FDD Talk 2019: DQ Grill & Chill Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the DQ Grill & Chill franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a DQ Grill & Chill franchise, based on Item 7 of the company’s 2019 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a DQ Grill & Chill franchise, based on Items 5 and 6 of the company’s 2019 FDD

• Section IV – Number of franchised and company-owned DQ Grill & Chill outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD

• Section V – Presentation and analysis of DQ Grill & Chill’s financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2017 average, high, and low gross sales for the 79 DQ Grill & Chill restaurants that were newly constructed freestanding restaurants; were developed and first opened for business between January 1, 2015 and December 31, 2016; were operated for the full year 2017; and are franchisee owned and operated

• 2017 average total gross sales, total product cost, total labor cost, total restaurant controllables, and total manageable profit for DQ Grill & Chill’s GC Core 72 (63 units) and GC Core 47 (6 units) restaurants, respectively, that were newly constructed freestanding restaurants; were developed and first opened for business between January 1, 2015 and December 31, 2016; were operated for the full year 2017; are franchisee owned and operated; and submitted usable profit and loss statements to ADQ

• 2017 average, high, and low gross sales for the 10 DQ Grill & Chill restaurants that were newly constructed freestanding restaurants; were developed and first opened for business between January 1, 2015 and December 31, 2016; were operated for the full year 2017; are franchisee owned and operated; and submitted sales reports, but not usable P&L’s, to ADQ

Section I – Background Information

18 Things You Need to Know About the DQ Grill & Chill Franchise

Launches New Franchisee Incentive Program and Targets Growth Markets

1.  At the end of February 2019, Dairy Queen announced that it was starting the year off with a bold plan to expand its DQ Grill & Chill restaurants by targeting 10 major metro markets and by launching a new franchisee incentive program.

2.  As part of its plan, Dairy Queen aims to add more than 70 new restaurants this year in markets including Sacramento, California; Baltimore; Orlando, Florida; Milwaukee; Tulsa, Oklahoma; Memphis, Tennessee; Albany, New York; Fresno, California; Charlotte, North Carolina; and New Orleans. The brand says it is also planning to add units internationally.

3.  Julie Davis, franchise development director for American Dairy Queen Corporation (ADQ), said, “For decades, the Dairy Queen brand’s staying power has resonated with talented franchise ownership groups. It’s an iconic brand that evokes tradition and comfort for people worldwide. By highlighting our brand’s sustainability and tremendous room for growth, there are increasing opportunities for strong multi-unit operators who want to diversify their portfolios and be a part of this development phase.”

4.  Dairy Queen’s four new incentives are meant to attract multi-unit operators eager to grow and move through the development process quickly. These incentives are:

• Timeline Incentives – ADQ will give franchisees a fixed incentive payment of $30,000 if they open a new DQ Grill & Chill restaurant within 32 weeks of signing their franchise agreement; ADQ will give franchisees who open within 40 weeks a fixed incentive payment of $15,000.

• Multi-Unit Opening Incentives – Franchisees opening multiple DQ Grill & Chill restaurants within the same calendar year are eligible for an additional $10,000 per opening.

• Year-on-Year Incentives – Franchisees opening new DQ Grill & Chill restaurants in consecutive years are eligible for an additional $10,000 incentive on their first opening in the second calendar year.

• Re-Purpose Incentives – Franchisees that develop and open a DQ Grill & Chill restaurant by expediting the conversion of a closed, former DQ or other QSR restaurant facility will be eligible for a fixed incentive payment of $10,000.

5.  Davis added, “These incentives are designed to attract elite franchisees with a fast-track mindset. We’re a determined, innovative team and we have the processes and systems in place to support this development vision for years to come.”

Appoints New Franchise Development Director

6.  In late October 2018, American Dairy Queen Corporation (ADQ) announced the addition of Julie Davis to the corporate team as the brand’s new franchise development director. For nearly 20 years, Davis has held franchise development leadership positions with various franchise brands in the QSR space including Schlotzsky’s, Popeyes, Dunkin’ Brands, and El Pollo Loco.

7.  Through these various positions, Davis has been able to drive her expertise specifically in the QSR segment, building trust and consistency with prospective franchisees looking to grow within QSR.

8.  Davis said, “I love being a part of someone trying to achieve their American Dream. Working with franchisees, I am able to help entrepreneurs diversify their business portfolio by working with incredible brands. And on the client side, I am able to partner franchisors with amazing franchisees who make up the backbone of the franchise.”

9.  Davis was initially drawn to the Dairy Queen system through the initial stages of the interview process when she saw the transparency and knowledge behind the leadership team. Instead of looking to fill the role quickly, she noticed the corporate staff wanted to fill the role with the right person who would be there for the long run. Davis is excited to join the dynamic team as they put a large focus on technology and growth moving into 2019.

10.  According to Davis, “I was confident in the strong franchising system and extremely inspired by the way the corporation has incorporated technology solutions into the business. From site selection to mapping analytics, and even inside the building with the consumer facing technology and LMS training solutions, the Dairy Queen brand has both a rooted history and a forward-thinking outlook when it comes to the business. These two qualities combined have positioned it as a leader in the segment.”

11.  Davis plans to hit the ground running in her new development role at ADQ. She will spearhead growth through a multi-unit lens utilizing technology to target both new and existing markets with forecasted success. Specific markets of interest include Sacramento, California; Baltimore, Maryland; and Orlando, Florida as ADQ sets its sight on growth through the remainder of the year.

12.  Jim Kerr, executive vice president, franchise development, US & Canada, for ADQ, said, “As we move forward, the important thing is to lay groundwork for future years, and this means strengthening our leadership team to offer something better to our franchisee family. With the help of our committed franchisees, our strong work culture and our commitment to the brand legacy, we are excited for what is to come.”

Company History

13.  In 1938, John Fremont McCullough and his son Alex invented the first soft-serve ice cream formula. The McCulloughs asked their friend Sherb Noble to sell the new product in his ice cream shop in Kankakee, Illinois. On the first day of sales, Noble sold more than 1,600 servings of the soft serve within two hours.

14.  Encouraged by this success, the McCulloughs and Noble decided to start a business that would sell the soft-serve ice cream. They opened the first Dairy Queen store in 1940 in Joliet, Illinois. While this first DQ store has not been in business since the 1950s, it is a city-designated landmark.

15.  Dairy Queen was one of the first businesses to use franchising to grow and by 1941, the company had expanded to 10 locations. Over the next decade, Dairy Queen continued to grow rapidly and by the mid-1950s, there were over 2,600 stores in the United States and Canada. Also in the 1950s, Dairy Queen began expanding its menu to include malts, milkshakes, banana splits, and Dilly Bars.

16.  A decade later, Dairy Queen once again changed up its menu and added hot foods like hamburgers and chicken strips. Dairy Queen initially sold hot foods and cold treats out of its Brazier concept. In the early 2000s, Dairy Queen launched a new concept, DQ Grill & Chill, which features hot food, treats, table delivery, and self-serve soft drinks. It is the brand’s new concept for all new and renovated full-service restaurants.

17.  DQ Grill & Chill locations are larger than older-style locations and feature a completely new store design. In most cases, they offer an expanded menu including breakfast, Grill Burgers, and grilled sandwiches, as well as limited table service (customers still place orders at the counter). Today, Dairy Queen has locations of various store types in 28 countries.

Entrepreneur’s Franchise 500

18.  Dairy Queen ranked No. 21 on Entrepreneur’s 2019 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of DQ Grill & Chill franchise costs, based on Item 7 of the company’s 2019 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on DQ Grill & Chill’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2016

• Outlets at the Start of the Year:  1,797
• Outlets at the End of the Year:  1,874
• Net Change:  +77

2017

• Outlets at the Start of the Year:  1,874
• Outlets at the End of the Year:  1,886
• Net Change:  +12

2018

• Outlets at the Start of the Year:  1,886
• Outlets at the End of the Year:  1,893
• Net Change:  +7

Company-Owned

2016

• Outlets at the Start of the Year:  2
• Outlets at the End of the Year:  2
• Net Change:  0

2017

• Outlets at the Start of the Year:  2
• Outlets at the End of the Year:  2
• Net Change:  0

2018

• Outlets at the Start of the Year:  2
• Outlets at the End of the Year:  2
• Net Change:  0

Section V – Financial Performance Representations (Item 19, 2019 FDD) and Analysis

• Schedules A, B, and C disclose information about DQ Grill & Chill restaurants that:

• were newly constructed freestanding restaurants;
• were developed and first opened for business between January 1, 2015 and December 31, 2016;
• were operated for the full year 2017; and
• are franchisee owned and operated.

• This financial performance representation does not include:

• (1) new DQ restaurants developed in Texas (which have the “Texas County Foods” cooked food menu and are offered under a separate disclosure document);
• (2) existing DQ restaurants that have converted to the DQ Grill & Chill restaurant’s facility design, menu, and trademark by remodeling an existing DQ restaurant or replacing an existing DQ restaurant with a new DQ Grill & Chill restaurant design facility either at the same site or at a new location;
• (3) new DQ Grill & Chill restaurants that involved a conversion of a closed location of a different quick service restaurant brand;
• (4) new DQ Grill & Chill restaurants that were opened in a fuel center or other non-traditional location inside a host building such as a ferry terminal or mall; or
• (5) new DQ Grill & Chill restaurants that were opened under a developmental rights contract.

• Schedule A presents Gross Sales for all locations that meet the criteria above for inclusion in this financial performance representation.

• Schedule B includes the following information for a subset of the locations listed in Schedule A, based on the usable profit and loss statements (“P&Ls”) these locations submitted to ADQ:

• Weighted average and straight average Gross Sales;
• Certain expenses and manageable profit percentages; and
• Best, worst, weighted average, and standard average restaurant results by category.

• Schedule B has two tables, one for DQ Grill & Chill locations developed using the GC Core 72 prototypical freestanding building model, and one for DQ Grill & Chill locations developed using the GC Core 47 prototypical freestanding building model.

• Schedule C presents Gross Sales information for a subset of locations listed in Schedule A that did not submit a P&L to ADQ that ADQ could use as a basis for including the location in Schedule B. None of the locations listed in Schedule C are included in Schedule B.

• Schedule A. Number of locations included in Schedule A:  79

• Schedule B. Number of locations included in Schedule B:  69

• Schedule C. Number of locations included in Schedule C:  10

• The data in Schedules A and C is based on sales reports submitted to ADQ by franchisees of the restaurants included in the schedule and the data in Schedule B is based on information submitted on P&Ls from franchisees of the restaurants included in the schedule.

• ADQ has not audited or independently verified the results in the P&Ls or sales reports.

• Gross Sales. Gross sales, as used in Item 19 and in the Operating Agreement, means the total revenues and receipts from the sale of all products sold by the Restaurant, whether paid for by cash, credit (not adjusted for credit card fees) or gift card, barter, or otherwise, including sales of all products under any of the Trademarks as well as sales of other products, services, and merchandise, whether or not identified by other brand names, and excluding sales taxes and revenues and receipts arising directly from Licensee’s sale of gift cards.

• Product Cost. The cost of the food products that are sold to consumers and the associated paper purchases (based on beginning inventory, plus purchases, less ending inventory). The food products include ingredients, beverages, and condiments. The associated paper purchases include bags, product wraps and containers, other paper products, cups and lids, straws, and eating utensils.

• Note that the food cost portion of discounts given and employee meals is reflected in local advertising. Local advertising is a restaurant controllable expense.

• Labor. The sum of crew labor wages, manager’s salary and other compensation, and related taxes and benefits. Labor does not include payments that may be made to a franchisee or its owners in the form of a manager’s salary or wages. Labor does not include payments that may be made to a franchisee or its owners in the form of an owner’s draw, a dividend, or similar distributions.

• Restaurant Controllables. The sum of utilities, telephone, local advertising (includes product costs for discount sales and employee meals), repairs and maintenance, service contractors, laundry and uniforms, operating supplies (other than inventory), trash and recycling, and bank charges (other than debt service).

• Miscellaneous Expenses. All miscellaneous expenses are rolled up into the total Restaurant Controllables percentage.

• Manageable Profit. Profit remaining after deduction of sales taxes, discounts, Product Cost, Labor Cost, and Restaurant Controllables, but before the deduction of occupancy costs, insurance (non-employment), continuing license fees, sales promotion program fees, legal fees, accounting fees, and other administrative costs.

Schedule A – Gross Sales for All Locations That Met the Criteria for Inclusion in the Financial Performance Representation (79 units)

Total Gross Sales