Dutch Bros prioritizes high AUV deals as the company has nearly 1,000 locations

Since Dutch Bros went public in September 2021, exceeding its development targets has been one of the company’s greatest achievements.

From then to now, the coffee chain has nearly doubled in size to 912 restaurants. Dutch Bros opened 81 locations in the first half of the year, extending its streak to 12 consecutive quarters of 30 or more store openings. The brand expects to hit the low end of its 2024 guidance of 150 to 165 store openings, meaning it will likely close the year just under 1,000 stores systemwide.

Dutch Bros grows primarily through company-owned outlets. The company has more than 400 internal employees – with an average tenure of seven years – who are ready to lead a market.

“When these new operators get the call, we invest in their success and the success of the market by bringing on our experienced opening team,” CEO Christine Barone said during the chain’s second-quarter earnings call. “These teams work with our new operators to build a strong cultural foundation and ensure our new (Broistas) are positioned to be very successful. This powerful combination of experience, energy and teamwork helps us consistently deliver an exceptional customer experience focused on speed, quality and service. We continue to be pleased with our store-level sales indicators, which are in line with our expectations. Our best people are staying and growing with us.”

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Much of the expansion has taken place in Texas. Dutch Bros has nearly 200 stores in the Lone Star State after debuting just over three years ago. The brand has learned a lot by ramping up its stores in the state. The benefit of entering a market with multiple stores is increasing brand awareness and reducing wait times at the drive-thru. The downside is shifting sales and lower revenue at each store.

Dutch Bros has decided to pivot its growth strategy and focus on stores with higher AUV. This includes a higher percentage of new openings and slower infill rates. This also resulted in the removal of locations in the pipeline that do not meet the chain’s updated investment criteria, resulting in stronger new store performance.

The second quarter AUV was $2 million, matching the first quarter record. That’s much higher than the leading beverage chains in America. Starbucks had a 2023 US AUV of around $1.8 million and Dunkin’ had an AUV of $1.3 million. Granted, those two brands have thousands more stores across the country.

“When we enter large new markets like Florida, we use all of that data to really refine our approach so we can increase the average AUV of a unit,” Barone said. “That’s the goal of this process.”

“We now have a very sophisticated real estate process where we look at each location individually to see what all of these impacts look like, and we feel like we have a higher level of confidence in the development of our AUVs as we enter new markets,” she added. “And that translates into us being excited about the pipeline that we’re building right now, because we have more confidence in our estimates going forward.”

The company is also trying to restructure its pipeline toward more capital-efficient leases and reduce per-unit development costs. This means more build-to-suite leases instead of more expensive ground leases.

“It will take some time for these improvements to work their way through the real estate pipeline, and we will likely start to see impacts in 2025,” Barone said. “However, we are encouraged by the improvements in new store productivity that are now being felt.”

In addition to these new insights, Dutch Bros is using an improved marketing plan to increase sales in new stores – by introducing innovative menus, expanding paid advertising, investing in the rewards program and developing mobile ordering. Thanks to these initiatives, in-store sales increased by 4.1 percent in the second quarter, despite increasing advertising competition and a difficult second round in 2023.

In early 2024, the brand launched boba and protein milk. Both products were so successful that the chain added them to its permanent offering. Strawberry boba was in such demand that stores experienced product outages in April and May. By June, supplies had been restored across most of the system. In addition, Dutch Bros is feeling the impact of increased paid advertising, especially in newer markets. The retail areas that receive this greater attention are seeing sequential traffic growth that outpaces the system. With results exceeding expectations, Dutch Bros has decided to make further investments.

The brand’s rewards program, which accounts for 67 percent of transactions, is a major contributor to customer loyalty and targeted promotions, boding well for the expansion of mobile ordering at Dutch Bros. The chain expanded the test to about 40 stores in Arizona, California and Texas as of June 30, and plans to expand it to more than 200 stores by the end of July. Dutch Bros is optimistic that the program will be available in all stores before the end of the year.

The company has never had the option to pre-order, but has set up a drive-in model for it.

“Many of our stores have dual drive-thru systems with an escape lane that could be used for mobile ordering,” Barone explained. “After checking in, our mobile ordering customers can be directed to the right lane where a messenger can bring them their drink if it is ready before the customer reaches the window. The customer can then escape in the free lane to the right, avoiding a potential bottleneck at the window. We already use this operational tactic in many of our stores.”

Mobile ordering could also benefit Dutch Bros’ physical stores, which have 10 percent of the market share. Early data shows that most digital customers choose this ordering method. The brand is also aware that the possibility of mobile ordering will likely lead to an increase in customer traffic and much-needed capacity planning.

“We intend to throttle orders when necessary to maintain a high level of customer service across all of our channels. That said, we believe many of our stores can achieve significantly higher throughput given the volume of some of our most productive stores,” Barone said. “These high-throughput stores have the same footprint as our standard prototype, which makes up much of our existing portfolio. We’re excited to continue learning from this launch and look forward to providing feedback on adoption and potential incrementality as we observe customer behavior over time.”

In the second quarter, Dutch Bros’ revenue increased 30 percent year-over-year to $325 million and adjusted EBITDA increased 34 percent to $65 million.