Dutch Bros (BROS): the Next Starbucks?

Now three decades later, Starbucks is a household name with more than 35,000 locations around the world. However, the coffee-selling tycoon only had 165 stores when they decided to IPO.

Through disciplined reinvestment, aggressive marketing campaigns, and a great product — the company was able to scale into the most well-known coffee shop today. 

In this post, we’re going to explore if Dutch Bros (BROS) will be able to do the same. 

Welcome to the Family —

Founded in 1992 by brothers Dane and Travis Boesrma, Dutch Bros began with a double-headed espresso machine and a pushcart in Grants Pass, Oregon.

Today, they’re one of the fastest-growing brands in the foodservice and restaurant industry by location count. As of December 31, 2021, Dutch Bros boasts 538 shops across 12 states – including one here in Nashville, Tennessee. 

In 2017, the company moved to a company-owned-only model. Today, 271 shops are company-owned while the other 267 are still franchises.

Unlike their competitors, Dutch Bros is focused on quality, speed, and service. Similar to the #1 highest revenue grossing restaurant in the world — Chick-fil-A — Dutch Bros’ employees will meet you at your cars with tablets in hand to take your order or explain menu items.

Their menu features both hot and cold espresso-based beverages, cold brew coffee products, proprietary Dutch Bros Blue Rebel energy drinks, tea, lemonade, smoothies, and other beverages on the company’s “secret menu.” Interestingly, this is something another famous fast-food joint from the West Coast does — In-N-Out Burger. Worked for them.

Dutch Bros puts an emphasis on building highly-efficient drive-thrus. Their standalone shops stretch out around ~900 square feet, but the lot surrounding their shops stretches out more than 25,000 square feet. By allowing for more room, Dutch Bros is able to handle substantial car volume throughout the day.

The Numbers —

Dutch Bros shared their S-1 filing about 9 months ago as they readied their IPO. Feel free to poke around, but I’m actually going to be pulling the most recent data from their 2021 Annual Report – published March 11, 2022. 

The company ended 2021 with 538 shops across 12 states – this is a +45% increase since 2019, or a +20.6% compounded annual growth rate. Company-owned shops grew from 90 in the beginning of 2019 to 271 at the end of 2021. Over three calendar years, Dutch Bros was able to triple their 2019 company-owned footprint. Mind you, this was during a pandemic when people were working from home and not swinging by a shop on their way to work. 

During the same period of time, Dunkin’ and Starbucks were forced to close hundreds of stores.

Revenue grew from $238.4 million in 2019 to $497.9 million in 2021, representing a +44.5% compounded annual growth rate.

Adjusted EBITDA grew from $48.7 million to $82.1 million throughout the same time period.

The company was able to produce a 25.1% contribution margin against these figures in 2021, up from 22.3% in 2019.

Each Dutch Bros shop’s average unit volume (the average of a store's total sales for a 52-week period) comes in at $1.7 million. This specific metric isn’t astonishing — but what is, however, is their ~31% adj. EBITDA margin per store.

Compare to this to Starbuck’s 23%, Chipotle’s 23%, and the industry-average 20%.

Dutch Bros’ unit economics are incredible.

What is specifically interesting about this $1.7 million figure is that it is the “average,” with recently opened stores dramatically outpacing this average. The average Arizona and California shop has an AUV of $2.4 million and $2.5 million, respectively. The shops that are currently below this average (mainly in Oregon) are legacy locations with half the lot size as those opening in new markets.

To me, this means Dutch Bros has successfully cracked the code for “bigger shops = more revenue.” Think about it — there’s definitely a sweet spot between the size of the shop and the amount of revenue it’ll be able to generate before hitting capacity.

For context, those legacy shops mentioned above in Oregon are roughly 500 square feet each, compared to ~900 square feet in Arizona and California.

The Future —

If Dutch Bros has any chance at becoming “the next Starbucks,” they need to grow, grow, grow!

That’s a 21X in store-count in only 8 calendar years. I’m not at all saying Dutch Bros will experience this kind of growth in such a short period of time. However, the company has made it very clear their “North Star” is 4,000 locations.

This 4,000 location goal came with a 10-15 year timeline via their recent earnings release.

So here’s how they’ll get there.

To open a new location, Dutch Bros is spending anywhere between $500K to $1.35M depending on the type of shop. With these incredibly favorable adj. EBITDA margins, they’re able to see cash-on-cash returns between 35% and 75% within two years, on average. Considering these new stores are doing $2.4M+ in AUV, these returns are likely to be even better.

Remember, the company pivoted toward a company-owned-only business model in 2017 — which means all of the ~3,500 new locations will be owned and operated by Dutch Bros. This is good for two reasons — new shops are able to move $2.4M+ in AUV compared to the smaller legacy franchise-owned locations, and the same-store revenue growth of the company-owned locations outpace franchise-owned.

Their footprint is ~49% franchise-owned today. In the next 12 months, this figure will decrease to ~40%, then to ~35% by the end of 2024.

Now you’re likely thinking “Hmm, opening +125 new locations in this tight labor market? Good luck!” 

Dutch Bros has an incredible company culture that retains “broistas” very well. Their 12-month turnover is ~56%, compared to ~100% you’ll see at any other comparable food and beverage company (Starbucks, Chipotle, etc.)

Because of this lower turnover, Dutch Bros is able to save on recruiting costs as well as offer a clear path for their “broistas” becoming shift leads, assistant managers, managers, regional managers, and regional operators. This is how you scale an operation from 538 to 4,000 in 15 years — you properly incentivize good people to stick around and eventually open one of their own stores under the company’s guidance.

According to recent earnings data, there are ~900 individuals currently working for Dutch Bros who are / will be ready to open the next 750 - 1,000 locations across the country.

Their employees aren’t the only loyal people in the equation here. Dutch Bros recently pivoted away from a paper punchcard to a loyalty app — similar to Starbucks. The app has been downloaded more than 3.2 million times, with a clear correlation between in-app promotions and increased revenue.

There is absolutely a world where Dutch Bros has 4,000 locations within 15 years. 

The Stock —

At time of writing, Dutch Bros is an $8 billion company. They guided to $715 million in revenue for 2022, which means they’ll likely end up with ~$115 million in adj. EBITDA. Right now, the market is valuing Dutch Bros at 11X 2022 revenue, and 70X 2022 adj. EBITDA.

Both of these valuations are incredibly rich, especially as we head into a time of rising interest rates and compressing valuation multiples. As we’ve learned over the last few months, even great companies get sold into oblivion during bear markets — and Dutch Bros could absolutely be one of them (despite holding up so well compared to the broader market).

So Here’s My Plan:

I really like this company, their product, their management team, their culture, their financials, and their North Star. Their unit economics are industry leading, and even with 4,000 locations there’s plenty of room just around the “southern smile” states to open thousands more.

I like the company!

At its very worst, Starbucks traded down to ~$7 billion in market capitalization (1X forward revenue) during the Great Recession. This was after the company let go ~1,000 employees and experienced only $5.4 million in profits compared to $154.5 million the year prior.

Things weren’t looking great and Starbucks was considered a “luxury” at a time when countless people were unemployed.

I don’t think we’re going to get remotely close to that valuation with Dutch Bros.

My reasoning is the “Rule of 40.” I’m not saying Dutch Bros is a tech stock and deserves to be trading at tech stock valuations. However, they’re certainly checking the traditional tech stock “Rule of 40” box with their 2022 revenue growth projected to come in at +43% and adj. EBITDA margins to come in around ~16%.

Heck, that’s a “Rule of 60.”

Dutch Bros will continue to trade lower as the Nasdaq continues into a bear market, likely much close to their IPO price of $23 / share. This would put us close to a ~$4 billion market capitalization, or ~5.5X 2022 revenue. I’d feel very comfortable building a meaningful 1-2% position in this range. 

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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Cover Art Credit: Joselyn D. via Yelp.