Facing elevated build-out costs and moderating new shop AUV, Dutch Bros is rethinking its ongoing growth plan.
Currently, the coffee chain deploys a fortressing strategy where it enters a market and proceeds to stockpile stores in the trade area for the purpose of building brand awareness and shortening drive-thru times. The resulting sales transfers have pulled annualized AUV to approximately $1.7 million for stores opened in 2022 and 2023.
The brand’s infill rate is twice as high this year compared to 2022 primarily because of Texas. Since entering the Lone Star State in January 2021, Dutch Bros has opened 131 shops in various Texan cities. President Christine Barone—who joined the company in February as president and will move to CEO in January—described Texas as a “high potential market and a critical component of our eastbound expansion.” The state has served as a gateway for greater growth in the Southeast, and securing a foothold quickly was Dutch Bros’ way of competing effectively. The chain even opened its second roast facility outside of Dallas.
Going forward, the chain plans to spread out stores and adjust its pace of infilling new markets. The altered growth method doesn’t impact Dutch Bros’ prior targets of mid-teens annual growth in 2024 and the years beyond.
“We purposely built a robust pipeline, providing us the flexibility to be selective,” Barone said during the company’s Q2 earnings call. “A refined real estate strategy allows us to continue to live up to our commitment of building the right shops at the right time and expanding our footprint at the right pace on our path to 4,000 shops.”
” … We believe this [updated growth strategy] will provide markets time to curate demand while balancing the benefits of overhead leverage and distribution efficiency that comes with market density,” she added.
Additionally, Dutch Bros will use a more diverse range of lease and shop types—still with a focus on the drive-thru channel. In recent years, the brand sought ground leases to have better control of the development process in light of supply chain and construction pressures. But the chain is willing to widen its scope as these headwinds start to abate. Dutch Bros will also find opportunities to value engineer its existing prototypes.
“We expect to see this work impact site build beginning in late 2024,” Barone said.
Despite moderating AUVs, newer shops are following a similar profitability curve as prior years thanks to more favorable operating conditions as it marches east. Systemwide, company stores grew margin to 30.3 percent in Q2, up from 27.6 percent in 2022.
Dutch Bros opened 38 new locations in eight states during Q2—35 of which were company-operated—pushing store count to 754 as of June 30. For the full year, the brand expects to open at least 150 shops, which would be a new record. These outlets are led by existing or newly promoted regional operators. The brand has more than 325 qualified operator candidates with an average tenure of seven years in its pipeline.
“In many organizations, people availability is a limiting factor to growth,” Barone said.
At Dutch Bros, this is one of our competitive strengths. We will continue investing in our people, specifically in our shop managers, many of whom will become the next generation of regional operators. Through these investments, we aim to even more closely align incentives with great customer service and driving traffic.”
Same-store sales increased 3.8 percent in Q2 year-over-year, inclusive of sales transfers from Dutch Bros’ fortressing strategy. Comps improved 580 basis points quarter over quarter, and most of that growth came from upward traffic trends. The chain deployed multiple approaches to build traffic in the second quarter innovation, the rewards program, scaling paid media, and leveraging promotions to drive trial.
The company released a limited-time Mangonada platform that mixed more than 10 percent and resulted in nearly 3 million drinks sold in the quarter. Other examples of innovation were the Strawberry Horchata Chai, a cookie crumble topping, and the Poppin’ Candy Firecracker Rebel. In terms of the rewards program, Dutch Bros made a change earlier in the year, adjusting the point system so that each dollar spent now earns three reward points, down from five. The change was made in response to higher menu prices. In Q2, the chain implemented a double points promotion that saw a positive reaction from loyalty members, who account for nearly 65 percent of transactions. The chain also experimented with offers based on time, geography, and frequency.
As for paid digital media, Barone said it was a “meaningful driver of our traffic improvement quarter-over-quarter” and was used alongside product innovation and app-based efforts. The executive noted that it allows Dutch Bros to reach a wider audience and realize an attractive ROI. And for promotions, the brand brought back its Fill-a-Tray campaign in June involving customers grabbing any four medium drinks for $15.
Barone said one-third of Q2’s traffic improvement was from an easier 2022 comparison. The rest was spread evenly among the chain’s aforementioned initiatives. All these strategies now have the backing of CMO Tana Davila, who joined the team in June. She has marketing experience from CKE Restaurants and P.F. Chang’s.
“We made real progress against our traffic-driving initiatives, which built in momentum throughout the quarter,” Barone said. “We plan to keep our foot on the gas, adding capabilities and executing through the back half of the year.”
Soon, Barone will take over the role of CEO, replacing Joth Ricci, who is stepping down after more than five years with the company. Under his leadership, Dutch Bros executed an IPO and experienced record-breaking unit growth.