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

Okay. Welcome to our presentation. So we're going to do a quick couple of slides, then we'll do a little bit of Q&A. And I just wanted to introduce you to the concept first. So we are a drive-through beverage concept. We sell about 1/2 of coffee-based beverages, 1/4 of energy drinks and then 1/4 of tea, lemonades and other beverages. We were founded in 1992 in Grants Pass, Oregon. So we've been around for quite some time. We have a focus on speed, quality and service, all at the same time. And I think one of the hallmarks of the brand is really that incredible connection that we have and that we create with all of our customers. When you look at our growth strategies, we're focused on a number of different things. It always starts with our people, though. We are growing very rapidly across the U.S. We shared yesterday that we expect to hit 1,000 shops next month. And with that, all of our growth has been predicated on growing with folks who started as Broistas within our system. We have 400 operators in our pipeline ready to go open new communities and have their own shop. Each one of those operators sits right above store and can handle about 3 to 4 shops when they get started. And so we are growing through our people. We're growing with our people. The second piece is we're growing our shop base very rapidly. So we shared that we're going to open at least 160 shops in 2025, so continue to really expand in contiguous markets across the U.S. We have a very long runway in front of us and are really just getting started with our growth. Next, growing our transactions. So we have a number of different things we're working on to really enhance our experience for our customers. So it always starts with that connection, but working on adding exciting things that will really help grow those transactions across our shops; and then finally, focused on growing our margins. As we grow, we really expect to leverage our G&A as we grow and continue to get larger. And then finally, I just wanted to share a little bit about our multiyear transaction drivers. So as you look at this, we really start with the base level of some of the marketing drivers, things like innovation. We change up our menu about every 2 months or so with some exciting news. We're building new platforms like protein coffee and boba. We also have holiday launches, things like that, just to keep that exciting news for our customers coming along. The other piece we're really focused on is our Dutch Rewards program. 67% of our transactions come through our Dutch Rewards members. And so when someone comes into the brand, they join, they want to be a part of it, they want to see news from us. And that's just an awesome way for us to be able to talk to our existing customers. We also do a lot with paid media, so bringing new customers into the brand. As we're rapidly expanding our shop base and ourselves, it really is bringing those new customers in, building brand awareness, especially in our new markets, and then getting those customers into the rewards program. And then finally, some of the new initiatives that we're working on, mobile order and pay. So we just launched mobile order and pay across our system. The first full quarter that mobile order and pay was across our shops was Q4 of 2024, so very, very recent for us. And we're doing it in a really unique and Dutch Bros way. We are connecting with our customers. Every single beverage that's mobile-ordered is handed to a customer with the opportunity to have a great connection and a great conversation. We're also focused on throughput. So we've got long lines at some of our shops and always just being thoughtful about how do we get customers through those lines quicker, how do we serve them faster and really create that connection but do it in a very quick way. And then finally, we shared at the end of Q3 that we're just starting to test food. So we have food in a handful of shops. We're really working on assortment right now and understanding kind of what that assortment should look like. So those are just a couple of the initiatives, the sales building layers that we have as we look ahead, and really multi-years of different initiatives we have to drive the business. All right. Turn it over to you.

I love it. I'm Greg Francfort. I'm the restaurant analyst at Guggenheim. I probably dropped the ball in the introduction here, but it's Christine Barone and Josh Guenser. Christine has been with the company for about 18 months.

2 years.

2 years now, okay, and Josh for 6 to 9 months.

Almost 1 year.

I need to update these. But they both have decades of experience in the coffee business and really have put their stamp on the brand in a very quick period of time.

Christine, you might be one of the fastest restaurant growth businesses right now. When you came into Dutch Bros, what did you see in the unit growth that -- what did you want to change? And what changes have you made that really put your imprint on the brand and the growth?

Well, I'll start with the most important things were right, and so it's my job to continue to enhance those. So thinking through, the brand is really on fire. The connection we have with our customers, how we create that with sticker drops and merch drops is really a lot of fun, so continued and enhancing those things, and I think most importantly, our people systems. So our ability to promote every single new operator from within, I think, is a huge differentiator for us and really what is that special sauce of Dutch Bros that, if you've met some of the folks who are serving drinks right outside of our trucks, some of them have been with us for 15 years plus. And that longevity with the brand and the passion for the brand, the want to stay, all of those things are right. So I think the first job as a CEO is what don't you change because it's really working and the most important things were right. And then I think as we look together as a team at what we could enhance in the brand, I think one was adding more to the real estate process, so more rapidly ingesting some of the real estate data that we were getting to add that to our pipeline to kind of refine how we approached our new market growth. And so we've really done that and seen great results with new shop productivity over the course of 2024. The other piece is we're enhancing marketing in some of these sales layers that we're driving. So the #1 thing that our customers were asking for on our app was the ability to mobile order and pay and have just seen such a great response from our customers on mobile order. The other thing they've been asking for is food. So our business is a little bit unique in that 1/3 of the business is in the morning, 1/3 of the business is in midday and 1/3 of the business is in the afternoon. And when you look at the broader beverage market, really 1/2 of that business is in the morning. So we've had just an incredible opportunity to look at that morning daypart and understand why our customers might want to come to us more often. And the biggest reason is they want more shops. The other 2 reasons were really mobile order, which is a little bit more important to them in the morning, and food. And so thinking through and shaping the strategy to solve those things that our customers really want from us.

And maybe I'll jump around a little bit, but mobile order and pay, you've now got it in 90% of the system. It's around 7% of sales, I think you shared. What does that customer visitation look like versus a traditional customer? Are you seeing increased frequency? And is there a difference in kind of that profile of the customer?

Yes. We're seeing a couple of things that are really impactful. So the first thing is we were able to look at our Rewards members and understand what did their visitation look like before we launched mobile order, what happened after they had their first mobile order. And what we've seen is a 5% frequency lift after that first mobile order. So that's for our existing customers. We also had our highest growth in our Dutch Rewards program in Q3 that we've had since launch. So we added over 1 million members to our Dutch Rewards program in Q3. And many of them, their first transaction was a mobile order. So we believe we're bringing in new customers also with mobile order who really wanted that functionality to be a part of the brand. And then finally, with the lines that we see, our business, 90% of our volume comes through the drive-through and 10% comes through the walk-through window, which is on the other side of our shop. And so what mobile order does is a number of our customers -- more of our customers choose to pick up their mobile order at that walk-up window. And so it's really shifting that production to the walk-up window and then taking some cars out of the line, which gives other customers confidence to join the line.

Have you seen -- so you said you've seen that change. Is that 10% after the change or before the change?

Oh, the 10% is what the business looked like before mobile order.

Got it. And are you willing to share what it's been more recently?

We haven't shared that yet.

Okay. And then maybe just going into food. Through this test, what does the platform look like? How do you basically get food to line up with the speed at which you're doing your beverages at? And is this something that we should expect in 2026 to kind of be a big menu shift? Or is this a multiyear build for the next 2026 and '27 and '28?

Yes. So I think the way that we think about food is actually there's probably a beverage occasion that we're missing in the morning. And so we are a beverage company. We will always be a beverage company. And so the goal with food is really to capture that extra beverage occasion because, in the morning, a lot of us don't want to go to 2 places as we're on our way to work. And so in thinking through how to capture that beverage opportunity, that's really what the food opportunity is. Our goal is to do it with very few SKUs. So today in our shops, we have 3 muffin tops, and we have a granola bar. And so the goal with our food test right now, we're just testing 8 SKUs, so really doubling the number of SKUs we have, but it's still a really low complexity and really low number of SKUs. And I think the key in our business is that the cycle time of the food has to be below the cycle time of the beverage, that we definitely want to make sure that the items are ready at the same time and that you still have a superfast experience.

And maybe, Josh, just with this level of growth, clearly, that's being driven off a very solid unit economics. Can you walk through what the build-out cost looks like, what the return profile looks like of a Dutch Bros store?

Yes, you bet. So we, over the last several years, have shifted to more ground lease-type locations. So we're building, for those that don't know, about a 900- to 1,000-square-foot box stand-alone drive-through. And that was really during a period where we really wanted to be able to control our construction, period of high inflation. The build cost for ground lease is about $1.9 million for us. We've been working to shift that portfolio over time as we work through our pipeline to more build-to-suit leases. Build-to-suit for us is going to be $700,000 to $800,000 build cost. So we've been really focused on driving down that upfront per unit CapEx. We've made some progress this year. We'll continue making progress into the future years here. But if you just think about the returns on either end of those bookends, we target about $1.7 million, $1.8 million for new shop AUVs, and we're doing about 30% shop-level margins in year 2. So you think about the flow-through, the cash on that, certainly stronger on a build-to-suit lease, but we see great returns overall in both cases. It's taking us some time to shift to the build-to-suit, but we're certainly making some progress in that way.

And Christine, one of the things you've done, I think, since coming in is you've been spreading out the unit growth a little bit, recent entrants over the last 12 months, 18 months into Florida. How has that gone? And you have 6 stores today. How has that gone? By the way, there's one 20 minutes away, if anybody wants to go. But how has that gone? And how are you choosing what cities to enter into the state?