International Dairy Queen, Inc. Business Information, Profile, and History

Company Perspectives:

The DQ tradition you grew up with is continuously growing as new locations are opening in both new and existing markets. Our brands--Dairy Queen, Orange Julius and Karmelkorn--have very high favorable consumer awareness. Most importantly, we thrive because of our hard-working franchisees. The vast majority of our locations are franchised--we own and operate very few stores. We are strong believers in franchising, unlike many of our competitors who operate a significant number of their own stores. While we have grown over the years and adapted to changing market conditions, IDQ Companies' family of fast food concepts have remained rooted in the tradition of DQ quality and customer satisfaction.

History of International Dairy Queen, Inc.

International Dairy Queen, Inc. licenses, services, and develops over 5,900 Dairy Queen stores in the United States, Canada, and numerous foreign countries, including Austria, Slovenia, China, Oman, and Guam. In addition to selling its famous dairy desserts, many of the stores also sell hamburgers, chicken, hot dogs, and a variety of beverages. The company also owns Karmelkorn Shoppes, Inc., a franchisor of over 30 retail stores that sell popcorn, candy, and other items, as well as Orange Julius, a franchisor of some 400 stores which feature blended drinks made from orange juice, various fruits, and fruit flavors. In 1998 International Dairy Queen was purchased by Warren Buffett's Berkshire Hathaway Inc.

1920-40: A Good Idea in Search of an Audience

The founders of Dairy Queen, J.F. 'Grandpa' McCullough and his son Alex, originally established the Homemade Ice Cream Company in 1927. Located in Davenport, Iowa, the two men sold a variety of ice cream products throughout the Quad Cities area (which includes Moline and Rock Island, Illinois, and Bettendorf and Davenport, Iowa). In order to expand their operations, during the early 1930s the McCulloughs moved their business to Green River, Illinois, and purchased a former cheese factory in which they located their ice cream mix plant.

When the McCulloughs made ice cream at their plant in Green River, it was a complicated process. Butterfat, milk solids, sweetener, and stabilizer were first combined, then mixed, and finally put into a batch freezer where the combination was chilled, given a specific amount of air (technically called 'overrun'), and flavored. The product was denser and richer than most ice creams, with less overrun. When the temperature reached 23 degrees Fahrenheit, a spigot was opened in the freezer and the soft ice cream flowed into three-gallon containers. The containers were covered with lids, frozen at minus-ten degrees Fahrenheit, and delivered to customers. When an ice cream store was ready to serve the product, the ice cream was put into a dipping cabinet and the temperature increased to five degrees Fahrenheit.

The ice cream was frozen solid, not for the pleasure and enjoyment of the customer, but for the convenience of the manufacturer and store owner. Yet the elder McCullough had known for a long time that ice cream at colder temperatures numbed the tastebuds and resulted in a much less flavorful product; soft, fresh ice cream drawn from a spigot at approximately 23 degrees Fahrenheit tasted best. He began to wonder if there was some way to dispense semi-frozen ice cream that kept its shape but soon realized that the batch freezers in use during the 1930s were

unsuitable. An entirely different type of freezer was required and, moreover, every ice cream store that wished to dispense the new product would have to purchase at least one of the new freezers. Faced with these difficulties, Grandpa McCullough decided to give up the idea as impractical.

After a few years, however, Grandpa McCullough was still thinking about soft ice cream, and he convinced his son that they should find out whether or not the product would capture people's tastebuds. They asked one of their customers, Sherb Noble, if he would arrange a special offering of soft ice cream at his store in Kankakee, Illinois. With an advertisement of 'All you can eat for 10 cents,' the sale was held in early August 1938. Using an ordinary commercial batch freezer, the men put the soft ice cream into five gallon containers and then hand-dipped the product into 16-ounce cups. In two hours, Noble and the McCulloughs dished out over 1,600 servings. A short time later, another sale of soft ice cream was offered at Mildred's Ice Cream Shop in Moline. The response from the public was the same. With such overwhelming success, the McCulloughs began searching for the type of freezer that would make dispensing soft ice cream a reality.

The McCulloughs approached two manufacturers of dairy equipment and asked if they would be interested in designing a machine that dispensed semi-frozen dairy products into dishes or ice cream cones. The first manufacturer immediately rejected their proposal, and the second firm, Stoelting Brothers Company in Kiel, Wisconsin, thought the idea lacked potential. With nowhere else to go, the McCulloughs seemed to arrive at a dead end. However, one day while Grandpa McCullough was casually paging through the want ads in the Chicago Tribune he noticed an advertisement for a continuous freezer that would dispense soft ice cream. The ad had been place by Harry M. Oltz.

Oltz and the McCulloughs met in the summer of 1939. Having already received the patent for his freezer in 1937, Oltz extended the production rights to his new partners, as well as rights for the exclusive use of the freezer in Illinois, Wisconsin, and all the states west of the Mississippi River. According to the agreement, Oltz kept exclusive rights to use of the freezer in all states east of the Mississippi and would receive continuous royalties based on the number of gallons of soft serve ice cream processed through all the dispensing freezers produced under the patent. Oltz then moved to Miami, Florida, and established AR-TIK Systems, Inc., a firm that would find stores to serve soft ice cream in the eastern United States. Meanwhile, the McCulloughs returned to the Stoelting Brothers and reached an agreement with them to manufacture a soft-serve ice cream freezer for their own company.

1940: Dairy Queen is Born

The first Dairy Queen store opened in Joliet, Illinois, on June 22, 1940. Jointly owned by the McCulloughs and Sherb Noble, the store was managed by Jim and Elliot Grace. By the end of the summer, the store had grossed $4,000, and Noble decided to buy out the McCulloughs' interest in that store. On April 1, 1941, the McCulloughs opened another store in Moline and once again contracted the Graces to manage it for them. Additional stores were opened in Aurora, Illinois, and Davenport, Iowa, and by the end of 1942 there were a total of eight Dairy Queen businesses in operation. However, with the advent of World War II, manufacturing materials used for building the freezers were reassigned to the war effort. Without new freezers, no new stores were able to open for the duration of the war.

Despite the inability of the McCulloughs to open more stores, they remained active. During the war, father and son sold rights to would-be store owners to use the Dairy Queen freezer and mix, and develop businesses in certain geographical areas of the country. Since they both suspected that the popularity of Dairy Queen would be brief, it was more sensible to the McCulloughs to sell territories outright rather than to arrange an ongoing royalty system. All profits were up front, and if the product lost its appeal there was no fear of losing any income. Unfortunately, the McCulloughs' method of contracting the development of new territories was extremely informal--sometimes scribbled on a napkin, paper sack, or daily newspaper--and this led to a host of problems later on.

Impressed with the long lines at the Dairy Queen store in Moline, Harry Axene, a sales manager for a farm equipment company, approached Grandpa McCullough and soon became a 50-50 partner in the mix company. He also purchased the territory rights for Illinois and Iowa at a price of $12,000. By the end of the war, Axene had purchased the remaining interest in the mix company and, more importantly, had seen the future of Dairy Queen in franchising. In November 1946, Axene organized a meeting with 26 potential investors at the LeClaire Hotel in Moline. Excited about organizing a national Dairy Queen franchise system, Axene introduced the idea of selling territories based on a royalty system where territory store owners would pay Axene an initial fee plus an ongoing royalty fee for the soft serve mix. Even though no formal organization resulted from this meeting, interest in Dairy Queen stores grew at a tremendous pace. With only eight stores in operation at the end of the war, by the end of 1946 there were 17, and by the end of 1947 there were over 100 Dairy Queen stores operating throughout the United States.

In 1948, Axene arranged for 35 store owners and territory operators to meet in Minneapolis with the purpose of establishing a national organization. In December of the same year, the first official meeting of the newly incorporated Dairy Queen National Trade Association (DQNTA) was held in Davenport, Iowa. Organized as a not-for-profit corporation, with C.R. Medd as its first president, national offices were soon established in the city. The DQNTA was created in order to standardize cones, plastic goods, and all other materials used in Dairy Queen stores, along with coordinating all the various kinds of advertising for Dairy Queen products. By the early 1950s, membership in the DQNTA had grown to nearly 900 dues-paying members.

An Expanding Menu in the 1950s

There were 1,400 Dairy Queen stores open for business in 1950, and up until that time the menu was limited to sundaes and cones for immediate consumption, or pints and quarts to take home. When supermarkets began to sell ice cream at low prices and when air conditioning and television began keeping people home on sultry summer evenings, sales in Dairy Queen stores across the country began to suffer. In order to keep attracting customers, most stores responded to requests for an expanded menu. In 1949, milkshakes and malts were made available, and banana splits were added in 1951. Toppings for sundaes were expanded to include hot fudge, chocolate, strawberry, pineapple, butterscotch, and other flavors. Take home novelty products were also introduced, including the Dilly bar, a soft-serve, chocolate-dipped confection with a wooden tongue depressor inserted for the customer to hold while eating.

During the 1950s, Dairy Queen stores were also challenged by the emergence of fast food outlets that offered hamburgers, hot dogs, french fries, and various soft drinks. Since these outlets served full meals, they remained open the entire year; Dairy Queen stores were put at a disadvantage since they were boarded up for most of the winter season. In order to stay competitive, store operators in different parts of the country began to offer various food products, from bowls of chili to pork fritters. Yet the lack of a standardized menu brought complaints from customers, until the Brazier system of broiled burgers, hot dogs, barbecued beef, french fries, and onion rings was introduced in 1958. With the introduction of this system, the quality control and standardization of meat products helped to increase profits for store owners.

Though the DQNTA had been formed in 1948 to standardize products and services for store operators, its not-for-profit status rendered it unable to enforce any of its policies. As a result, the DQNTA was reformed in 1955 and made a for-profit corporation. Renamed the Dairy Queen National Development Company, its members gave it more latitude and authority to implement uniform products, operating practices, standards, and services to all Dairy Queen stores, though it had no franchising rights. Relocating its offices to St. Louis, Missouri, the new company immediately initiated a consumer research program and lobbied for a standardized mix formula for all soft serve products.

After years of involvement, the family members who had started Dairy Queen slowly left the company. Grandpa McCullough had retired during the late 1940s, while his son retired in 1953. Harry Oltz also retired during the late 1940s, while his son Hal continued the family's involvement with the Dairy Queen system. Harry Axene presented the idea of an automatic continuous freezer to the Dairy Queen store operators convention in 1949, but when his proposal was rejected he severed ties with the system and formed the Tastee Freeze business, which he operated on the Pacific coast for 20 years. Only Alex's son, Hugh, remained to look after the McCullough family interests during the 1950s, and by 1960 trouble was brewing on the horizon.

1960s: Legal Troubles Lead to a Change in Ownership

Harry Oltz's patent on his continuous freezer expired in 1954, and a number of store operators refused to continue paying royalties. Hugh McCullough responded with a lawsuit to prove that franchisees were not only paying royalties for use of the freezer, but for use of the trade name. The dispute became even more complicated when a group of store owners who had acquired their territory and franchise rights from Harry Axene filed suit to prove that people who had purchased territory rights from Axene had the right to use the Dairy Queen name because it was Axene and not the McCulloughs who owned the rights.

As the legal battles dragged on and on in the courts, Hugh McCullough grew more and more weary, and finally agreed to sell all his holdings and the rights to the name Dairy Queen. For $1.5 million in cash, McCullough relinquished his claim to all territory and trade name rights. Thus in March 1962, a new corporation, International Dairy Queen, was formed by a group of investors led by Burt Myers, who served as chairman of the board, and Gilbert Stein, who became president.

Headquartered in Minneapolis, management immediately created a wholly-owned subsidiary, American Dairy Queen Corporation, to take care of trademarks, collect royalties, and sell store franchises. More importantly, the new management quickly cleared up all the remaining lawsuits and established undisputed ownership of the name Dairy Queen. In addition, management inaugurated a standardized food program, implemented a national advertising and marketing program, created a national training school, imposed product uniformity at over 60 percent of Dairy Queen stores, revised contracts to cover percentages of sales rather than gallons of soft serve mix, and increased the number of employees in the national office from five to 125.

During the mid-1960s, International Dairy Queen consolidated its domestic operations by purchasing the franchising rights of Harry Oltz's AR-TIK Systems, including seven southeastern states, and by securing the development rights for territories in numerous states. The confusion over who owned territory in what state, and whether fees were outstanding or not, was due to the McCulloughs' tendency during the early years to sell territories and prospective store locations in a haphazard manner. Management's intention was to provide more effective services and standardize products by ironing out these problems. At the same time, management launched an aggressive acquisition strategy by purchasing interests in franchise operations within the recreation industry. A ski-rental firm in Denver was bought first, and was soon followed by a franchise for camping equipment.

1970s: Further Leadership Changes and a Return to Profitability

The company's consolidation of operating territory and its acquisition strategy proved costly, and a $2 million loss was forecast for fiscal 1970. With a growing cash flow problem that made it a potential takeover target, company management decided to accept the overtures of a new investment group. Headed by men who were part of the development of National Car Rental System, Inc., the group offered $3 million in cash with $2 million in credit to provide financing for working capital and expansion needs. In return, the investors assumed both majority interest and effective control of International Dairy Queen. Bill McKinstry became executive committee chairman and chairman of the board of directors and Harris Cooper was named president.

McKinstry's and Cooper's reorganization strategy had immediate effects. By discontinuing one of the company's divisions, closing 16 accounting and regional offices, and standardizing operating procedures and product lines, International Dairy Queen soon became profitable once again. In 1972, the company began trading its stock on the over-the-counter market; during the same year, its stock price increased from $1.50 per share to $22.75.

In May 1972, the first Dairy Queen store was opened in Tokyo. While 75 stores were operating outside the United States and Canada in 1976, more than 150 stores in Barbados, Guatemala, Iceland, Japan, Panama, Puerto Rico, Trinidad, the United Arab Emirates, and Hong Kong were operating by the end of the decade.

International Dairy Queen's total revenues in 1979 amounted to $956 million; as the system celebrated its 40th anniversary in 1980 total revenues came to $1.2 billion. Within the fast food industry, Dairy Queen ranked fifth in total sales volume behind McDonald's, Kentucky Fried Chicken, Burger King, and Wendy's; the company ranked third in total number of stores behind McDonald's and KFC. In the United States, Dairy Queen had 4,314 stores in operation, with 365 in Canada, 123 in Japan, and over 30 in eight other foreign countries.

In 1976, McKinstry was replaced as chairman by John Mooty, who worked well with President Cooper. Due to a sudden fall in stock prices during the mid-1970s, Mooty implemented a stock repurchasing plan to provide more stability for the company. By the early 1980s, International Dairy Queen had used nearly $40 million to buy back two-thirds of its outstanding shares on the stock market. At the end of the decade, the performance of the stock was widely regarded as one of the best; an individual who had invested $10,000 in Dairy Queen stock in 1980 would have a portfolio worth $470,000 in 1990.

1980s-90s: New Products and Restaurant Chains

Under Mooty's and Cooper's stewardship, International Dairy Queen had introduced both the Peanut Butter Parfait and Fudge Brownie Delight, both of which were highly successful novelty products. However, it was the introduction of the Blizzard, a concoction of soft-serve ice cream blended with candy, cookies, or fruit, that secured Dairy Queen's ranking as the number one treat chain during the 1980s. In 1985 alone, the year it was introduced, the Blizzard achieved sales of over 100 million units. Along with the success of the Dairy Queen stores, the company's purchase of Golden Skillet, a chain of fried chicken restaurants; KarmelKorn Shoppes, Inc., a 60-year-old popcorn and candy franchise; and Orange Julius, a franchise selling fruit-flavored blended drinks and various snack products, secured the parent's position as the eighth ranked fast food chain in the United States. International Dairy Queen also purchased 60 percent of a staffing agency, Firstaff, Inc., in 1989.

As the company entered the 1990s, John Mooty remained chairman of the board of directors and Mike Sullivan had replaced Cooper as president. Slow domestic growth and international expansion continued. Within the United States, the company was developing opportunities to open stores in shopping malls, office complexes, railroad stations, airports, and other non-traditional markets. In the international arena, the company initiated development programs in Thailand, Cyprus, Kuwait, Oman, Taiwan, and Indonesia, and planned a major campaign to open stores in Western and Eastern Europe.

In 1994 a dispute with franchisees surfaced when a group of store owners filed suit against International Dairy Queen, alleging that their efforts to develop alternative sources of food and paper supplies had been thwarted by the parent company. Two years later the case was granted class-action status by a federal court.

Continuing to test new marketing concepts, in 1996 the company unveiled a new, smaller prototype store in Caledonia, Minnesota. The "1500 Series" store, only 1,500 square feet in size, had half the capacity of a typical 90-seat restaurant and a smaller kitchen area. The intent was to develop a store that was appropriate for markets of 2,500 people or less. Franchisee interest was reportedly strong. The following year the company sold its 60 percent interest in Firstaff to AccuStaff, Inc. of Florida, and also jettisoned its long-time advertising agency, Campbell Mithun Esty, replacing it with Grey Advertising of New York.

Late 1990s Acquisition by Berkshire Hathaway

The biggest news of 1997 came in the fall, when it was announced that the company would be sold to Berkshire Hathaway Inc. of Omaha, Nebraska. Investment guru Warren Buffett controlled Berkshire, which would pay $585 million in stock and cash. Owners of Dairy Queen shares grumbled that the amount was low, but the deal was approved by voting stockholders and finalized in early 1998. The sale had been spurred by the death of Rudy Luther, a Twin Cities-based car dealer who owned 15 percent of Dairy Queen. When Luther's heirs decided to sell his stake, Buffett was approached. Having previously sought to buy the entire company, he refused to take only a portion and renewed his earlier offer, which was now accepted. Buffett pledged to be a "hands off" owner, and no major management or structural changes were planned.

Grey Advertising delivered the company's biggest promotional campaign ever during the summer of 1998. A new tag line, "Meet me at DQ," and an emphasis on the chain's hometown feel were features of the $25 million push. The first television spots were scheduled to run in the United States and Canada beginning in July.

In 2000 the six-year-old lawsuit with franchisees was finally settled. International Dairy Queen agreed to contribute $5 million per year for six years to the store owners' national advertising fund, while also giving the Dairy Queen Operators' Cooperative $6 million to help ensure availability of alternate sources of food and supplies. The court-approved settlement was hailed by all sides as a fair one. At the end of the year CEO Michael Sullivan stepped down and became chairman of the board, with chief financial officer Chuck Mooty taking over the top position. Mooty, age 39, was the son of John Mooty, who was named chairman-emeritus.

Turning the corner into the 21st century, International Dairy Queen was facing the future with renewed vigor. The deep pockets of Warren Buffett and an experienced team of leaders provided the proper conditions for continued success. The company's ongoing international expansion was further extending the reach of one of the most recognizable advertising symbols in the world: "The Cone with the Curl on Top."

Principal Subsidiaries: American Dairy Queen Corporation; KarmelKorn Shoppes, Inc.; Orange Julius of America.

Principal Competitors: A & W Restaurants, Inc.; AFC Enterprises, Inc.; Ben & Jerry's Homemade, Inc.; Burger King Corporation; Carvel Corporation; Checkers Drive-In Restaurants, Inc.; CKE Restaurants, Inc.; CoolBrands International, Inc.; Friendly Ice Cream Corporation; Jack In The Box, Inc.; McDonald's Corporation; Sonic Corporation; TCBY Enterprises, Inc.; Triarc Companies, Inc.; TRICON Global Restaurants, Inc.; Wendy's International, Inc.

Chronology

• Key Dates:

• 1927: J.F. McCullough and his son Alex found Homemade Ice Cream Co. in Iowa
• 1938: Trial sales of soft ice cream prove a hit with the public.
• 1940: First Dairy Queen store opens in Joliet, Illinois; others quickly follow.
• 1948: Non-profit Dairy Queen National Trade Association (DQNTA) is formed.
• 1955: DQNTA becomes a for-profit company (DQNTC) and relocates to St. Louis, Missouri.
• 1962: International Dairy Queen (IDQ) takes over DQNTC and moves to Minneapolis.
• 1970: Investor group headed by Bill McKinstry and Harris Cooper takes control of IDQ.
• 1972: IDQ stock begins trading over the counter; first Dairy Queen is opened in Japan.
• 1985: The Blizzard, a soft ice cream treat with other blended-in items, proves a huge success.
• 1998: Berkshire Hathaway, Inc. purchases IDQ for $585 million.
• 2000: IDQ settles antitrust lawsuit brought by its franchisees six years before.