Dutch Bros Coffee continues to generate record revenues, which jumped by 44.1% in Q4 and surpassed $200 million for the first time in a quarter. These results are driven largely by the company’s aggressive expansion pace. In 2022, the company opened 133 new shops en route to its long-term goal of 4,000 shops over the next 10 to 15 years. The company currently has just over 670 locations across 14 states.
Still, same-store sales on the quarter decreased slightly to negative 0.6% and traffic levels also decelerated on the quarter, from a negative 3% in Q3. Much of the traffic hits came from Dutch Bros “fortressing” strategy in which the company is strategically opening stores within close proximity to alleviate long lines that have driven away some customers, CEO Joth Ricci said during a phone interview Thursday morning. These are short-term issues, he adds, and the company plans to stay the course on its strategy while also making operational and digital improvements throughout the duration of this year.
“We’ve spent a lot of time building and some of that has included fortressing more aggressively in some markets than in the past. There are markets like Oceanside [California] that had $620,000 in the first month and last week it was $85,000. That’s the fortressing, the buildout. If we can run between $1.7 million and $1.8 million in [average unit volumes], it’s our sweet spot. We have some that are $1.3 million and some that are north of $2 million. All of it builds into the long-term goals,” Ricci said. “We’re playing the long game.”
In doing so, the company is experiencing stronger unit economics as cost of goods and materials start to cool down. AUVs in mature shops opened since 2019 are $2.1 million, or approximately 25% higher than shops opened in 2018 and prior, for instance. Further, Dutch Bros biggest commodity cost is dairy, which have slowly started to deflate. The labor market may take a bit longer, he noted.
“The market is correcting itself every day and we’re starting to see the labor market stabilize,” he said.
That stabilization will play a big role in supporting the company’s expansion plans, as Dutch Bros prides itself on its “bro-ista” culture that has created relatively low turnover rates in the mid-70% range. It will also be critical as the company looks to claw back some of its traffic from an anomalous 2021.
“We have to be careful when talking about traffic, as Q4 of 2021 was the single best quarter this company has had in its 30 years. We were open when a lot of places were shut down, we were coming off of our IPO halo and people were trying us for the first time,” Ricci said. “We knew this Q4 was going to be a challenge, but we're not going to start pivoting from what we do every day that has made this company so successful – we’re not going to drive different consumer behavior because we’re worried about traffic. That’s a short-term look and it could impact long-term value. We like our playbook for the long haul.”
One of the biggest sections of that playbook is dedicated to its Dutch Rewards program. First launched in early 2021, the program now accounts for 64% of all transactions – far exceeding executives’ expectations. Ricci said the 90-day rate for the program is now over 3 million members, or about 4,600 people per shop.
The company announced changes to the program during its earnings call late Wednesday and, beginning March 27, each dollar spent at the brand will result in three points earned, versus the current five points. Ricci said the adjustment should help the company better align redemptions with current pricing levels and, again, support the long-term success of the company. Importantly, the changes are also expected to help the company create more targeted and customized offers to loyalty members, which Ricci said will help drive growth and traffic.
“Loyalty is not one thing. We run an individualized business for our customers, so our rewards program is now evolving into a customized rewards program for you. I can run a personalized promotion, so I don’t have to spend dollars on a macro promotion that only gets traction for 5-to-10% of customers,” he said.
The company tested this iteration with product-level and daypart-level programs and customers responded favorably, Ricci said. The program now also allows you to share points with other Dutch Rewards members.
“So I can send a free drink to my son. That’s a game changer,” he said. “We’re excited about the flexibility these changes allow and about taking this to the next level.”
Dutch Bros is also promoting its Dutch Pass program to achieve further penetration. Ricci called this a “big unlock” operationally.
“If we can get more people to pay with Dutch Pass, we can remove the unnecessary part of the transaction, when people are fumbling for their card, and just make it a quick scan of a QR code and move through the line,” he said. “We are working on several ways to empower our teams by removing obstacles. We don’t want to overcomplicate this.”
Contact Alicia Kelso at [email protected]
