Special Report: Inside Dairy Queen, Berkshire’s Queen of the Quick-Service Restaurants

(BRK.A), (BRK.B)

For much of the company’s 75-year history, Dairy Queen was a sleepy also-ran that missed out on the explosion of fast food restaurants that began in the 1950s, and became ubiquitous by the 1970s. By that time, McDonald’s and Burger King had become the dominant food purveyors in the Quick-Service Restaurant category (QSR).

In contrast, Dairy Queen served its signature soft-serve ice cream, but it didn’t always place much emphasis on food. It certainly didn’t put a priority on the national promotion of its menu items.

On the plus side, Dairy Queen was one of the first in the QSR category to embrace smoothies, with its 1987 purchase of Orange Julius, and they also own fading popcorn retailer Karmelkorn.

Along Came Berkshire Hathaway

In 1998, Berkshire Hathaway acquired Dairy Queen for $585 million in cash and stock. At the time there were 5,790 locations in the U.S. and internationally.

Today the formerly sleepy ice cream purveyor has found renewed energy and direction. There are more than 6,700 locations in the U.S and Canada, and 28 other countries. 1,495 of the stores are outside the U.S. and Canada, and of the 271 Dairy Queen locations that opened during 2011, some 131 of them were in China. The chain is particularly popular in southern states, with 600+ stores in Texas alone.

Total system wide sales were just under $3 billion in 2014.

McDonald’s, with its 35,000 restaurants in 100 countries, is still the king of the QSR category. According to QSR Magazine, Dairy Queen is ranked #19 on the QSR 50. That puts it behind #18 Little Caesars and ahead of #20 Papa John’s. And, its global sales has it ranked #16, according to Franchise Times. While it may be from the same era as the root beer chain A&W, Dairy Queen’s 6,600 locations make it roughly 6 times larger than A&W’s 1,100 US and international locations.

Dairy Queen’s popularity is more than just a hankering for a taste of nostalgia. It received the #2 ranking in Huffington Post’s “2012 America’s Favorite Fast Food Chains,” while the website declared McDonald’s to be “America’s least favorite.”

A New Strategy

While Dairy Queen’s strength is the heritage of the frozen treat business, the famed “Cone With The Curl On Top,” it now has an increased emphasis on selling food. Dairy Queen wants customers to stay and eat, rather than just get dessert, and a recent national ad campaign touted its $5 Buck Lunch in order to get customers to try its burgers, hot dogs and chicken strips. Upgrades to food quality have been ongoing, and include freshly baked buttered buns and grilling the burgers to order.

There also has been a focus on expanding and updating the menu to reflect changing tastes, and to convince customers it’s not just a seasonal eatery that focuses on summer treats for hot summer nights.

In 2015, Dairy Queen began putting ovens in its stores and debuted its DQ Bakes! menu, which featured nine products across three categories: Hot Desserts à la Mode, Artisan-style Sandwiches and Snack Melts.

The company is also trying to lure customers in at a traditionally slow time of day through a new campaign that focuses on the period between lunch and dinner.

The afternoon-snack daypart is seen by Quick-Service Restaurant experts as one of the major growth opportunities in the category, after competition has heated up for breakfast and late-night business.

DQ’s Efforts are Paying Off

It looks like Dairy Queen’s efforts are paying off. YouGov.com, an internet-based marketing firm that polls thousands of members on a wide variety of issues, is reporting that its YouGov BrandIndex’s is showing positive news for Dairy Queen.

The BrandIndex is billed as a key measurement of potential revenue, and it’s showing an uptick in interest in eating at Dairy Queen for the month of December 2015, as compared to December 2014.

According to their polling, “31% of adults 18 and over who were aware of the brand considered Dairy Queen when making their next fast food purchase. The percentage is now up to 33%.”

The 6% increase in shows that the company is making progress, and what’s more, the 33% is a healthy one, with the “average Purchase Consideration score for the fast food dining sector overall is 22%.”

Dairy Queen Grill & Chill

Dairy Queen has had a number of branding efforts over the decades to give the chain a consistent look and customer experience. In the 1970s, the company launched the Dairy Queen Braziers motif. Today the emphasis is the DQ Grill & Chill concept, which features separate “grill” and “chill” areas, warm lighting, HD televisions, and free Wi-Fi, and it is working with its franchisees to not only build DQ Grill & Chills, but to convert the older Brazier restaurants to DQ Grill & Chills.

There are currently 500 U.S. remodels in the works, with upgrade commitments from 1,100 more. In addition to stand alone stores, Dairy Queen is also proving a good fit for the gas station convenience store business where it serves to draw in customers that otherwise just pay at the pump and skip higher profit margin in-store purchases.

A Dozen Target Markets Nationwide

Dairy Queen has announced that it would be opening hundreds of new locations in Louisiana, Massachusetts and South Carolina, as well as several hundred in Northern California. The company will also be adding 30-35 locations in Chicago.

“We have about a dozen targeted markets throughout the United States. Louisiana is one of the primary ones because of the demand for the combination of the food menu and the treat menu items,” said Jim Kerr, International Dairy Queen Inc.’s VP of Franchise Development.

It’s About Making Money

Why should a potential operator choose to go with the Dairy Queen system? “Because he’s going to make money!” explains Dairy Queen’s president and CEO John Gainor says with a smile.

Dairy Queen is a popular franchise in the QSR category. Its franchise fee and liquid cash requirements are both significantly lower than McDonald’s. To build a prototypical Core 72 location runs $1,030,000 to $1,430,000 for construction and equipment. Most importantly, Dairy Queen’s low SBA loan-failure rate made it one of CNN Money’s 10 Great Franchise Bets for 2011. It was one of only two restaurant chains that made the top ten list, the other being Little Caesars Pizza. Dairy Queen was also ranked #1 in Entrepreneur Magazine’s 2012 Top 500 Ice Cream & Frozen Dessert Category.

Overseas Growth

While U.S. and Canada locations have remained stable, it is overseas where growth is exploding. Between 2011 and 2015 the number of locations expanded over 66-percent from 871 locations to 1,495 locations.

The focus is on emerging market countries, and you can find a Dairy Queen in Gabon, Guyana, Cambodia, Laos, and Vietnam, among others.

In Europe the focus is on Poland and nearby countries. It is avoiding France and other developed European markets where the competition is greater.

“This move is strategic. We are entering the Eastern European market at a time when Western brands are being embraced by a consumer base that is well informed on the importance of global brands,” Dairy Queen’s Jean Champagne, Chief Operations Officer — International Groups explains. “We look forward to working with a strong franchise partner in Poland. We see this as a launching pad for other contiguous countries in the region.”

Caribbean Growth is also in the works. Dairy Queen has announced it will open a total of 24 locations within the next five years in five countries in the Caribbean.

Plans call for the development of DQ Grill & Chill locations in Trinidad and Tobago, DQ Grill & Chill and DQ Treat locations in Jamaica, and DQ Treat locations in St. Lucia, Grenada and St. Maarten.

Currently, there are eight DQ Treat locations in Trinidad, the first of which opened in 2012.

A Hot Brand in The Middle East

The largest DQ Grill & Chill restaurant in the world is in Saudi Arabia, and its quickly becoming a familiar brand throughout the Middle East, including Bahrain, Brunei, Dubai, Egypt, Oman, Qatar, and Saudi Arabia. Jordan, Kuwait, and the United Arab Emirates were added in 2015.

Dairy Queen doesn’t want to do this expansion piece meal, and is looking for franchisees with the strength to take on whole countries.

The China market for Dairy Queen began in 1991, with the first location in Beijing. In 2012, Dairy Queen reached its 500th restaurant in China, and today it has over 600 locations.

I’ll Take Manhattan

U.S. growth is mostly focused on the South and South-East. However, in May 2014 the company launched the first two-story DQ Grill & Chill in the U. S. on 14th Street in Manhattan. The opening generated a wave of press aimed at New Yorkers nostalgic for its popular mix-in treat known as the Blizzard, and additional DQ Grill & Chills are now open in Queens, the Bronx, and at the Staten Island Ferry Terminal on Staten Island. Other 2014 expansion included stores in Phoenix and Tucson, Arizona; Levittown and Watertown, New York; Houston and Fort Worth, Texas; and former NFL quarterback Jeff George opened a store in Westfield, Indiana.

Expanding Advertising

With an increased emphasis on promoting its food, Dairy Queen is looking to expand its national advertising, which has been running March through October. Now, the company want to advertise year-round.

Texas, with its over 600 locations, even has its own stand-alone marketing campaign that is run by the Texas Dairy Queen Operators Council. The Council runs its own TV spots and ad campaigns that brand the DQ logo as the “Texas Stop Sign,” and support marketing of special Texas-only menu items such as the Jalitos Ranch Hunger-Buster.

Dairy Queen’s also upgrading its national advertising, and in May of 2015 it launched its first movie tie-in in 20 years with a cross-promotional campaign tied to the blockbuster Jurassic World.

Revamping the Menu, Getting Healthier

In keeping with its increasing emphasis on food, on June 22, 2015, Dairy Queen’s actual 75th anniversary, the company introduced its DQ Bakes!™ menu with nine products across three categories: Hot Desserts à la Mode, Artisan-style Sandwiches and Snack Melts. DQ locations across the U.S (excluding Texas) installed ovens to make the new menu items.

The company introduced funnel cakes, a fried batter staple of fairs and carnivals, into the menu in 2016.

Gainor points out that the funnel cakes fit right in with the “fan food” customer experience that Dairy Queen is known for. It’s a loyalty that gave the company 10,472,082 likes on Facebook.

“A lot of our consumer research focuses on the emotional connection that you take out of the store,” Gainor explains.

Dairy Queen also set a date of September 2015 for getting soda out of its children’s menu, which already offers a choice of a carbonated beverage, Arctic Rush slushy drink, or milk.

The move comes as quick-serve restaurants are under increasing pressure to reduce the fat and sugar content of menu items marketed to children.

On the plus side (not the plus-size), Dairy Queen already offers the choice of a banana or applesauce in place of French fries, and it already markets a Kids Live Well Menu that features a chicken wrap, a banana, and a bottle of water. The meal omits a frozen dessert.

The Kids Live Well program is an initiative of the Nation Restaurant Association, and is a voluntary industry program that now has over 42,000 participating restaurant locations committed to “providing families with a growing selection of healthful children’s menu choices when dining out.”

Billions for Berkshire

Dairy Queen’s U.S. revenues in 2014 were $2.985 billion, according to QSR Magazine. The company produces this huge revenue stream almost entirely from franchises.

Each franchise pays a $35,000 franchise fee, a royalty fee of 4%, and a marketing fee of 5% – 6%. In the aggregate the franchises net Berkshire hundreds of millions a year on its investment of only $585 million.

Low Capital Costs

This huge revenue generator for Berkshire comes without the capital costs of a chain such as Chipotle Mexican Grill, which owns all of its 1,600+ stores. In contrast, Dairy Queen operates only 3 company-owned restaurants, as compared to the roughly 20% of McDonald’s locations that are company-owned.

Reducing the number of corporate owned locations was a big part of Burger King’s turnaround when 3G Capital’s partner Daniel Schwartz took the helm as the Chief Executive Officer and a Director of the company. He quickly put the Burger Kings where they belonged, in the hands of more motivated franchisees.

McDonald’s is planning to sell off half of its company owned locations, and Wendy’s also announced plans to sell 640 restaurants in the U.S. and Canada to franchisees in a move that would “significantly reduce future capital expenditure requirements.”

Fortunately for Berkshire Hathaway’s Dairy Queen System, they already knew that franchisees are highly motivated, hard-working people motivated by the ultimate incentive, ownership.

76 Years and Growing

According to Gainor, Dairy Queen’s internal strategic plan, DQ 2020, focuses squarely on its customers, which it refers to as “fans,” due to their high brand loyalty. He notes that it is Dairy Queen’s “great value and product that creates the demand.”

With its high consumer loyalty and brand awareness, (they boast 95% consumer brand recognition and 4.3 million loyal Blizzard fan club members), Dairy Queen has proved to be a versatile fit for airports, highway travel plazas, military bases and university campuses, in addition to stand-alone locations.

Last but not least, Dairy Queen has long been known for stability. While other restaurants have come and gone, (anyone been to a Chi-Chi’s or ShowBiz Pizza Place lately?), Dairy Queen has a tried-and-true formula that works. Franchisees seek it out, and lenders feel more confident knowing that Berkshire Hathaway is behind scenes.

(Portions of this report have been revised with new information.)

© 2014-2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.