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DQ owners sue franchisor


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For years, Dairy Queen has been trying to develop a concept to sweeten its brand, yet its latest plan has left a sour taste in the mouths of franchisees.

The Michigan Dairy Queen Operators Association last month filed a lawsuit against the Minneapolis-based chain. The operators claim in the suit that Dairy Queen is trying to force them to change their units to either its "Grill & Chill" concept or a dual-branded treat-centered unit with Orange Julius.

The changes amount to an overhaul of the brand and could require franchisees to spend tens of thousands of dollars to convert their units, according to the lawsuit. The complaint also states that the concepts are unproven and "neither is likely to provide a reasonable return to the

Dairy Queen franchisees in Michigan are fighting a requirement that they convert their stores to Grill & Chills. They say the concept has yet to show an adequate return on the required investment.

franchisees on the required investment."

"The market has not embraced this concept yet," said Carmen Caruso, an Illinois-based attorney for the franchisees. "If Dairy Queen has a new, winning concept that represents the future of the system, it has every right to present that concept to new and existing franchisees. But the market will dictate that. The fundamental problem is that when you go from offering a concept that the market may accept, to trying to coerce people to make a switch they never bargained for."

A Dairy Queen spokesman would not comment, other than to say company officials "don't agree with the allegations in the lawsuit." The Dairy Queen Operators Association—a traditional legal rival of the franchisor—is on the sideline, letting the franchisees take the lead. But the group's executive director, Harris Cooper, is fervently in favor of Michigan association's effort. "I'm glad to see that Michigan stepped up and raised the issue," he said.

The lawsuit is the latest challenge to Dairy Queen's effort to expand its concept. The chain has tried for years to encourage franchisees to convert their units to the Grill & Chill, a full-service fast-food concept with sandwiches, quesadillas and burgers in addition to ice cream that was first introduced in 2002.

There were 105 Grill & Chill units in the U.S. by the end of 2006, according to Dairy Queen's most recent UFOC. That's up considerably from 2004, when there were 39, but still a fraction of the 1,600 U.S. Dairy Queen Brazier stores—which also serve food. In 2006, the DQOA filed a lawsuit that in part included allegations of a forced conversion.

That lawsuit was dismissed last year after most of the issues in it—most of which had nothing to do with conversion—were resolved. Cooper said his association allowed the suit to be dismissed without settling the conversion question because it wasn't as big of an issue at the time. 

It apparently is now. Last June, according to the lawsuit, the company made the changeover mandatory. Franchisees who sell food would be required to switch to a Grill & Chill whenever they upgrade, renew or transfer their franchise. Those who sell only treats would have to switch to a "Treat Center" concept, which is co-branded with Orange Julius and has been around since 2005. There were 325 treat centers in the U.S. and Canada at the end of 2006, according to the UFOC.

Neither concept would be a cheap conversion. Conforming to Dairy Queen's minimum Grill & Chill standards would cost a franchisee up to $75,000 this year but more so in subsequent years—up to $95,000 in 2010, according to the lawsuit. Following the minimum Treat Center guidelines, meantime, would cost up to $60,000 this year and up to $70,000 by 2010.

Franchisees also contend that the franchisor has the right to require franchisees to pay even more—which the lawsuit says is likely because the total cost of converting a unit from a Brazier to a Grill & Chill is as much as $450,000. 

Requirements that franchise owners pay to remodel stores are hardly uncommon, and Dairy Queen is plagued with a huge number of different concepts—at least five, including soft-serve only with no dining area, those with a limited menu, those that are multi-branded, Brazier stores with full menus and the Grill & Chills. A mandatory conversion would, over time, unify the brand.

Yet Caruso said that this conversion goes beyond the typical franchise requirement. "It's a significant investment," he said. "It's a new name, a new concept. They're not just updating the concept. They're not just establishing lunch or dinner or offering breakfast. This takes the Dairy Queen franchise and makes it something else."

And critics also say the conversion isn't worth it from a financial perspective. They note that in the more than five years the Grill & Chill has been offered, comparatively few franchisees have taken the bait. "They're telling people they have to change their business into something else," Caruso said. "But if it was such a great idea to make this change, the free market would support that."

Critics also point to figures in Dairy Queen's UFOC. Among them: units that were remodeled and switched to a Grill & Chill saw sales increase 24.5 percent, on average. But if the Brazier store kept its original menu sales went up 44.93 percent. Figures were similar if stores were fully replaced—46.26 percent if the store switched its menu, 53.6 percent if it didn't.

In other words: At best it makes no difference to switch to a Grill & Chill from a post-remodel sales perspective. "I think it's a highly suspect venture," said Cooper. "If you're four or five years into an update, if it's successful then you don't have to mandate franchisees' change. If it worked, they'd be scrambling to do it."

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