Fizzy drinks, energetic 'broistas' are fueling Dutch Bros' rise as the next big coffee chain
07/26/2024 19:23![Fizzy drinks, energetic 'broistas' are fueling Dutch Bros' rise as the next big coffee chain](/new/image/load.gif)
The new CEO of Dutch Bros is tasked with her biggest career challenge yet, scaling an 800-store coffee chain to rival Starbucks.
On a 100-degree day in Phoenix, Ariz., Dutch Bros (BROS) CEO Christine Barone walked up to a drive-through window for a caffeine boost.
"Broista" Samantha Mercado, hanging over the window's ledge with a tablet, eagerly offered recommendations, mentioning that it’s Drink One For Dane day, an annual MDA (Muscular Dystrophy Association) fundraiser in memory of Dutch Bros co-founder Dane Boersma.
Mercado quickly realized Barone was not her everyday java seeker, as the former Starbucks (SBUX) executive offered to get “between the windows” and whip up drinks herself.
Within seconds, Barone was inside the 900-square-foot shop, stirring up a protein coffee (Dutch Bros’ latest offering with 2% milk and 20 grams of casein), fulfilling orders, and leaning on other employees as she forgot the last ingredient that completes an Aquaberry soda (comprised of strawberry, kiwi, blue raspberry, and watermelon).
Dutch Bros, which has garnered a cult following for its funky drinks and high-energy staff, is capturing Wall Street's imagination as Starbucks falters amid consumer resistance to high prices and poor execution.
A flattering comparison for a company with a $6 billion market cap (Starbucks currently trades at around $90 billion).
Last quarter, Dutch Bros handily beat expectations on earnings, revenue, and sales, with same-store sales growth of 10%, while Starbucks' North America and US same-store sales dipped 3%.
Its profit jumped 40% year over year to $54.3 million, while revenue increased 39% to $275 million.
The stock is up 34% in the last 12 months at a time when the broader food industry is battling uncertain macroeconomic conditions spurring things like the hamburger value wars.
Starbucks shares have fallen 26% over the past year, while Tim Hortons’ parent company Restaurant Brands International (QSR) fell 8%. McDonald’s (MCD), which is getting into the coffee game with its latest concept CosMc, is down roughly 11%.
So how is Dutch Bros brewing this performance up?
A humble beginning, a unique culture
Dutch Bros was founded in 1992 by two dairy farmers, brothers Dane and Travis Boersma. Dane, who franchised a Dairy Queen at the age of 22, recruited Travis, then a college student, to embark on roasting espresso together.
The duo bought their first espresso machine that year, then opened Dutch Bros as a coffee pushcart by the railroad tracks in Grant Pass, Ore. (where the company is still headquartered). Travis Boersma tells me the team strove for a “fun and cool” working environment from the get-go, without a “big, bad boss standing over your shoulder.”
The employees are given autonomy on how to serve customers and encouraged to be “cool and creative” in their interactions. Boersma, who still sits on the company’s board, said sometimes employees even realize the high-energy environment isn't for them.
Dane Boersma, whom the team called the wise man, passed away in 2009 at age 55 from ALS. But his customer-centric management philosophy endured, eventually paving the way for bubbly-yet-poised food veteran Barone to become Dutch Bros’ third CEO in January 2024.
The board searched "high and low" for her, Boersma said. The former True Food Kitchen CEO "had a reputation for rolling up her sleeves and being very hands-on" in addition to her experience at Starbucks, where she oversaw everything from food to licensed stores during a five-year stint.
"The most important part for me was her demeanor … her affinity of the culture and the brand itself, and her understanding of how important that is to our customer base and to our broistas company-wide," he recounted.
It’s that culture — a "fun-loving, mind-blowing company that makes a difference one cup at a time" — that Wall Street pros say is one of its secret ingredients.
"Dutch’s menu is a point of differentiation, as is the extremely customer-friendly culture the company has cultivated," William Blair analyst Sharon Zackfia, who has an Outperform rating on the stock, told Yahoo Finance.
"What differentiates Dutch Bros is that they really trust the people, they really care to continue to experiment and learn. There isn't arrogance there. There's a real focus on customers and the team,” Joshua Margolis, a professor at Harvard Business School, told Yahoo Finance.
Barone is now tasked with preserving that culture as it ramps up to its goal of 4,000 shops nationwide.
Guggenheim analyst Gregory Francfort, who has a Hold rating on the stock, said keeping that core DNA could be a challenge.
"There's some risk that she 'over-Starbucks-izes' the Dutch Bros brand, and maybe the culture, that she would risk disrupting the culture,” said Francfort.
“But I think she's pretty aware of that. She's very focused on protecting and maintaining that."
That energetic customer service is an important leg up, considering Dutch Bros’ price point isn't "meaningfully" different from Starbucks', per Zackfia.
In Phoenix, a medium latte at Dutch Bros runs $5.45, while Starbucks will cost you $5.25. A medium nitro cold brew costs $5.55 at Dutch Bros and $5.75 at Starbucks.
In Q1 2024, the company opened a record 45 new shops, marking the 11th quarter of 30 or more new openings. To ensure consistency in its culture and product, Dutch Bros brings in the “mob,” a group of more experienced broistas, to work with new shop staff.
Its model of 900-square-foot drive-through stores, which typically bring in a revenue of $2 million each, ensures efficiency. The company-owned locations boast a margin of 29.8%, which is "quite high" for the industry, said TD Cowen analyst Andrew Charles.
More Poppin' Boba Fire Lizard Rebel, please
Barone’s current go-to is an iced Creamy Vanilla Protein Milk Latte. In between juggling her three kids’ busy schedules and traveling, you’ll catch her mixing up different concoctions to discover the next big hit.
To help support Dutch Bros’ growth, the CEO has brought in a wave of new executives in the past year, including Starbucks alums Sumi Ghosh and Josh Guenser as president of operations and CFO, respectively.
Ghosh, a former Nike (NKE) executive, first crossed paths with Barone when he was a regional vice president at Starbucks. Guenser met Barone while both were rising through the ranks at Starbucks, where he later became the senior vice president of finance.
Barone also recruited former Carl’s Jr exec Tana Davila as chief marketing officer. It was important to bring on individuals who “really [have] a compilation of different experiences … both big and small places,” said Barone, who started her career as an analyst at Raymond James Financial.
Executives, regardless of seniority, have to complete a “manifesto quiz” on Dutch Bros' values and history, as well as a “flow test” on building the drinks. They spent hours in the shops before they "stepped foot to hang out with me," she joked.
Davila is the brains behind many of Dutch Bros’ creations. For inspiration, she looks to the grocery aisles instead of other coffee shops. Her observation that there's an increasing interest in protein products led to high-protein coffees, a key winner last quarter.
“It's really inspired by consumer trends and behavior,” said Davila of her push for innovation. “As we see the evolution of our category, there are a lot of copycat concepts out there.”
Two hits from last quarter, protein coffee and strawberry boba — which costs a dollar to add to any drink — are now on the regular menu. Starbucks introduced its own boba-like pearls in May, shortly after Dutch Bros’ launch.
Dutch Bros also offers sodas — think Double Rainbro (strawberry, peach, and coconut) and Laser Cat (raspberry, coconut) — alongside customizable Rebel energy drinks that were introduced back in 2012, which Starbucks tapped into in late June with iced energy drinks.
Stifel analyst Chris O’Cull said Dutch Bros stays on brand with its new products, compared to Starbucks' recent efforts, like spicy lemonade, that may be "a little off-brand."
To keep followers engaged, the company also offers merchandise drops, such as stickers and friendship bracelets.
“They're not that super interested in a free drink; they’re way more interested in getting, like, a bracelet,” said Davila about its Gen Z fans. “It’s an interesting dynamic I have not seen at other brands.”
Growing to be the next coffee giant
As of its latest quarter, there are 876 Dutch Bros locations, 582 company-operated and 294 franchisees, though the company is no longer accepting new franchise operators.
For comparison, Starbucks has 16,600 US locations as of last quarter.
Now, Ghosh is spearheading the push to 4,000 shops in the US over the next 10 to 15 years.
Texas, where it opened 45% of its new locations in the past two years, remains a key target. In 2022, then-CEO Joth Ricci said it saw the biggest white space in Texas, with plans to use it as a hub to increase distributions into new markets. As Dutch Bros excels at selling cold drinks, Ricci said the company is expanding geographically from its northwest origins down to southwest Texas, then southeast.
Currently, the company plans to open 30% of its new shops in Texas, as well as a $13 million roasting facility on a 65,000-square-foot plot, per a local report.
However, brand awareness has been an obstacle in its rapid expansion.
“One of the challenges they ran into Texas was that … customer awareness wasn’t improving as quickly as needed," O’Cull said.
Jefferies analyst Andy Barish commented that "a lot of the Texas consumers don't really know that they serve energy drinks," one of their core menu items.
As real estate value and financing costs rise, developing new locations will also become increasingly expensive. Barone said the company is taking lessons from the Lone Star State as it spreads its footprint in Florida and Tennessee.
For example, it's building stores five miles apart instead of one mile apart, then building a third shop in between once the previous two have attracted a following.
Barish said investors can expect a different buildout speed than in the past. "They probably won't have 175 of them after two and a half years; it'll be kind of slower and broader, in terms of getting to markets and establishing the brand.”
The company will still focus on local marketing, but may explore national advertising, which it hasn’t yet done, per Davila.
In addition, Dutch Bros plans to add mobile orders to the mix, with a goal of enabling mobile orders at the majority of its restaurants by the end of 2024.
Starbucks already has a robust mobile order and pay system, which it started back in 2015. In Q2, 31% of its US transactions came through its app. However, the number of 90-day active loyalty members declined to 32.8 million, compared to 34.3 million in Q1.
In its latest quarter, 66% of Dutch Bros' transactions were conducted by loyalty members. It's currently testing mobile orders at handfuls of restaurants.
How the system works will depend on each location. Ordinarily, a few broistas, also dubbed line-busters, walk along the waiting cars, taking orders on their tablets and inputting vehicle descriptions (e.g., silver SUV). The cars will then pick up their orders at the shop's window.
For mobile orders, customers can share a description of their car in the app, and broistas will deliver their orders from the shop to the car once they drive in.
Approximately half of the shops have installed "escape lanes," which allow cars to drive out of the line and leave once they receive their drinks. Aaliyah Ortiz, a shop manager in the Phoenix area, said her team’s goal is to have 20% to 25% of its customers exiting the line.
But drivers at shops without an escape lane will have to park and use the walkup window or wait in the car line as usual.
Sticking to Dutch Bros' service-oriented culture, drinks won’t be left on grab-and-go shelves at the window, but handed out by chatty broistas.
Christina Browne, a partner at consulting firm Bain, told Yahoo Finance this design isn’t typical of the industry.
“New builds today, especially in coffee, which has been leading-edge, are often designed with a dedicated pickup lane and we expect this to become the norm over time,” Browne said.
But adding the ability to order ahead could complement the business in different ways. Customers who load money in the app spend more and visit more frequently, based on data about Starbucks, Wedbush's Nick Setyan told Yahoo Finance.
"One element of mobile order that we believe is underappreciated is the check and mix benefit as the customer is able to discover greater customization options more seamlessly," TD Cowen's Charles wrote in a note to clients.
Faster service during peak times is also crucial to coffee shops.
“One of the No. 1 things we hear from our customers is, 'I would love to go more often, but sometimes your lines are a little long,'" Barone said.
It remains to be seen whether each location will need more staff or if the additional demand will overwhelm an already busy system.
Boersma said that "tension is healthy" as it looks to scale and expand.
"You've got to be cognizant and self-aware of where we really sit and what the business needs," with a "never-ending improvement kind of mindset," he said.
In the meantime, Barone will be watching the progress firsthand as she jumps in to do her training at every shop she visits.
"A dream job is when you're the best version of yourself, and I feel like here I get to show up and be the best version of myself ... and for my team too."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at [email protected].