DQ Bakes is Dairy Queen's largest-ever menu expansion

Look for a raft of Dairy Queen TV ads next month for the Turkey BLT, Triple Chocolate Brownie a la Mode and more items from the new DQ Bakes menu.

Dairy Queen says it's the restaurant chain's largest-ever menu boost, aimed at bolstering its appeal as a food destination, while fortifying its stronghold in sweet treats.

Dairy Queen's franchisees nationwide are installing oven systems — a big investment — to make DQ Bakes. And the Edina-based chain is for the first time doing year-round advertising to burnish a brand that turned 75 this year.

"Dairy Queen is an iconic brand," said John Gainor, Dairy Queen's CEO. "That's why Warren Buffett bought it."

The investment king scooped up Dairy Queen back in 1998. It's a small part of his Berkshire Hathaway empire, but Buffett has to like what he sees: Dairy Queen has posted strong annual sales growth and has continued evolving into a fast-food force.

"There's nothing quite like it," said Mac Brand, a partner in consultancy Bellwether Food Group. "The only one close is Sonic," he said of the drive-in fast-food chain that is known for its beverages and treats. About 55 percent of Dairy Queen's sales come from treats, 45 percent from fast food.

Dairy Queen is one of the nation's oldest eatery chains. Its first soft-serve dairy joint opened in 1940 in Joliet, Ill. Today, it has almost 4,500 outlets in the United States, all but two of which are franchisee-owned. Minnesota is tied with Ohio as the state with the third-largest number of Dairy Queens, with 249 stores.

The company has 660 outlets in Canada and 1,470 more overseas. International growth has been particularly strong over the past decade, and China has become Dairy Queen's biggest overseas market with almost 700 stores.

However, Dairy Queen's China business has slowed down with that country's economy. "If China is weak, obviously that impacts international markets," Gainor said.

Gainor, whose background is in logistics, arrived at Dairy Queen in 2003 as its chief supply chain officer. Five years later, he became CEO. Gainor reports directly to Buffett, but often only communicates with the Oracle of Omaha a couple of times a year, including at Berkshire Hathaway's annual meeting.

"Warren really allows us to run each of the companies we are accountable for," Gainor said of the CEOs of Berkshire's many companies. "That's the beauty of it."

While Berkshire is publicly traded, it doesn't include Dairy Queen's results in its financial reports. Gainor said that Dairy Queen's stores together do $4.1 billion in annual sales. The company's massively popular Blizzard makes up about 36 percent of that tally.

The chain's same-store sales growth, a key restaurant financial gauge, has been in the high single digits in the past year or so, and in the mid-single digits on average since the 2009 recession, Gainor said.

Unlike most franchised restaurant chains, Dairy Queen has a bit of a mishmash of concepts. There are still DQs with soft-serve dairy only, a result of decades-old franchisee agreements. Most Dairy Queens these days are paired with the DQ-owned Orange Julius concept.

The old "Brazier" DQs still exist, too, though they're increasingly replaced by the DQ Grill & Chill concept rolled out in the early 2000s. Brazier, launched in 1958, basically sold burgers and hot dogs in addition to treats. Grill & Chill was a step up, both with its menu and its call for major store renovations.

"The upside opportunity the brand has had is the growth of the food and beverage side," Gainor said. "When you come into a Dairy Queen Grill & Chill, you can see it is a full quick-serve restaurant."

The new DQ Bakes line, which just started rolling out in late spring, will further Dairy Queen's food goals, Gainor said. It features nine new items evenly split among three categories: snack melts, "artisan-style" hot sandwiches and hot desserts with soft-serve dairy.

With DQ Bakes, ovens will be introduced to Dairy Queen outlets. "It's the first time we will have a common cooking platform across all stores," Gainor said. Grills are a staple at Dairy Queens, but as DQ restaurants were built over many years, grill platforms aren't standardized.

DQ stores that sell treats only need one oven, while full-scale food outlets require two or three. That means per-store investments for oven systems of $6,500 to $15,000.

"It is a big deal," said Sam Oches, editor of QSR, a quick-serve restaurant industry publication. "Adding equipment is tricky, particularly when you are a franchisee." When a franchiser asks a lot of its franchisees and they don't get a decent return, Oches said, "they can get kind of grumpy."

Dairy Queen has a lot more mom-and-pop franchisees — operators with only one or two stores — than other restaurant chains. They have an independent streak. The franchisee group, the 1,200-member-strong Dairy Queen Operators' Association (DQOA), was at loggerheads in the 2000s with DQ corporate over the cost of rolling out new DQ Grill & Chill restaurants.

Members of the independent franchisee group are concerned that the DQ menu is already crowded, but a number of items will be dropped to make way for DQ Bakes. The Bakes lineup is high-quality, and DQOA members have not opposed the rollout, said Josh Schmieg, the group's executive director.

"It hasn't taken off quite as well as operators would like, but that doesn't mean that it doesn't have potential," he said.

The Dairy Queen Franchisee Advisory Council, which represents franchisees nationwide, has endorsed DQ Bakes. Franchisees are looking for the national ad campaign for DQ Bakes, which is slated to start next month.

Dairy Queen has been investing more in advertising in recent years. The company's ad expenditure in 2014, as tracked by Kantar Media, was $87.5 million, up 30 percent over 2012. Through 2015's first quarter, DQ's ad spend was up 32 percent over a year ago, according to Kantar.

The company has long done national advertising for only eight months, skipping November through February. This year marks Dairy Queen's first year-round ad campaign, with DQ Bakes at center stage this fall.

Matt Frauenshuh, Dairy Queen's largest franchisee with 161 stores in 10 states, is confident DQ Bakes will be a hit. He is based in Bloomington and his Madison, Wis., Grill & Chill is one of two test markets for the Bakes platform.

"Customers really loved it," said Frauenshuh, a member of the franchisee council."DQ Bakes is something different, and we've seen it be quite successful."

Mike Hughlett • 612-673-7003