DQ franchisees sue corporation over revamping

DQ franchisees sue corporation over revamping

Dairy Queen franchisees say costly upgrades are being forced on them.

staff/wire reports

CHARLESTON, W.Va. — Dairy Queen is facing a dilly of a problem — a rebellion against the revamping of restaurants by a growing number of mostly mom-and-pop franchise owners.

Claiming that DQ is forcing them to increase the size of restaurants or add table service under the threat of losing their franchises, owner associations with members in 10 states are now suing the chain.

Resistance to the Minneapolis-based corporation began in Michigan last month.

This month, franchisee associations with members in Arizona, West Virginia, Ohio, Virginia, Maryland, Pennsylvania, Kentucky, Missouri and Illinois filed suit to block the corporation’s plans.

Randy Rapp, president of the Northeast Ohio Store Owners Association, said his group joined the suit but he declined to comment further. His sons own stores in Canfield, New Middletown and North Lima.

The lawsuit pits entrepreneurs who mostly own one or two restaurants against International Dairy Queen and its corporate parent, Berkshire Hathaway Inc., the investment company of billionaire investor Warren Buffett.

“It’s the classic David vs. Goliath balance,” says Carmen Caruso, an attorney for the plaintiffs.

But Dairy Queen Chief Executive Chuck Mooty says the company isn’t strong-arming anyone.

“What you’re hearing is the minority that really are saying, ‘I really don’t have any desire to evolve and rejuvenate,’” Mooty says. “We have to be a brand that’s relevant.”

Dairy Queen’s plans center on two relatively new restaurant lines. DQ Grill Chill establishments would sell meals and desserts and would expand to include limited table service, among other things. Outlets that sell only Blizzards, Dilly Bars and desserts would combine with the Orange Julius beverage chain to become a DQ/Orange Julius Treat Center.

Traditionally, Dairy Queens have been small restaurants, often with just a few tables or even just window service.

The lawsuit contends Dairy Queen is trying to force franchise owners to spend between $275,000 and $450,000 to remodel stores to adhere to an unproven concept — one that will cost more to operate, double staffing requirements, and cut into profits.

“No one should have to make this conversion that is quite expensive unless they want to,” Caruso says. “If the DQ Grill Chill concept was such a promising new concept, then the free market would solve this problem.”

That hasn’t happened, according to the lawsuit.

As of December 2006, the complaint says, just 105 Grill Chill restaurants had opened in the United States. Some have performed poorly, and two have closed.

Mooty, however, says Grill Chill restaurants have performed well, though he declined to talk about profit margins.

Moreover, Mooty maintains no one is being forced to do anything. Dairy Queen does require about 70 percent of franchises to modernize restaurants periodically. But Mooty says Dairy Queen has capped the required investment at $75,000 for 2008, $85,000 next year and $95,000 in 2010. The required modernization should be no surprise to franchise owners because it’s standard in most of their contracts, Mooty says.