In 2018, Dutch Bros—a little more than 300 shops at the time—threw out a massive goal. The coffee chain expected to reach 800 shops nationwide by 2023.
The moment of truth is just around the corner. And from where Dutch Bros stands right now, it looks like that five-year promise will be kept.
The red-hot coffee chain debuted a record 38 stores in Q3, which almost eclipsed what it accomplished for all of 2019 (42 openings). At the end of the quarter, Dutch Bros had 641 locations systemwide after opening 103 units from Q1-Q3. The year-end projection is at least 130 shop openings, meaning at least 27 stores should open in Q4. If accomplished, that would put the brand around 670 to begin 2023. Next year, the goal is 150 stores, likely putting Dutch Bros over the 800-unit hump sometime in Q4 2023. In 10-15 years, the brand wants 4,000 outlets.
Dutch Bros is now the third-largest coffee chain in the U.S., trailing only Starbucks and Dunkin'. It has a presence in Arizona, California, Colorado, Idaho, Kansas, Missouri, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, and Washington.
"As a 30-year-old company, we have the good fortune of our operating teams executing through many economic cycles," CEO Joth Ricci told investors during the chain's Q3 earnings call. "Throughout all the uncertainty of the past year, the fundamental strength of the Dutch Bros four-wall operating model has held firm."
Since 2020, Dutch Bros has entered seven new states, including Tennessee earlier this year, and the brand keeps proving it will work anywhere. The concept is earning $1.8 million annualized AUV in the greater Nashville market, $2 million in Kansas City, and $1.8 million in Oklahoma City. Stores that opened in 2020 and 2021 produced trailing 12-month AUVs of $2.1 million in Q3, which is 10 percent higher than the system average. The company's Oceanside, California, shop—its first in San Diego County—earned $123,000 in its first four days and $629,000 in its first month. Although labor and construction costs have escalated, Dutch Bros' cash-on-cash returns are still in the 30-40 percent range for ground leases.
The brand implements a fortressing strategy in which it infills under-penetrated existing markets and rapidly grows into new trade areas. This helps spread demand across a market, thereby reducing customer wait times and improving guest satisfaction. In Q3, Dutch Bros experienced a 150-basis-point sales drag because of cannibalization, but that's within expectations.
Sixty percent of openings in 2023 (roughly 92 outlets) will be between California and Texas. Dutch Bros also plans to hit new markets in Alabama, Tennessee, and Kentucky. So like Huntsville, Knoxville, and Lexington. The brand has finished filling its 2023 pipeline. Any new store additions will be for 2024 and 2025.
"Through proactive bulk purchasing of key materials, we've been able to sidestep many supply chain disruptions and keep our construction timelines stable," Ricci said.
Of the 641-store footprint, 370 are company-operated and 271 are franchised. Dutch Bros is growing primarily through corporate stores, which are run by a deep bench of operators. The brand works with franchisees to identify crew members who can rise the growth ladder from broista to an operator with multi-unit responsibilities, Ricci said. In the past 12 months, 45 employees have been promoted to an operator position. Dutch Bros sees virtually no turnover from these store leaders.
"In combination with our people-first culture, we believe our outstanding career opportunities drive our comparatively low turnover," Ricci said. "People capability and availability are fundamental to realize in our growth potential."
Dutch Bros same-store sales rose 1.7 percent in Q3 year-over-year and 11.4 percent above 2019 pre-pandemic comparisons.
It was a bounce back from negative 3.3 percent in the second quarter, which the company blamed on conservative pricing, faster inflation, deferred expenses related to maintenance, new store inefficiency. In Q3, cost escalation and commodity inflation stabilized, and the company benefited from menu pricing. The chain took 4.4 percent pricing at the start of September, bringing the year-over-year total to 10.3 percent. The brand's cold beverage business drove more than 90 percent of sales, fueled by the Rebel and Dutch Freeze categories.
The chain is being particularly dragged by its California markets. If it removed Sacramento, same-store sales would've increased 4.1 percent in the third quarter. Although, matters are getting better. Sacramento's comps dipped 9.7 percent in Q2, but that changed to negative 4.8 percent in Q3.
Cost of goods inflation was near 11 percent in the third quarter because of dairy (more than 25 percent) and coffee (high single digits). Wage inflation was just under 1 percent. Turnover remained blow industry averages, although trailing 12-month numbers grew from 66 percent to 78 percent between Q2 and Q3. Ricci said this movement isn't unexpected since turnover is typically higher when Dutch Bros enters new markets and staffs from scratch.
Ricci said the company is pricing carefully to cover costs, but not alienate the consumer.
"We want to continue to create a value position for our menu across just about most of the categories that we're in," Ricci said. "We want to be careful about how we do it. What we say is we want to earn price as we put that on our menu. There's a taking price. So we've been careful about the impact of the consumer during this time, and we've also been careful about where we put price."
"So we've done things on a lot of our products that you premiumize an item with," he continued. "We've done that so that the customer is choosing an item that you would take price on. We also look at other places in our menu that we feel like that there's a price opportunity there. We've also protected other parts of our menu against the customer base that may not be able to take price."
Total revenue increased 53 percent to $198.6 million in the quarter. Company-operated shop gross profit was $34.7 million as compared to $23.1 million last year. Adjusted EBITDA increased 32.8 percent to $27.8 million.