Franchise Rules Could Be A Business-buster

(Sunday, March 30, 2008) - The world's richest man is making Mohammad Dar miserable.

Dar, who 18 years ago paid $125,000 for a Dairy Queen franchise in Kemah, has never met Warren Buffett.

It's a safe bet that Buffett, whose fortune recently was pegged at $62 billion, has never heard of Mohammad Dar but, in a way, the two are facing off over the future of a Texas icon.

Buffett heads investment firm Berkshire Hathaway Inc., which bought Dairy Queen's parent company in 1998.

Dar, 56, is among hundreds of mom-and-pop franchise owners across the nation who say they're being pressured by American Dairy Queen to spend from $275,000 to $450,000 remodeling and adding table service at fast-food restaurants fabled in Texas for Hunger Buster burgers, Blizzard ice cream treats and steak finger baskets.

Failure to comply would mean losing their franchises, the owners say.

But American Dairy Queen officials say no one is being forced to do anything beyond what their franchise contracts stipulate. Like all major restaurant chains, American Dairy Queen imposes a standard that store owners must meet. Keeping up with the times is part of the deal, they say.

Court Battle

Tensions between franchise owners and American Dairy Queen culminated late last month when DQ franchise owner associations with members in 10 states filed a lawsuit against Minneapolis-based International Dairy Queen and its corporate parent, Berkshire Hathaway. American Dairy Queen is a subsidiary of International Dairy Queen.

The Texas Dairy Queen Operators Council, which includes about 200 members who own more than 600 restaurants, has not joined other associations in that lawsuit. But if the council and American Dairy Queen can't find accord soon, legal action is likely, officials say.

"It's something that's being considered," council President Larry Newell said. "Frankly, we would rather find business solutions than fight things out in court."

American Dairy Queen is pushing franchise owners in other states to convert their restaurants to a DQ Grill & Chill format. Those typically are larger, offer table service and have more on their menus, including breakfast fare.

Some Dairy Queens sell only ice-cream treats such as Blizzards and Dilly Bars, while others sell ice cream and have limited menus. The restaurants that sell only frozen treats would combine with the Orange Julius beverage chain to become DQ/Orange Julius Treat Center, while the others would convert to the Grill & Chill format, according to reports.

Bigger In Texas

Texas Dairy Queens do things a little differently than their counterparts in other states. Although the first Dairy Queen franchise opened in 1940 in Joliet, Ill., the fast-food restaurant has become as much a part of Texas as armadillos and oil derricks.

With 600 restaurants, Texas has more Dairy Queens than any other state. The Texas Dairy Queen Operating Council is the largest of all Dairy Queen associations.

DQ restaurants in Texas use a separate menu branded as Texas Country Foods, which has the trademark rights to Hunger Buster and Belt Buster burgers. The council provides guidance in hot-food quality control, marketing and operations. American Dairy Queen controls the soft-serve and frozen treats.

Because Texas uses a separate menu under Texas Country Foods, its franchises could not adopt the Grill & Chill menu. But American Dairy Queen wants Texas restaurants to adopt the larger restaurant format, Newell said.

Not all franchises would have to convert, however. For years, the Texas market was a single territory, controlled by a master franchise operator who "sub-franchised" to others. In 1981, American Dairy Queen bought the franchise rights, inheriting a system where owners have varying contracts.

‘Creating Opportunity'

In Texas, only 38 percent of Dairy Queen franchise owners have provisions in their contracts that require them to modernize.

"For a lot of the operators, modernization doesn't apply," Newell said. "But it's a huge factor for the 38 percent."

Troy Bader, chief development and legal officer for American Dairy Queen, said the issue boils down to whether franchise owners want to invest in their businesses.

"There are franchises who choose not to reinvest in their facilities," Bader said. "Just as you look at a neighborhood and people choose not to invest in their home ... it declines and becomes less competitive."

Restaurant chains, be they Applebee's or Sonic, have standard designs that consumers come to expect, Bader said.

"There is a designated décor that you need to comply with," he said. "The reality is that when you reinvest in the facility from which you operate, you're creating an opportunity for greater profits over the long term."

Dar is among the franchise owners whose contract requires him to periodically modernize. Unwillingness or inability to comply with remodeling plans could cost him his franchise, he said.

Earlier this month, representatives from American Dairy Queen inspected Dar's store, leaving behind a list of more than 50 improvements he must make, ranging from repairing potholes in the parking lot to replacing cracked tiles in the ceiling.

Dar, who said he's spent nearly $300,000 in renovations and maintenance of this restaurant through the years, said to comply with the list would essentially mean building an entirely new restaurant, which he asserts is behind the zealous inspection of his restaurant, 1107 state Highway 146.

"The screw is being turned," said Dar, a U.S. citizen who immigrated from Pakistan. "They want me to build the Taj Mahal, but they want me to pay for the logistics."

Piece Of Cake?

Dar said he has endured demands by American Dairy Queen before. About a year ago, he spent $8,000 to install equipment to sell ice cream cakes. Dar said American Dairy Queen did not offer direct training on how to decorate the cakes, but advised franchise owners to attend some sessions from a retailer not affiliated with Dairy Queen. Dar did not attend the training sessions.

The equipment sits in his restaurant, unused. Corporate representatives, toting computers, often visit his store, telling him to make changes or add new items or equipment. Dar said there's no room to add more items or equipment. Adopting a larger format would require more staff.

The Dairy Queen restaurant is Dar's only source of income. It helped put his daughter through college and supports his son in high school. He said he can't afford more staff. His wife and sister help run the business.

Dar last year paid $17,500 to the Texas Council of Dairy Queen Operators as part of marketing and promotion fees. He paid another $17,500 to American Dairy Queen in royalties based on a percentage of his sales.

Last year, Dar's restaurant generated $400,000 in net sales, he said. To convert to the DQ Grill & Chill format and make other changes could cost more than $200,000, he said. Should Dar agree to build a new store, he would be forced to take out a loan, he said. But Dar said he would not be able to make the monthly loan payments.

"I'd be out of business," he said.

Some other local Dairy Queen owners, who declined to be quoted, say they too are being pressured to make changes they can't afford.

Dar said issues between parent companies and franchise owners have flared before. But he said Berkshire Hathaway's intense focus on profits is behind the latest troubles.

‘See The Light'

If he could speak with Buffett, what would Dar say?

"Do not be the beast that eats his own children to gain strength," he said.

In the late 1970s, there were about 1,000 Dairy Queen Restaurants in the Texas.

But as owners lose franchises, Dairy Queen restaurants — including those in Galveston, Hitchcock and La Marque — have closed or converted to independent restaurants under different names.

"Fortunately, we have leveled off, and the number of restaurants has slightly increased in the last couple of years," Newell said.

Newell said some restaurants closed because owners didn't want to invest in their businesses. But others had a tough time meeting American Dairy Queen demands, he said.

"There's an element of truth both ways," he said. But Newell said American Dairy Queen's determination to change the chain's image isn't necessarily what consumers want.

Dar said he doesn't want to lose his franchise. But he wants American Dairy Queen and Berkshire Hathaway to consider the mom-and-pop owners.

"They have made my life miserable," he said. "I want them to see the light."

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Dairy Queen A Texas Landmark For Decades

Dairy Queen wasn't born in Texas.

But with more than 600 restaurants, the state boasts the most restaurants in the worldwide DQ system, known for Belt Buster burgers and Blizzards.

Dairy Queen has come to symbolize small-town Texas and to some is a relic of slower, easier times.

Locally, a Dairy Queen meal can be had in Dickinson, Friendswood, Kemah, League City and Webster.

Notable DQ milestones:

• 1940 — Sherb Noble opened the first Dairy Queen restaurant in Joliet, Ill., on June 22.

• 1941 — When the United States entered World War II, there were less than 10 Dairy Queen stores.

• 1950 — The concept of franchising was very new. But the Dairy Queen franchise took off quickly, growing to 1,446.

• 1955 — The Dilly Bar debuts.

• 1962 — International Dairy Queen is formed.

• 1965 — First national radio advertising sends the DQ message 169 million times a week.

• 1966 — First national TV commercial is aired with the slogan: "Live a little."

• 1985 — More than 175 million Blizzard Flavor Treats sold in its first year.

• 1998 — Berkshire Hathaway Inc. acquired International Dairy Queen Inc.

• 2008 — The Dairy Queen system has more than 5,700 locations throughout the United States, Canada and 22 other countries.

SOURCE: American Dairy Queen Inc.

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