where they are, feel like they are the face of Dairy Queen in their community,” Schmieg says. “If you’re in a smaller town, you know who the DQ person is.”

McKinnon notes that “we have our fair share of customers who see us as a quick meal or a quick treat. But there are also a lot of families and regular customers who will linger and really enjoy their time. When I visit some of the other chains, I don’t see that. I don’t see Taco Bell or Subway as a place to go to hang out.” Part of that difference is the customer loyalty, he says. “There’s such affinity for the brand. Maybe it’s because we’re serving treats, maybe it’s because Dairy Queen was the destination after baseball practice or soccer practice. I think it gets into our customer’s blood from a young age.”

One question going forward is whether IDQ can build that cozy, small-town feel in the larger metropolitan areas that it’s moving into. Perhaps the older DQs can maintain that hometown glow for the brand. While International Dairy Queen has worked hard to present a unified look and feel, there’s still room for stores like the Roseville DQ, which still looks and in many ways operates the way it has since it opened in 1947.

“In the QSR sandwich category, almost everybody wants to build that emotional connection” with its customers, American Dairy Queen COO Bader says. “They aspire to building it. But few are fortunate enough to have it actually exist.”

Gene Rebeck is a Duluth-based freelance journalist who writes monthly for Twin Cities Business. This article is reprinted in partnership with Twin Cities Business.