In bouts with franchisees, chains need to keep cool heads, avoid risks of customer alienation

Nation's Restaurant News, May 17, 2004 by Robin Lee Allen

Warren, your grill is killing our chill." That sentence recently appeared prominently on a billboard, aimed at investor-billionaire Warren Buffett, who is the chairman of Dairy Queen's parent company, Berkshire Hathaway Inc. of Omaha, Neb., and also one of the world's wealthiest men.

The message came from a group of frustrated franchisees who insisted that Dairy Queen's push to modernize its aging stores with a new concept called DQ Grill & Chill will put some longtime operators out of business.

The franchisees, in order to make their concerns known, staged a protest on the same weekend that tens of thousands of shareholders flocked to Omaha for Berkshire Hathaway's May 1 annual meeting, and they bought advertising space on a billboard near the arena where the gathering was held.

In a separate case of ongoing tension between a franchisor and its operators, Little Caesars recently slapped 40 franchisees with a lawsuit charging them with trademark infringement for using products that do not meet the chain's ingredient specifications. About six months ago some of those same operators created their own purchasing cooperative--something made possible by a 2001 settlement of a lengthy class-action lawsuit.

The strife in both the Dairy Queen and Little Caesars systems serves as a reminder that although friction between franchisors and franchisees is a constant, public showdowns in court or on billboards don't necessarily have to follow.

Berkshire Hathaway purchased International Dairy Queen in 1998. About two years ago the chain, which now has some 5,700 units worldwide, began to reposition its traditional DQ Brazier outlets by converting them to the DQ Grill & Chill concept. That new format features an expanded menu with such items as a grilled turkey sandwich and a chicken Caesar salad as well as an upgraded decor created to look more like casual dining than fast food. In keeping with the brand's heritage as a seasonal soft-serve ice-cream and treat stand, Grill & Chill also offers frozen desserts.

But the Dairy Queen Operators' Association, which purports to have some 1,500 members, says franchisees are being pressured to convert their stores at an estimated cost of $400,000 per location. The group claims the amount is simply too expensive for some operators, especially those in small-town and rural locations.

However, Dairy Queen says the conversions of existing restaurants are strictly voluntary and insists that the association represents only a minority of the system. Some 40 units to date already have been converted to the Grill & Chill format with an additional 60 slated for conversion by the end of 2004. Operators who don't want to upgrade to Grill & Chill have the option to choose a second concept that focuses primarily on ice cream and treats while downplaying other menu items.

But that apparently is not an acceptable solution to the operators who appealed to Buffett, who is not expected to take action. Although he has an affinity for DQ Dilly Bars, he also has a reputation for not interfering with the management of companies that Berkshire Hathaway owns.

As often is the case with disputes between franchisors and their franchisees, both sides appear to have staked out legitimate positions. For example, DQ has the responsibility to keep pace with its quick-service rivals, which increasingly are upgrading their concepts. At the same time franchisees feel a responsibility to ensure that their investments generate profitable returns.

However, battles that become public send signals to customers that attempts at negotiations have failed, which could hurt sales and dampen brand loyalty. Although Dairy Queen and Little Caesars already are embroiled in high-profile disputes, other restaurant chains can choose a different route when tempers flare.

Whether the issue is store upgrades or product procurement, the bottom line is that franchisors and franchisees alike want to make money. Both parties also share the burden of remaining at the negotiating table to iron out frictions. The hope is that each side can make concessions to find a workable middle ground, even if it is not necessarily an ideal situation.

A recent newspaper account predicted that "Dairy Queen's next Blizzard flavor of the month could be Sour Grapes." With any luck the negative publicity will serve as the incentive DQ and its operators need to create a more palatable flavor--one that will be more likely to ring up sales at the register.

NRN'S EDITORIAL BOARD

Editorial Page Editor: Robin Lee Allen

Alan Gould, Ellen Koteff, Richard Martin, Elissa Elan, Amy Garber, Alan Liddle, Paul Frumkin and Ron Ruggless