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Banking Warren Buffett's ice cream chain looks to fix its winter problem

Warren Buffett’s ice cream chain looks to fix its winter problem

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Dairy Queen, Warren Buffett’s favorite ice cream chain, is trying to turn itself into a year-round treat.

With a new menu of snacks and sandwiches, the 75-year-old fixture of American summers is looking beyond its signature soft-serve and diving deeper into fast-food fare, where even giants like McDonald’s have been struggling lately.

It’s a major bet — but one that DQ’s chief executive officer, John Gainor, says is already starting to pay off. After introducing a line of hot desserts and artisan-style sandwiches, part of the company’s biggest menu overhaul in its history, same-store sales grew in September and October.

“The sandwiches are doing especially well,” he said in an interview. “It is driving incremental traffic.”

The bigger test will come when winter sets in next month. The hope is new warm fudge-stuffed cookies and chicken-bacon sandwiches will get customers to think of Dairy Queen when the weather turns cold. It’s not an easy task for a company based in Edina, Minnesota, where the average low in January is about 7 degrees Fahrenheit (-14 Celsius).

International Dairy Queen Inc. — owned by Buffett’s holding company, Berkshire Hathaway Inc. — also faces a more competitive restaurant industry. McDonald’s has added all-day breakfast in a bid to revive sales, and Burger King has ramped up its discounts and promotions.

The Dairy Queen menu change is an attempt to both drum up additional sales and update its image. The new warm desserts, which are topped with vanilla soft serve, include a cookie, brownie and apple tart. The lineup also has chicken-bacon ranch sandwiches, turkey BLTs and three chicken melts. The company just started its third month of TV ads featuring the new menu.

Gainor, who took the helm in 2008, has returned the company to growth after years of stagnation. Sales increased 7.5 percent domestically in 2014, according to research firm Technomic. The chain is more than 99 percent franchised, so corporate revenue comes mostly from fees and royalties. That revenue increased 3.6 percent to $169.7 million last year, while net income climbed 7.3 percent to $49.8 million.

Dairy Queen’s new items have come at a cost. Franchisees had to buy two TurboChef ovens to bake the sandwiches, brownies, cookies and apple tarts, with the average investment totaling $6,000 to $8,000. And customers may be dismayed to find that some items, including the brownie earthquake sundae, French silk pie blizzard and waffle bowls, have been discontinued to make room for the new fare.

“They’re moving away from being that soft-serve ice cream place,” said Joel Cohen, owner of Cohen Restaurant Marketing Group in Raleigh, North Carolina. “They’ve got to increase sales and they’re doing what everyone else is doing, and that’s extending their product line.”

The first Dairy Queen opened in 1940 in Joliet, Illinois, almost 50 miles from Chicago. The company, which reached 100 stores in 1947, happily sold desserts only its first 18 years. It gradually added burgers, fries and onion rings, but never shook its reputation as an ice cream stand. Buffett bought the chain for $585 million in 1998 after one of the previous owners died and his family needed cash for a looming estate-tax bill.

At the time, the billionaire investor said he was a regular at the Dairy Queen in Omaha, Nebraska, where Berkshire Hathaway is based. “We have put our money where our mouth is,” Buffett said.

Jordan Roy, a community marketing manager for Dairy Queen’s largest U.S. franchisee, Fourteen Foods, said there were always some die-hard customers who would show up during winter. The challenge is finding more of them.

“People will still buy ice cream in the middle of February,” Roy said.

****

Noah Buhayar contributed.

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