In 1998, I remember when Warren Buffett and Berkshire Hathaway bought Dairy Queen. I had to ask myself, “Why would he want this company?”
So, I wrote down the fundamental and psychological reasons which I believed affected his purchase decision.
- Buffett would buy control over the organization, culture and harness the economies of scale discounts in costs.
- He would own a franchise with distribution around the country that was generally insulated from innercity government regulation, legal risk, and policy/crime failures.
- He would buy a brand that catered to suburbs and rural towns having a virtual monopoly in many counties, cities, and villages.
- These restaurants such as Dairy Queen are staffed by locals and local high school kids. Thus, friends, grandpa and family members and so forth want to visit who they know working at the local shop.
- Buffett gets buying power of a huge restaurant chain which could benefit other assets that he owns.
- These businesses outside of big cities have cheaper operating costs for employees, insurance, security, inventory, and less risks in doing business.
- Business outside of big cities have less operational risk and legal liability risk particularly related to crime, theft and violence.
- Rent, taxes, and land is cheaper outside of metro areas.
- Employees and the taxes on employees are cheaper.
- Local governments actually appreciate your presence.
Here are 5 reasons that Berkshire Hathaway got a good deal that we did not anticipate:
- Berkshire Hathaway & Buffett got a COVID friendly restaurant with drive through sales in over 6800 locations worldwide.
- It is insulated from most cities with high crime, high taxes, high regulation, and even from riots.
- There is significantly less risk where these restaurants are located; thus, less crime, theft, arson, vandalism etc.
- Main Street real estate values in small and medium markets is going up thus increasing asset values.
- People are leaving high tax cities and states with undue regulation of employees’ wages, insurance, or related.
In sum, the “Dairy Queen Theorem” is this: Buy businesses that are “heartland-related,” steady, not risky, and insulated from human resources regulatory issues and tax problems. Dairy Queen has 6,800 locations in the United States, Canada and more than 25 other countries employing over 10,000 people.
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award-winning author and advisory board member to several companies around the world in education, charities, and FinTech Companies.
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