Saturday, December 22, 2007

Been to a Dairy Queen Lately?

Starbucks recently opened its third store in our town—that’s one more than McDonalds has—and despite Wall Street’s concern over the recent downturn in Starbucks’ fortunes, its newest store is picking up extra business without crimping the other two stores one bit.

This is no big surprise: the first Starbucks in town grew steadily for years despite a second-rate location, until it was bursting at the seams. Lines reached the door at peak times and the under-sized parking lot generated at least one near-miss each morning among the bleary-eyed commuters zipping in and pulling out.

Local opposition delayed the second Starbucks for a while, but when it opened—four miles from the first, on prime real estate smack in the heart of town—it did gangbusters almost from Day One. And although it cannibalized the first store for about eighteen months, today the two stores are doing well over 50% more than the first did by itself.

Now, this third Starbucks will probably never be an above-average store: the location is odd and out of the mainstream traffic flow. Still, being a university town with 50,000 people who for the most part fit the Starbucks demographic, we could probably support one more Starbucks at the least.

After all, there are four Dunkin Donuts within our borders, and that’s not including the Dunkin Donuts “store-within-a-store” inside the local Stop & Shop, which does a land-office business, particularly in the mornings and especially on weekends, when grocery shoppers line up with shopping carts that actually contain built-in coffee cup holders.

Is this a great country, or what?

Am I the only person who never ceases to be amazed to see people lining up to buy donuts and coffee before they shop for food? Is pushing a shopping cart around a grocery store that much effort that people need coffee and donuts before they’re up to it?

Maybe Stop & Shop should consider letting Domino’s deliver right inside the store—pimply-faced teenage boys running recklessly around the aisles with little lights on top of dented, oven-warming shopping carts bringing pizza slices to calorie-deprived food shoppers pushing shopping carts with little pizza-slice-shaped warmers built into their shopping cart handles, right next to the coffee cup holders.

And don’t stop at the main meal—set up a Dairy Queen stand at the end of each check-out counter, so that after the stress of swiping their credit card and watching the clerk bag their groceries, Stop & Shoppers can load up on sugar for the five-minute drive home.

Here, unfortunately, I show my age. Dairy Queen might not be the most popular choice of an ice cream treat for most Stop & Shoppers these days, poor old “DQ” having been supplanted in our area of the world by Cold Stone Creamery.

Cold Stone does to excess what Dairy Queen started with its Oreo-filled ice cream Blizzard, mushing cookies and all manner of incongruous treats into ice cream with jolly names like “Cookie Doughn’t You Want Some” and “The Pie Who Loved Me” (Cheesecake ice cream, OREO cookies, Graham Cracker pie crust and fudge).

Teenagers love the stuff, and I can vouch for that: what used to be an after-dinner trip to Dairy Queen has turned into a late-night visit to Cold Stone.

Now, I don’t know for a fact what impact Cold Stone and other entrepreneurial ice cream ventures are having on Dairy Queen, but it can’t be good. Not that Dairy Queen seems to care: the “DQ” in our town looks like every other “DQ” that I’ve ever seen in this area of the country...a sad little faded-red-roof with white siding structure in a dingy lot on a crowded section of strip malls along Route 1.

I have not been there in years—since the girls grew out of that particular style of soft ice cream around third grade—but my memories of the handful of visits we took are not fond.

For starters, just finding a parking spot at the DQ on a hot summer night can be hazardous, what with hormone-charged teenage boys fighting for the inadequate number of spaces in a parking lot that was never zoned for peak demand levels of hot summer nights.

Then there’s the building itself, which is straight out of “American Graffiti” and nearly as outdated as the America that movie portrays, with only walk-up service at a pair of sliding windows along a stainless steel counter.

You wouldn’t mind the atmosphere—cars, boys, and the stale cool air wafting from the window—if the lines moved along nicely, but on a hot summer night they are long and spectacularly inefficient. Absolutely no effort has been made to implement McDonalds-type efficiency engineering on line control. Nor has much thought been put into the order process itself: whoever catches the attention of the sweaty, underpaid workers behind the glass is next.

Still, like any terribly managed customer experience—the Post Office on a good day, for example, or the airline counter of a flight that’s been cancelled—you feel that much better once you reach the head of the line and your order’s actually been taken.

Then you wait, and while you wait you try to avoid the stale air peculiar to ice cream shops, as well as the sticky stainless steel counter and the cars zipping in and out of the lot. After getting the cones and handing them out to your children, you pay, invariably exchanging normal dollar bills for change that comes in damp and crumpled bills, or sticky coins, or both. Back in the car you discover that the cups never hold the stuff: whatever flavor you bought eventually gets worked into the baby seat or the car seat.

It is not an experience I particularly recommend.

Still, the ice cream itself is fine, and kids especially love the chocolate covered cones. But aside from quieting down antsy toddlers on a hot summer night, there is no great reason to schlep to a “DQ” any more than any other ice cream joint.

After all, “The Blizzard” was the last major new product from Dairy Queen, and that was in 1985. Its initial revelation—that you could smash Oreo cookies and candies into ice cream—has long since been surpassed by Cold Stone Creamery and others.

Indeed, hot summer nights aside, the local “DQ” might as well be a spare parking lot for the businesses nearby—and, in fact, in December that’s what happens: it becomes a Christmas tree lot.

Now, I recognize that the northeast part of the country may not be the dream market for an ice-cream shop. In fact, there are only about 50 Dairy Queens in the New York/New England area, while Texas alone has 115.

But there are plenty of Dairy Queens in the cold-weather states of Minnesota and in DQ’s home state, Illinois (the original store on which Dairy Queen was based opened in Kankakee, made famous in the Arlo Guthrie song “City of New Orleans”), not to mention Michigan and Wisconsin, which has 37 Dairy Queens.

And summers in Wisconsin are not exactly long.

So why has Cold Stone Creamery—which was started in 1988, fifty years after Dairy Queen—already overtaken Dairy Queen in my home state?

Well, have you been to a Dairy Queen lately?

Lousy locations, decaying plant and the fact that the last really new product was introduced 22 years ago might be part of the answer.

Another part of the answer might be the fact that Dairy Queen is owned by Berkshire Hathaway, which is, of course, controlled by Warren Buffett.

And Warren Buffett does not like to spend money.

To be continued…

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.


Lois said...

I'm 24 and worked part-time nine years at that original Kankakee DQ.
It's still a summertime success.

BelowTheCrowd said...

Jeff, you are bringing back bad memories. Mostly ones I'd rather forget.

I remember when there was a DQ a bit further up the road from the current location. (Not quite sure if that one moved, or if it just went out of business.) One of my highschool hangouts years and years ago and the only thing I can recall that made it a desirable place back then was that they had videogames back in the original Pac-Man era.

I do have one fond memory of the parking lot, but of course I was one of those testosterone-filled boys and poorly-lit parking lots had some attraction.

Other than that, I do remember gagging on their burgers, and definitely recall that if you wanted good soft-serve ice cream there was a Carvel across the street. Also now long gone.

You're highlighting one of the problems of the Buffett style of investment. While investing in strong cash cows with good balance sheets is not a bad idea, a strategy of presuming that the cash cow doesn't need to be fed or cared for very much tends to fail over the long term.

In fact, it's the same strategy that was employed for years by the US auto industry, and which that industry still has not recovered from.


Mark said...

"And Warren Buffett does not like to spend money."

Maybe not, but Buffet likes to MAKE money. What's the ROI he gets from Dairy Queen by investing nothing (assuming that's what he's doing) and "milking" (no pun intended) what he's got vs. what he'd make by spending major dough (no ice-cream mix-in pun intended) to modernize the stores? I don't know the answer to this, but you at least need to consider it.

Len said...

Driving trhough Texas in July or August at lunch time a DQ can seem like a heaven sent oasis. Even with the sticky tables,and soft wet crumpled bills.
In many of the places I've stopped the DQ is right there on the main drag,not far from the feedlot.

Bamass said...

Remember the Mark Cuban incident with DQ? How badly does management have to have its hands tied to not be able to take advantage of that kind of a golden marketing opportunity?

Rural, interstate DQs here in Texas are probably doing just fine and are as good as anything, but in the more urban areas there's a strong correlation: "DQ = low-income neighborhood", sad to say.

And according the the DQ website (yes, they have one), their latest marketing slogan is, "Something Different". Mmm, taste the irony!

whydibuy said...

" The pie who loved me" ............I'll bet that garners alot of jokes. But, then again, sex sells so why not a little implied in a slang kind of way on a type confectionary.

Patrick Watson said...

I've lived in Texas all my life and I can't believe there are only 115 Dairy Queens here. Every little town I drive through has one.

Anonymous said...

Jeff: I think you're letting a poor customer service experience color your view of DQ as a whole, based on an assessment of BKH'S capital spending.

I have not been to a DQ in quite a while only because I like to eat a healthier type of fare (i.e., fruit smoothies at Jamba Juice for example). That's not to say however that DQ doesn't attract customers anymore.

The DQ near my home is located next to a check cashing store - talk about an interesting choice of location (get a payday loan, then get some ice cream)! Yet next to the DQ are baseball fields where, on hot summer nights, the DQ is filled to the brim with parents and their children looking for a sweet treat to eat, no matter how stale the air is in the place.

IMHO, I think the fact that DQ hasn't changed much (i.e., the lack of capital investment in plant and equipment) is part of its "charm", if you want to call it that. DQ has, in fact, offered many new items on its menu since 1985. I am not making this up - here's a link to DQ's web site for your readers here

Even if DQ is a part of BKH, the fact that most of business is seasonal (i.e., April - September), especially in midwestern states like MI and IL, gives Buffett an edge where he shouldn't have to spend a lot of money on operations, where Cold Stone Creamery, located in many malls, has to spend a great deal in order to keep its business going year round.

Finally, I would ask this question as well - how much real estate does Cold Stone Creamery own VS. that of DQ? Just wondering...

mldds said...

I'd rather eat DQ than ColdStone, MaggieMoo's or their ilk any day of the week. Besides, any of those places is a disaster on a hot summer night. Aside from the wait, all of my DQ memeories are pleasant.

Dan said...

We've got a DQ Grill & Chill in town as well as an outdated red roofed version Jeff described perfectly. The Grill & Chill is ALWAYS packed.

Question said...

Here in the South, what amazed me the most about DQ is that it carried Pepsi, not Coke. You think Buffett would make sure that Coke was the beverage of choice.

120wallace said...

Buffet owns International DQ is that the same DQ in CT?

Jeff Matthews said...

Patrick Watson is right: there are over 600 DQ's in Texas, according to the DQ web site. We backed into our estimate using the store locator, which understated the total. Thank you Patrick.

120Watson asks is "International Dairy Queen" is the same as "Dairy Queen." It is.

Boris said...

Went to a DQ on Sanibel Island yesterday and one on Pine Island today. Both were not wanting for customers. Don't change a system that ain't broken.

russell120 said...

Maybe its where I live but DQ around here is the province of the 7 and under crowd (including mine). Very simple and very fast.

Store count is meaningless. What exactly is Krispee Kreme's current store count?

Stupid PF Tricks said...

What kind of insanity leads to such vast frivolous spending?

I have NEVER bought anything at Starbucks, or a latte anywhere.

I think I did buy a cup of coffee in Boston in 1971, but never before or after that.

Michael McGraw Photography said...

I can see the DQ headquarters out my window from work in Edina, MN. I love the low key nature of most DQs, which are mostly independently owed so spending money or not is not up to Warren Buffet.

My own personal crusade with DQ is for standardized prices and flavor. Here in MN, the price of a small cone can vary from $1.39 to $1.89. It's crazy.
Check out (my blog) for more info.

Thanks for the good discussion. Mike