Dutch Bros Coffee continues to expand its footprint with record store openings during the first quarter ended March 31, but reported disappointing same-store sales deflation of negative 2%. However, the company is not worried about the income loss, and CEO Joth Ricci attributed this downturn to Dutch Bros.’ fortressing strategy and coming off of a particularly strong Q1 in 2022 compared to the rest of the industry that struggled during the Omicron COVID-19 outbreak last year.
Ricci and his team of executives emphasized that Dutch Bros continues to keep its eyes on the long-term prize, with a goal of growing to 4,000 stores over the next 10-15 years, with around 720 coffee shops open today, and plans for 150 more locations this year, particularly in markets with a lot of white space, like Texas and California, though the company wants to continue to push east.
“In 2022, we were focused on maintaining our business, our staffing, and our profitability,” Ricci told Nation’s Restaurant News. “We were also focused on building a record number of shops and now that we have our house in order, we can really start moving through some of these traffic-driving initiatives that we have planned for the balance of the year.”
As the Oregon-based coffee chain grows, Ricci said that Dutch Bros will be mainly focused on opening company-operated stores with a much smaller franchisee base—a strategy that the company has not always followed, but now makes sense moving forward as Dutch Bros. strives for that 1,000-store milestone.
“This helps us keep control over the people, the systems, and our brand,” he said. “The franchisees we do have in our system today are all former Dutch Bros employees, so our business model is basically a company-owned franchise system.”
But growth is only one pillar of success on the journey to 4,000 stores. Ricci said that one of the top priorities is improving both brand familiarity and loyalty. Fortressing and rapid expansion will help spread the word about the Dutch Bros brand and product, but there are other strategies for getting people in the door and making them lifelong customers. One of these strategies is a heavy-handed focus on discounting including last quarter’s “Fill-a-Tray” promotion, which the company said resulted in the “largest single sales day in Dutch Bros recorded history.”
Unlike many of the company’s colleagues in the industry which are pulling back from discounting to drive up average checks, Dutch Bros is using promotions to build the brand’s reputation as it spreads into new markets.
“In almost 60% of new markets, we’re building up a new customer base,” Ricci said. “We’re building brand awareness and something for people to start building into their daily behavior. […] It’s a balance of price, promotion, and traffic and how we create this brand for the long-term, which over the past 30 years have proven to be a pretty successful recipe.”
Another ingredient in this recipe is to build up loyalty, which goes beyond enticing people with initial promotions or discounts. Dutch Bros recently redid its rewards program to switch from a basic dollars-spent-to-points rewards structure to focus more on customer personalization and surprise and delight. The purpose of this new change is to drive consumer behavior toward specific menu items, dayparts or behaviors to build up the habit of coming back again and again.
“Whether it’s National Cold Brew Day and we’re running a program for that or implementing double point Tuesdays, we’re already seeing behavior changes in traffic related to those promotions,” Ricci said. “We know we have a large base of customers we’re working with, and if we can continue to incentivize them to sign up for the rewards program and continue to encourage people to load money onto their Dutch Pass…we’re still in the early innings of building that program.”
Taking time to form these daily relationships is working, as Ricci said on Tuesday’s earnings call that traffic is becoming sticky and supporting the company’s growth strategies and that digital technology investment is a large part of that success.
Dutch Bros reported increased revenues of 29.6% to $197.3 million for the first quarter ended March 31, 2023, compared to $152.2 million the same quarter last year. The company reported a net loss of $9.4 million or $0.07 per share, compared with $16.3 million or $0.10 per share in the same period of 2022.
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