The McCulloughs relinquished all claims and sold their interests to an investor group comprised of several operators of a great number of stores in large territories—Gilbert Stein, with 173 stores in Illinois and Missouri; James C. Cruikshank, who owned sixty-four stores in Georgia; and Burt and Miller Myers, a father-and-son team with hundreds of stores across Minnesota, Wisconsin, and eastern Canada. The group paid the McCulloughs $1.5 million and then borrowed to acquire other territories. A second stage of entrepreneurship had begun.
Hungry for central coordination, the group created a new company called International Dairy Queen to organize the system. Based in Minnesota, they formally adopted the franchise business model that was gaining popularity. The model, incubated as early as 1924 by Allen and White’s A&W Root Beer and 1939 by Howard Johnson, proliferated after World War II.60 Before then, franchising tended to be used only in product distribution settings, especially gas stations and car dealerships. After the war, the format was comprehensive, including a business plan, marketing strategy, operating manual, and quality control standards.61
The birth of the Dairy Queen franchise organization was unique in that the franchisees of Dairy Queen—Stein, Cruikshank, the Myerses—created the franchisor. Usually a company organizes the business and then recruits and trains franchisees, as is the case with Midas Muffler, Radio Shack, and Ramada Inns.62 At Dairy Queen, the franchisees organized the franchisor and, in effect, trained it. In addition to acquiring territories, they integrated purchasing, advertising, new store development, employee training, product research, and overseas opportunities. They updated franchise agreements, requiring franchisees to pay not merely royalties on branded products, as the McCulloughs and Axene had, but a percentage of all sales.
While these efforts were meaningful steps toward unifying the system, there were shortcomings. One factor was reconciling the different strategic views of the franchisees, all successfully running their chains as they saw fit. Even once they agreed on strategy, problems lingered due to the loose approach taken since the beginning by the McCullough family and Axene. By the late 1960s, the new franchisor had lost its focus on the franchisees, and Dairy Queen executives proposed an IPO. Preparing for it, advisors urged adding more stores to the program to establish growth potential.63 Dairy Queen followed the advice, but in its zeal to meet quantity targets, it compromised on quality. Many of the new stores were in bad locations, poorly managed, and inadequately financed.64
Exacerbating headquarters’ loss of focus on franchisees, the franchisor followed the conglomerate fashion of the period by acquiring businesses in unrelated fields, including a ski-rental company and a chain of campgrounds.65 In 1970, Dairy Queen proposed to acquire the National Car Rental System, a franchise business recently turned around by a group of fellow Minnesota businessmen led by Kenneth C. Glaser, William B. McKinstry, Rudy Luther, and John W. Mooty.66 While nothing came of this overture, and National Car was sold to Household Finance International, Inc., Dairy Queen soon contacted the Minnesota businessmen again, this time asking if they would be interested in acquiring Dairy Queen.
McKinstry and Mooty conducted extensive due diligence. While the franchisor had acute financial problems, on balance, the franchises were in good shape. It seemed possible to correct the problems of the franchisor and turn Dairy Queen into a marquee business. This meant firmly establishing a comprehensive organization—something that had never been developed during the McCullough—Axene period and had only begun to be created by the franchisees. Dairy Queen stores operated prosperously across North America, but due to the company’s haphazard origins, many stores, including those in Texas, had little or no affiliation with the franchisor.
The Minnesota group acquired Dairy Queen and immediately went back to basics, with a focus on organizing the franchisees. The investors paid $3 million in cash and committed $2 million in working capital in exchange for a large majority of Dairy Queen’s stock. They promptly injected another $5 million, cut overhead, and adopted policy based on what was in the best interests of the franchisees.
The new owner-managers, under McKinstry’s chairmanship for a short period and then under Mooty’s direction, spent the next decade integrating the system. They staked millions more dollars in acquiring all territories in North America—starting with California and Pennsylvania and ultimately including western Canada and Texas (the latter alone cost $14 million). They closed nonperforming stores, promoted uniform standards, and established an efficient distribution system and a successful advertising program. Dairy Queen expanded its menus well beyond ice cream to include a full range of hamburgers, hot dogs, and other staples of American fast food.