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Franchise Chatter Guide: Can Dairy Queen Franchises Stay Afloat While the Ice Cream Industry Experiences a Meltdown?

by Brian Bixler on July 14, 2014

in Franchise Chatter Guides, Frozen Dessert Franchise, Ice Cream Franchise



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DQ Treat

This Franchise Chatter Guide on Dairy Queen and other top ice cream and frozen dessert franchises was written by Brian Bixler.

Shaped like a pair of smacking lips, one of the most recognized symbols in the world flies atop every Dairy Queen franchise. Seen more often now with just a white DQ in the center instead of the whole name, the red logo has remained virtually the same for more than 50 years, beginning as just black capital letters on a white background when the brand was established in 1940.

Next year, Minneapolis-based International Dairy Queen, Inc. will celebrate its 75th anniversary as a brand. It will also be the 30th anniversary of its popular Blizzard ice cream concoction.

For Americans, DQ is not only iconic, but nostalgic: Who doesn’t remember visiting an ice cream stand as a kid and getting a cone with a curlicue on top? Or maybe people remember their first banana split, which DQ introduced in 1951, or a Dilly Bar, which has been around since 1955.



Leading a Losing Sector

For many reasons, including its efforts to stay relevant to today’s young consumers, DQ has endured to become the No. 1 brand of soft-serve ice cream and frozen dessert in the United States. But with consumer tastes switching to low-calorie treats and desserts perceived to be healthier, DQ tops a category whose sales are gradually shrinking.

“Traditional ice cream sales have been slowly declining and seem poised to hit their lowest levels this year since the mid 1990s,” Yahoo Finance reported just last year. “Production of regular ice cream peaked in 2002 at about 14 quarts per person each year, according to government figures. That has fallen to 11.6 quarts per person, a 13 percent drop.”

And Dairy Queen has not escaped unscathed. Although its sales have been up, its domestic store numbers have declined during the last three years, according to Technomic market research firm. But sales, especially due to international expansion, are solid. And that may be because of DQ’s evolution over the years.

DQ Grill and Chill

DQ Grill & Chill Exterior Photo

Dairy Queen has been represented by several brands during its history. The soft-serve ice cream formula was literally invented by John McCullough and his son Bradley McCullough. They started by selling the soft-serve treat out of a friend’s store in Kankakee, Ill. Based on its popularity with customers, the McCulloughs and their friend Sheb Noble opened the first Dairy Queen in Joliet, Ill. in 1940.

Over the years the Brazier name has also been connected to Dairy Queen units designed with a mansard roof that also serve items like hot dogs and hamburgers. Since 1940, DQ has used a franchise system to expand its operations globally.

And the international market seems to be where International Dairy Queen, Inc. is putting its efforts today, while developing a brand known for hot and cold foods. That iconic logo that looks like a pair of lips underwent a change in 2006 with the addition of a swipe of orange at the top and a swipe of blue on the bottom to help phase out the Brazier brand and usher in the new DQ Grill and Chill for all new and renovated restaurants.

The Grill and Chill concept seems to be DQ’s answer to growing competition from fast-casual restaurants. The stores are larger than the former DQ Brazier and usually have an expanded menu of grilled burgers and sandwiches and even limited table service and breakfast at some locations. The concept has been in place since 2001.

International Growth

Dairy Queen consistently lands in the top 100 of Entrepreneur magazine’s annual Franchise 500 list of leading franchisors (this year at No. 58); it has also been recognized as one of America’s top global companies and, in 2012, one of the fastest-growing.

According to Technomic, Dairy Queen has 43.9 percent of market share of the frozen dessert category in the U.S. with more than $3.8 billion in systemwide sales (including food and beverage) in 2013. With its domestic sales stable and the brand reaching saturation in some areas, the company has been concentrating on its global expansion plans, which have reportedly been moving ahead of schedule.



“The international marketplace has always presented a huge opportunity to grow the Dairy Queen brand,” CEO John Gainor said in a statement following the opening of a new DQ in Trinidad last year. “The Dairy Queen system saw tremendous growth internationally (in 2012) with 215 restaurants outside the U.S. and Canada, which included the opening of our 100th location in Mexico.”

Earlier this year, the company announced that it has re-entered Taiwan, and also plans to open the first DQ locations in Vietnam and Guyana during 2014, which will bring the number of countries outside the U.S. where the Dairy Queen franchise system has a presence, to 24. All of the recent international agreements are for multi-units.

First Outlet in New York City

Dairy Queen has more than 6,300 locations, 1,285 of which are outside the U.S. and Canada. With more than 500 units in China, Dairy Queen hopes to increase the number of units outside North America to 2,000 by 2015, according to Jean Champagne, COO International Groups of International Dairy Queen, Inc., which also includes Orange Julius and Karmelkorn. The company also made news this year by opening the first Dairy Queen in Manhattan with plans to develop several more in New York City.

There may be one more reason that Dairy Queen is forging ahead while other frozen dessert brands are losing ground. Dairy Queen is owned by Berkshire Hathaway, Inc., a well respected multinational conglomerate led by legendary investor Warren E. Buffett, who is reportedly the second wealthiest man in the world. Berkshire Hathaway’s 1998 acquisition of the quick serve franchise certainly boosted the DQ brand and unquestionably attracted new investors. Its marketing department says Dairy Queen’s leaders constantly look to update and refresh both the brand and the signature Blizzard product to stay relevant and sustain domestic and international growth.

Industry Overview

Ice Cream and Gelato Industry

While Dairy Queen is staying afloat, however, other well-known ice cream brands are experiencing a meltdown caused partially by the frozen yogurt boom and popularity of other alternative desserts. In 2012, Technomic reported that seven of the 10 biggest ice cream chains had fewer stores than they had in 2011. Cold Stone Creamery, for example, had shuttered more than 100 stores since 2009, and at Baskin-Robbins, revenue and store count had fallen every year since 2008, save for a slight increase in revenues in 2013.

Despite augmenting their menus, and offering franchisees options such as kiosks and ice cream truck franchises as well as store locations in shopping malls and strip centers, ice cream and gelato franchises in the United States are likely to continue experiencing falling numbers, according to an IBISWorld report released at the end of 2013.

“The emergence of frozen yogurt as a substitute for ice cream and gelato has burdened industry operators in the five years to 2013,” the report states. “Accordingly, the number of ice cream and gelato franchise establishments is expected to decrease at an annualized rate of 0.8 percent to 10,808 companies during this period.”

Furthermore, IBISWorld predicts product demand to decline marginally in the five years to 2018, which is expected to influence the industry’s annualized revenue decline of 0.3 percent.

And it’s not just consumer demand for menu items that are fat-free, low-calorie and low in sugar that is affecting the industry. Flat dairy consumption, the steep rise in milk prices and decreases in disposable income during the recession have also had a negative impact on the industry during the last few years.

According to the IBISWorld report, in the five years to 2013, the price of milk was expected to rise at an annualized rate of 1.7 percent. The trend is expected to continue through 2018, with the price of milk rising at an annualized rate of 2.3 percent. As a key ingredient for making ice cream, milk and its cost can put a big dent in profits. With an average industry profit margin already in decline from 2008 to 2013, by 2018, industry profit margin is expected to fall further to 3.4 percent of revenues.

The one bright spot in the IBISWorld report was a forecast for an improving economy that will increase disposable income, helping to stem the tide of revenue decline. But the competition from frozen yogurt, smoothies and other frozen desserts cannot be ignored. Of the 10 leading restaurants in Technomic’s ranking of limited-service frozen desserts chains, half of them are frozen yogurt dispensers with year-to-year sales growth (due primarily to unit growth) of as much as 48.6 percent for Orange Leaf Frozen Yogurt and 17.3 percent for Menchie’s, compared to the market leader Dairy Queen’s modest 4.6 percent growth in sales.

Trends

  • Customization has become key in the Millennial Age of consumerism. Therefore, ice cream shops must focus on providing many choices, a trend that applies to just about any restaurant these days. But they should also be perceived as healthy. Expect to find options such as reduced-fat, fat-free and sugar-free options at ice cream franchises.
  • Seemingly at odds with the first trend, customization also entails providing consumers a way of personalizing their purchase such as allowing them to add their favorite additional ingredients. Cold Stone Creamery is an example of one franchise that will start with the customer’s choice of ice cream and then mix into it ingredients such as candy bar pieces, gummi bears, cookie pieces, brownie bits and fruit. Jeni’s Splendid Ice Creams, a small Ohio-based chain, has even established a new gourmet segment with flavors such as goat cheese with red cherries and Riesling poached pear.
  • Atmosphere is becoming more important to frozen dessert establishments, according to industry observers. Frozen yogurt stores in particular strive to be family-friendly as well as a cool place for the younger set to hang out. Ice cream parlors have always been social establishments and will likely continue to foster that reputation through improved decor and comfortable seating to attract customers as much as the products being served.

Major Players

Baskin-Robbins

Baskin Robbins Interior

Both Technomic and IBISWorld rank Baskin-Robbins second in the field of frozen desserts, and ice cream and gelato stores, respectively. Of the latter category, IBISWorld estimates that Baskin-Robbins has a market share of 18.7 percent.

Owned by Dunkin’ Brands, which is co-branding the two concepts at some stores, Baskin-Robbins is also iconic and its longevity as a brand was illustrated earlier this year in a speech by President Barack Obama. While talking about the economy in Denver, the president recalled wearing a Baskin-Robbins uniform when he worked his very first job.

The company, headquartered in Canton, Mass., was founded in 1945 and built its brand around its “31 flavors” slogan. According to the company, it has introduced more than 1,000 new flavors during its history.

The company operates more than 7,100 retail stores in 49 countries and ranks above Dairy Queen on the 2014 Entrepreneur Franchise 500 list at No. 41. About 2,500 shops are located in 43 states.

In 2012, total global franchisee-reported sales for the company was $1.9 billion, according to IBISWorld. With a steady decrease in revenue from 2009 to 2012, Baskin-Robbins did show a year-to-year revenue gain of 1.9 percent in 2013.

Cold Stone Creamery

Cold Stone Creamery Photo by Robert Stockdill

Despite recent struggles, Cold Stone Creamery remains a worthy competitor in the ice cream and gelato space. IBISWorld estimates its market share at 7.6 percent.

Founded in 1988, Cold Stone serves ice cream, sundaes, pre-packed ice cream, cakes, pies, shakes, smoothies, frozen yogurt and sorbet. Franchising operations began in 1994. In 2007 it merged with Kahala Corporation, creating 13 diversified brands (including Blimpie and NrGize Lifestyle Cafe).

In 2013, the company was estimated to own about 1,000 establishments domestically with about another 330 locations internationally. The company has more aggressively pursued international operations over the past five years, with expansions into South Africa, Turkey and parts of Asia in 2013.

The recent and quick demise of Crumbs cupcake shops proved the dangers of concentrating on one product, analysts said, using Cold Stone Creamery as an example of a company that is diversifying its menu to also include things like cake pops and ice cream cupcakes.

But most recent Technomic numbers show that the chain continued to see a decrease in sales (-1.6 percent last year) and units, which were reduced by an additional 4 percent.

Rita’s Italian Ice

Rita's Italian Ice Photo by infinitesmilesx

Rita’s is the one franchise that really differentiates itself from competitors on the list of leading frozen dessert, ice cream and gelato purveyors. Founded in 1984 and headquartered in Trevos, Pa., it is primarily an East Coast regional chain that specializes in selling Italian ices, frozen custard and gelato. Its operations are continuing to grow.

Franchising since 1989, by 1996 it had expanded to 100 units in nine states. The company was then sold to McKnight Capital Partners private equity group in 2005, which continued growing the chain until it was purchased by Falconhead Capital LLC in 2011. In 2013, the company opened its first international location in Shenzhen, China.

IBISWorld estimates that Rita’s Italian Ice has 5.7 percent market share in the ice cream and gelato franchise space. The company reports having more than 600 stores in 24 states. This year it is opening its first store in Iowa with an area development agreement for that state and it has just appointed Eric Taylor senior vice president and chief development officer to oversee franchise growth. Taylor has held leadership roles at such companies as MetroMedia Restaurant Group (Bennigan’s, Steak & Ale, Ponderosa, Bonanza) and Sbarro.

Ben & Jerry’s

Ben & Jerry's Photo by saschmitz_earthlink_net

Still a powerhouse brand in prepackaged ice cream and frozen yogurt sold in grocery stores, Ben & Jerry’s has not fared well as a franchise system serving ice cream in its own stores. The Burlington, Vt., company is now owned by conglomerate Unilever.

Ben Cohen and Jerry Greenfield, the company’s namesakes, founded the business in 1978. But in recent years, the company has seen fewer stores operating and the company’s franchise revenue is expected to decline during the next five years as it re-focuses on manufacturing ice cream for prepackaged sales in grocery outlets, according to IBISWorld, which estimates Ben & Jerry’s market share to be about 2.5 percent. It also estimates that in 2013 an estimated 259 Ben & Jerry’s franchises were in operation, generating about $78 million in revenue.

Braum’s Ice Cream & Dairy Stores

Braum's Ice Cream & Dairy Stores Photo by Mikey Walters

This venerable family-owned business also sets itself apart from competitors by emphasizing freshness. Pronounced like the name of the famous composer Brahms, Braum’s Ice Cream and Dairy Stores is a chain of quick-service restaurants and grocery stores based in Tulsa, Okla.

To ensure the freshness of its product, Braum’s does not franchise any stores outside of a 300-mile radius of the home farm in Oklahoma. Still, as of the fourth quarter of 2013, there were 280 stores in operation, with 128 stores in Oklahoma, 99 in Texas, 27 in Kansas, 13 in Arkansas and 13 in Missouri.

Almost all the food products sold by Braum’s are processed or manufactured by the company, whose assets include its own mill feed, dairy herd, dairy processing plant, bakery, stores and delivery trucks. The company describes itself as the only major ice cream maker to still milk its own cows.

The Future

Though the ice cream sector seems to be under siege, analysts expect it to stay around and evolve. However, it will continue to face new and emerging competition from a variety of frozen dessert products, including competition from other quick service chains that now serve soft-serve ice cream, such as McDonald’s and Sonic Drive-In Restaurants. Working in favor of the sector is the fact that its products are well established and accepted by consumers. Ice cream is still one of America’s favorite treats and while the industry’s products are seasonal in nature, demand remains strong during hot weather.

“While some consumers may decide not to eat ice cream or gelato because of health concerns, its widespread popularity ensures that demand for these frozen snacks is likely to remain relatively strong, especially during the summer months,” IBISWorld concludes.



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