Dutch Bros Inc. (BROS) Earnings Call Transcript & Summary

Good morning, everyone. I'm happy to open the session this morning with Dutch Bros, which is a company that JPMorgan took public in the second half of 2021. It's been quite a journey for the company as they have -- you pursued their same-store and overall shop growth strategy and leveraging their well-developed infrastructure. Very happy to have with the company today, the company's Chief Executive Officer, Christine Barone; the company's Chief Financial Officer, Charley Jemley. I'm John Ivankoe with JPMorgan, and we'll be leading the 30 minutes of Q&A. So thank you very much for joining us, and it is a pleasure to have you.

Bros is a company that was founded approximately over 30 years ago in Grants Pass, Oregon. And much of the -- it's been slow and steady growth since then, that's now led to the brand having over 800 stores. Texas was a major expansion for the company, achieving over 170 stores in just the past couple of years. And I wanted to get a sense of what you've learned from Texas as an expansion market opportunities that we may have both within Texas and also other non -- what I'll call, non-core meeting non-West Coast markets for Bros going forward.

Absolutely. I think that we've learned 2 things, I think, which have been really core to who we are, so I'll start with just our base. Our brand is about the strength of the brand and the opening in a brand new market and having so many new customers find us so quickly, really just speaks to the strength of this brand. And then two, the most important part about who Dutch Bros is, is our people and our people systems. And so all of our growth is predicated on having operators that are ready to go and open a new market and open a new shop, and that's exactly what we've done with all of our new markets, including Texas. So we have 350 qualified operators in our pipeline with an average tenure of 7 years with the company. When we open in a new city, Wilson, an operator there who will eventually have on average right now of about 3 to 4 shops with them, but they'll start with just that 1 shop as we're building ourselves into the community. And that model has continued to be really successful for us. When you look at our recent growth, one of the things that is -- that we have learned is in thinking through what does the pace look like? Where do we put the shops, what's the right order to put the shops in? And so one, we've learned a lot from our operations teams and kind of their thoughts on that. And then we've also done -- been able to add to our analytics modeling now with all of the new shop growth that we've had in the last couple of years. And so a couple of things coming out of that as we look forward. One is we're looking at, as we expand into markets like Florida, which we just opened in thinking through what is the right order to go into like in Orlando? And where do we put the first shop? Where do we put the second shop? How far apart are they? And then at what pace should we fill in? And so we're learning a lot from our recent experience and just continuing to -- on the margin, look at how we can even do that better as we go into new markets. We're also looking at how we expand in leases, what our build types look like. So we'll -- we do have some in caps in our system where you'll have a drive-thru still, we're all drive-thru, but continuing to look at other ways that we can actually reduce build costs as we continue to go. And then we look at the mix of types of leases we do. And so we do probably more ground leases than a lot of folks out there. And so just looking at that mix of what to -- how much build-to-suit, how much ground lease, we're always looking for the best site.

I don't know if they're perfect numbers. But in Texas, we have 61 stores approximately Greater Dallas, 35 Houston; 29 San Antonio; 21 Austin. That's according to us looking at a map on the web. So just assume those are close to right. So was the experience in those 4 key markets similar across Texas? I mean was there any significant variation that makes sense to point out? Maybe one was a positive outlier. One was a negative outlier. And obviously, Florida, in many companies, South Florida is either they're #1, 2 or 3 market in their country. So will that be the same for Bros, and how do we get that?

Yes. I would start by sharing most things are generally the same. So one, in our newer markets, we do have about half the brand awareness that we have in our legacy markets and places that we've been for longer. So in all of our new markets, there's really that ability to build into that brand awareness. The other piece is one of our core strengths is really around our energy drink business. And what we've historically seen as we go into markets, that's something that it's very popular, especially with young customers that ability to customize an energy drink though is very, very new to the market. And so as we see, as we go into new markets that we have that ability to really build that into a higher percentage of our portfolio like we have in our existing markets. I think the other thing we see is -- and probably very unlike when like we first went into Phoenix, Arizona, where we had very, very low AUVs, and people didn't even know who we were. Now when we go into markets like Florida or in Texas, there's a lot of really strong brand love and fans already existing in the market. And so I think that the national presence and the national awareness of the brand is something that has changed over time.

And awareness, obviously, it can be driven by physical locations, it can be driven by people that have been in different markets, obviously, social media, have people doing free marketing for you and the genuine passion that they have for their brand and their willingness to share that with others. But let's talk about traditional marketing and your ability to benefit from the scale that you now have. Our estimates I'll show you having around $1.7 billion approximately of system sales in fiscal '24. So how does that marketing equation change? And how might you be able to benefit from that?

Yes. So a couple of things. I think as you look at our marketing strategy, one, from an innovation standpoint is that at this scale now our suppliers really want to work with us to do unique things. And we have kind of that wherewithal and the scale to really go and develop new things. We launched a protein coffee -- protein milk coffee this January that we're very pleased with. And that was something that we were working closely with our dairy suppliers to really develop own proprietary protein milk for that. So the innovation piece really benefits from the scale because of the -- our ability to work with our suppliers and do new things. And then we're also still small enough that we can actually move quickly and get things into market as we see really cool new trends happening. The second piece from a paid media perspective, scale certainly benefits that. And as we grow, not only are we, I think, experimenting with new things, but also just learning what works best for us. I would say, a year ago, we were doing primarily retargeting and more performance marketing and so kind of finding people that had already found us and we're just encouraging them to come again. And we -- over the last year, we've really expanded that into building brand awareness. And so finding folks who should love us but don't really know about us yet and giving them a little more immersion into the brand with kind of original content like video. We also have done some work in broader-based promotions. And the goal there is to say, hey, the best way to be introduced to a brand is by a friend who loves it, and so that multiples based promotion really allows someone who loves our brand to get an extra brand to take to a friend and introduce the Dutch Bros brand to their friend. And then finally, the rewards program. So we've very strong rewards program. And in the last couple of months, we've reintroduced an introductory offer really to -- in those new markets to make sure that we're getting folks into a place where we can speak with them directly and share all of the fun things that we're doing.

I have not seen a brand achieved 65% of its transactions on rewards in such a short amount of time. In fact, I don't think anyone has 65% of anything regardless of how long the rewards program. So talk about your success -- your immediate overnight success with digital Dutch rewards and what you can do with that? Has that been fully optimized and where we can go from here?

Yes. So I would say -- I mean, I think having been in the consumer brand market for a couple of decades now, I've never seen customers respond the way that they do to our brand. And I think the rewards program is no different than in other places and within our brand. And so the rewards program, what we have been on a journey, we just launched the rewards program in 2021, so it's still actually relatively new with that strong penetration. The other thing is, is we've had that strong penetration despite that really strong growth in shop sales. And so to keep that level of penetration while we're growing shops, means that we have a lot of new customers joining our rewards program every single day. And I think that we're really, I would say, at the -- I don't know, if I'm good with baseball analogies, which I might not be at the second or third inning of our rewards program. So somewhere along the beginning. And about this time last year, we actually made a switch where we had a very rich base program, which we took down the base reward and then that -- what that has allowed us to do is to do more incentive type rewards to find -- help you find something that you love, help you find a new daypart that maybe you hadn't explored before. And so we've been doing -- right now, I would say we're still at the stage where we're just starting to segment our customer base. So I think if you think like that, where you eventually might want to go with a rewards program is really the one-on-one and the personalization of it. We're still at, I would say, like kind of that mass segmentation level and are learning and continuing to kind of tighten that and adjust that.

Mobile Order & Pay is something we've talked about before, and you've now committed to piloting this in I think a couple of markets in 2024. Do you imagine just that mobile order pay functionality being added to Dutch Rewards, talk about the integration that the customer will see, talk about the integration in the stores and what you're expecting from this important program. And I will just say it's over -- Mobile Order & Pay is over 30% of sales at Starbucks. So clearly, there's a use case that you haven't yet developed yourself.

Yes, absolutely. So if you look at our app, the #1 thing -- the #1 functionality that our customers are asking for is that functionality run Mobile Order & Pay. So we know that there is a strong want to have that functionality. And I think like just taking a step back is, one, our app is very -- already very popular with how folks are using it. But it -- but Mobile Order & Pay really allows you to explore the menu in a different way. And so a lot of what we're doing with this strong growth is educating new customers on who we are and what types of drinks you can get. And so the functionality alone of having that ability to customize a drink, know what categories you are, we believe, is going to help drive that kind of brand awareness and richness that we would like to have with our customers. The other piece is, is that oftentimes decisions as coffee and beverages are a high-frequency business. But as you're thinking and planning your day, whatever line you waited in at Dutch Bros, that was your longest line is kind of the amount of time that you need to leave when you're going to Dutch Bros, if you're going before a meeting or something like that. And so what Mobile Order & Pay does is we believe that it could really introduce a new occasion where you wanted Dutch Bros, but you said, well, hey, 5 times ago when I went, the line was a little longer, and it took me 15 minutes to get through. I don't have that time today, so I can't go to Dutch Bros. And so I think that there's this occasion that it allows. The other piece is, is the way our shops are set up, so we are drive-thru only, but we have a walk-up window within our shops. And so if we can -- and the drive-thru channel is much more used than the walk-up channel right now. And so if we can have some of the drive-thru traffic kind of park and come to the walk-up window, the visual impact of the lines as drive by is just different for our customers. So lots of reasons as to why this makes sense for us. And now as we test and go along, we're going to be super thoughtful. Our service is what differentiates us. It's having the conversation at the window. It's having the conversation as you pull up in your car. And so as we roll out mobile order and work through all of the operational pieces of it, that's really our primary focus is ensuring that we still have that connection with every customer that comes up to our shop.

It's interesting, as I mentioned, Starbucks Mobile & Order and Pay at 30%, just to consider the fact that your beverage sales on a per box basis is almost identical to Starbucks, very close, at around $1.9 million or so for traditionally located stores in the U.S. yet they have a much bigger breakfast business or morning business, I should say, than yours basically twice the size. So does Mobile Order & Pay Dutch rewards give you an opportunity to lean in harder in the morning daypart, which ironically, as a coffee company is actually where you under-index.

Yes. So I do think that the morning is a time where customers are most pressed for time. They're trying to get somewhere. And so again, taking that time piece out of the equation and being able to have Dutch Bros without thinking that you might run into something that might be longer than what you think is really important in that morning daypart.

Okay. And another big part of this sales difference between the 2 -- in fact, the biggest part of the sales difference between the 2 is food. You were previously had a professional responsibility for food at Starbucks. I just asked this question based on your resume and professional experience. So as you see the opportunity of developing a food program, not just to drive total sales, but to sell more beverages most importantly. Do you think that's an opportunity? And within the current 450 to 900 square foot box of Bros is it, in fact, even physically possible?

Yes. So I think taking a step back, we're really, really focused on rolling out Mobile Order this year. We're focused on the innovation that we've got coming throughout the year and that we're sitting with right now. And so that's certainly our primary focus. I think as we take a step back and look at adding sales layers over time, we're always looking at what others in the market are doing, what things our customers might like. I do think that food is important to the morning daypart as you think about making 1 trip versus 2, but there are things like the protein coffee that also are something that can be highly successful in that morning daypart as well.

Okay. We spent 2023 in many cases, was using a labor model that was more based on transactions as opposed to total sales. And certainly, there were some efficiencies that were gained within the stores from -- in 2023 that one could see on the P&L. As we think about '24, perhaps an opportunity might be around throughput, the number of customers that you can get through the line, particularly at peak dayparts. So do we have that opportunity? And is that a sales opportunity where is it a combination sales and cost opportunity as we think about the model evolving from here?

Yes. So as we look at throughput, I think with the lines that we have. There's always an opportunity to try and get our customers through faster. And so as we are running the business, we have a number of initiatives that we look across. So one, we think very carefully about labor deployment, how many people are on shift, and are they on shift at the right time. And so we've added more technology to our labor scheduling and have gotten tighter around understanding how our labor is scheduled versus our forecast. And really, it's mainly about making sure that we have enough people at those peaks to really serve our customers quickly. So that's the first piece along those lines. The second piece is, is we've been doing a lot of work, which around our POS and kind of what screens the POS buttons are on and how quickly you can take an order, so that also helps with throughput, and it allows instead of our Broista just being focused on the iPad, to be focused on our customers. So things that enhance the customer experience and our driving throughput at the same time are things that are important to us.

If I can add, thinking about '24, we're going to open up the vein, right? So we're going to do the -- we're going to get ready with mobile order. We're going to optimize that walk-up window, optimize the drive-thru. We're not in a position in '24 to really start to move on a lot of the labor because we want to have it available in there. And then as we move into '25, we rolled out order ahead, then we can look at optimizing, making job easier, making the beverage easier all of the logistics behind it. So there is opportunities, but we're wise to sort of pace this thing yet.

In approximately 100 stores or maybe a couple more than that now, there are taps I think specifically around your energy product, which is around 25% of sales, that makes it easier for the Broista to do their job faster, more consistent, easier, a lot less waste forward table. So talk about how big of an idea that is both for new and existing stores. And are there other opportunities like that? I'm going to use the word to modernize the internal workings of the box.

Yes, we believe that there's a number of opportunities there. So we've recently hired a President of Operations, Sumi Ghosh, who has significant experience in looking at throughput and looking at how to kind of best design our box to maximize that for labor deployment and also for speed as we come through. And specifically looking at the taps for this year, we're prioritizing putting the taps and new shops as we look at the amount of equipment we have and things like that to go, that is, it's certainly easier to put it into new builds than into existing shops, and we have so much in front of us. But that's a big opportunity for a couple of reasons. So one is that we're bringing in cans to the shop right now to just that sheer amount of cans that we actually have to take care of on the back end is something that is not super fun for the Broistas. So that's a big difference. It's also better for the environment with our Broista support, and it's something that can be faster as we go through the shops.

Okay. I mean you mentioned your President of Operations. I mean we also have a new CFO coming in, MOD Pizza and Starbucks, new CMO, who is already in place P.F. Chang's and CKE and you have a new Chief People Officer as well. So it's a lot of C-level talent that's been added into the company, including yourself, not much longer than a year ago from what I remember. So talk about as you -- the vision of the company, including Executive Chairman, Trav Boersma, the vision of the company in the next 3 years, maybe how you would like it to look different. With all the functionality and the talent that you've added to the organization specifically how Bros would evolve and, let's call it, '26 relative to what it was in '23.

Yes. So again, I'll start with like what we're keeping the same. So one, I think the we've -- all the new leaders are on board now. They are still in their immersion periods, most of them. Tana has been -- our CMO, has been on board for a bit longer. So she's very actively involved in running the marketing team. But I would say we're making sure that everyone is passing their flow check, which is how you learn how to make every single beverage and know what it feels like. Sumi, in particular, with operations has been in 4 or 5 different markets, got to open our busiest store ever in Orange County, California and got to see the mile plus long line at 4:00 a.m. before we even opened, and I think it's just an awe of how incredible the brand is. So we're really spending a lot of time immersing the leaders. And even before that, what's important to us is that it's our people, and it's people who are servant leaders. And so making sure the folks that we're bringing on board have the same hearts of those that are overlapping and staying with us for a while, but eventually want to go do something else. And Sumi is coming in for our existing COO, who has been with the business for over 30 years and will remain with the business. And so they partner together. They've been sharing an office. They've been traveling together. And so it's been just across the board, incredibly smooth transitions really giving everyone time to learn, immerse in the brand, understand what makes this brand really special.

Let me ask about the economy. I mean we have -- California, everyone's wages in quick service of any kind of size is going to $20 base pay before tips. So that's one micro economy. Other parts of the country you can pay a much lower minimum wage and have your Broista compensated in some cases, even the majority on tips and yet that might not be exactly the way that your consumer can spend at your brand. In other words, maybe the California consumer doesn't necessarily have more money to spend than the Tennessee consumer does, just as a for example. So how do we balance some of the unique cost challenges with how the brand is priced, and how much local adaptation of the brand, from a cost and a pricing perspective, are you currently experiencing?

Yes. So we do have pricing tiers across the country and are largely looked to understand what does the market look like? What does the customer look like? And so we do all of our pricing on what does the customer think is fair and right to pay for things and have done especially in the anticipation of understanding what might happen with the FAST Act. We've done a lot of pricing work not only in California, but really across the brand to understand where we sit. So we feel like we have a strong strategy going into the April move in California. I would also share, I think that, in general, what we also serve hospitality workers, they love our service. And I think that, that's something -- it's not something that we necessarily measure analytically, but something that every time I'm in a shop, they share with me like just how many people who work in the service industry are coming through the drive-thru at Dutch Bros and so I think one of the things we don't know about California is this is definitely putting also more money in the pocket of customers. And so I think none of us understand how that could potentially play out as well.

It is interesting. Starbucks had their annual meeting, McDonald's has had it an investor conference this week. Starbucks talking about some weakness in their occasional afternoon treat business, still continuing. McDonald's talking about an expectation that overall traffic for the category to be negative in fiscal '24 as their consumers at least in the lower end is trading to food-at-home based on the pricing that's been taken in the rest of the industry. Those are 2 big brands, big companies that both have some negative comments to make on a consumer that actually might be yours in a lot of cases. So as we are webcast, I mean, can we talk about the perceived health of your consumer? And maybe short-term outlook in terms of their ability to continue to spend and visit the brand maybe as much as they want to.

Yes. So John, we can talk about Q4 where we really saw strength, very strong 5% same-store sales that was led by a sequential improvement in traffic. We also saw strength in our afternoon daypart that helped drive that strength across Q4. And again, we're really pleased with what we saw with our customer. Our holiday LTOs performed very well during that time period. The customer we've seen continues to shift to ice beverages which really, I think, favors that portfolio of beverages that we have and what we're known for. And then we also shared on our last earnings call that I think like others, we did see some weather impacts in January. But outside of those weather impacts in January, we're very pleased with the trends and results we were seeing.

Okay. And as we spent a lot of time on Texas, obviously, Florida, but other markets where you have been expanding in Alabama, Tennessee, I think you'll be in Kentucky, maybe you are in Kentucky already seen. So as we kind of continue to kind of the Southeastern March, how are some of those non-core developing markets performing relative to your initial expectations?

So again, as we open a new market, our customers are finding us. Our super fans are finding us. And one of the things that you need to see is we do sticker days about once a month across the brand and the popularity of those things, when we do stickers or we do friendship bracelets, things like that, you really continue to be strong across those new markets. And then I would also add to that. I mean we're seeing similar things that we see in some of our other markets where the brand awareness is low. So the super fans find us, but it's really that next introduction and again, working through ways to continue to speed up that brand awareness piece as we go into new markets. And it's a delicate balance as you go into these new markets and have very high volumes, especially when there's not a shop in a place, and how quickly can we infill to take some of that balance off of those shops. So we're seeing lots of things, I think, that we're getting used to in those new markets.

You're not asked this often specifically, but you are going into markets with different competitive sets, Sonic, namely in Texas, for example, nearly 1,000 units, very big and has a very big beverage business, particularly afternoon beverage business. Your high-returning box relatively simple to open, at least from a construction perspective, much harder to run and develop a brand. So you've invited competition into the market. There's several trying to do what you do. It's a very hard execution, building culture is its own special things. So talk about as you come into markets and haven't been first. As you have kind of come in the room maybe reminding people of others, how the consumer has responded to maybe changing some of their existing habits and coming to yours?

Yes. So I would start with, we are based in the Pacific Northwest. We have grown up among a lot of competition in the Pacific Northwest. And so we are not unused to being a place that customers need to have many choices to choose among, and what I would say is we really, really resonate with a younger customer. We resonate with someone who's looking for not only a beverage, but that service to brighten their day. I think the number of stories that you hear across our shops at someone going through a difficult time and a Broista just making their day for it. We celebrate those stories. We encourage all of that to happen within our shops. And I think what we're finding is that service model is truly unique and that, that is really what drives customers to come to us. it drives customers to experiment with us. And what we see is once a customer comes over to Dutch Bros, the visit satisfaction is just incredibly high. And so that as we gain them as a customer, they seem to continue to come back.

Excellent. Thank you.

Thanks, John.

Thank you. Thanks.