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

Okay. So thank you, everybody, for coming to the afternoon session. So really happy to have with us from today Dutch Bros, we have Christine Barone, CEO; and Josh Guenser, CFO. I'm Sharon Zackfia from William Blair. I should have said that to start, but we're getting late in day 1. Hopefully, most of you know Dutch. If you don't, I think you're going to be really pleased with what you hear today. We're going to have Christine go over a little bit of a lay of the land and set the menu here, and then we're going to do a fireside chat. Clearly, Dutch is one of the fastest-growing publicly restaurant concepts. They have some really ambitious growth plans to double the unit base by 2029. So 2029 by 2029, is I think the catchy phrase. Some of the best employee culture, I think, you'll ever see in the restaurant space at this point, and something they've been able to scale, which is easier said done. We do need to tell you that there is a complete list of research disclosures and potential conflicts of interest at williamblair.com. And with that, I'll let Christine go over a few slides, and we'll have a chat.

Awesome. So you can read the disclaimers. And with that, I'll just jump into the presentation. So who are we? We operate drive-thru beverage business. So about 1/2 of our business is coffee-based beverage, 1/4 is energy-based beverage and then another 1/4 is like teas and lemonades and other drinks like that. We focus on speed, quality and service, and service is an incredible differentiator for us. As we open new shops, we open with operators that have an average tenure of 7 years with the company. All of our new shops and new markets are open with these operators that have been with the company for quite some time, which really helps us establish that culture, helps us to deliver awesome service to our customers. We were founded over 30 years ago in Grants Pass, Oregon. We're now in 18 states and we have over 1,000 shops. So with that, I just wanted to talk a little bit about our vision and mission and a bit about our values. So our values really are how we hire people, it's how we treat each other internally. And they're super important to us. So the first one is radiate kindness. And so how does it feel to be a customer at Dutch Bros? How does it feel to be an employee at Dutch Bros? We get up early, we stay up late. So we do what it takes to make things happen. And then we change the world. And so we do a lot of community givebacks. We're a big part of the communities that we go into. And it's something that our Broistas find is very important as part of their employment experience. Okay. So the next piece is, is what is our strategy? So the first thing is continue to grow our people, invest in our people, create awesome compelling futures for them, get those next opportunities ready for them to grow with Dutch Bros. The second piece is, is we focus on throughput and getting more transactions through our shops. The third piece is we're looking at how do we grow more customers into the brand. We recently launched mobile order. We're working on launching food right now. So a lot of new transaction-driving initiatives that are just ahead of us. And then finally, we'll continue to focus on growing our margins. So over the long term, we expect our EBITDA to grow a bit faster than our revenue growth. So if you look at this slide, I think we're in a really unique time in our growth right now and that we have an incredible amount of shop growth ahead of us, but we also have some idiosyncratic drivers of our comp store sales. And so I think in this environment that we're in right now, we have a number of things that are really helping to drive our comp growth forward. We had great Q1 results that we are super satisfied with. We're still growing our transactions in this challenging environment. And as you look at that, that starts with a couple of things. So one, we have some base initiatives that we've launched, things like paid media, so attracting new customers to Dutch Bros. Then we get them into our Dutch Rewards program. 72% of our transactions go through that Dutch Rewards program, so we can talk to our customers very quickly as they come into the brand. And then we're also focused on innovation. So we're focused on driving new beverage innovation, surprising and delighting our customers. Last year, we launched a protein coffee so that you can get your 20 grams of protein, along with your morning beverage. We also launched things like boba, and we're really, I think, first to market as a larger chain with that boba offering. And we continue to innovate and drive customers into our shops with that innovation. As we look forward, we launched mobile order in Q4 of last year. So we're very new to mobile order. We ended that first quarter Q4 at 8% of total transactions with mobile order. So it really took off right away as we launched it. We ended Q1 with 11% of our total transactions with mobile orders. So we are continuing to see really nice growth from that functionality. And then we're just beginning to test food. We shared on our Q1 earnings call that we're now in 32 shops and testing food. Today, food represents about 2% of our sales. Across the industry, that can be a much higher percent. So as we shared, there's just -- we have a lot of growth in front of us, and we're doing a lot of things that our customers have asked us to do. All right. So with that, we're going to answer a couple of questions with Sharon. Thank you.

Great. So I wanted to start off by just pointing out that I think you've had over 15 years of positive comps. I probably lost a few years and there might be even more than that. But it's been a remarkable kind of string of success and obviously continuing so far into 2025 despite a lot of challenges the company has faced in the first quarter. Can you talk about within the existing comp framework, so excluding the new stores, where are you seeing the kind of major drivers of that improvement? Is it continued new customer acquisition? Are you continuing to see increased frequency? How do we think about how the customer is using Dutch and how that could evolve?

Yes. So we're actually seeing the growth across a lot of different areas. So one, in bringing in new customers. So just as we grow and enter new markets, we always have new customers coming to Dutch Bros, and so we are acquiring a lot of new customers as we grow across the country. We are also adding new customers to existing shops. And so with some of the things like mobile order, some of the things like paid media, we're driving in new customers to the Dutch Bros business. We're also increasing frequency. So we launched our Dutch Rewards program at the beginning of 2021. So it's actually a pretty new rewards program still. And we're continuing to kind of deepen the layers of where we can drive transaction growth with that Dutch Rewards program. So doing things like having point offers, incentivizing our customers to come in at different times of the day than they might otherwise come in, having them come in on different days than they might come in, and so all of those things to really just deepen their experience with Dutch Bros.

You're kind of in an interesting competitive landscape. There's obviously a very big company out of Seattle that's in your neck of the woods. There are some emerging concepts like 7 Brew as well. I mean how do you kind of navigate a brand identity amongst this kind of evolving competitive dynamic?

Yes. So I think we have a very strong brand identity and our goal is always to continue to enrich that and grow that. So one, I think we are really known for that service level that we provide. When you come into our drive-thru, we want you to leave happier. We want your day to be a little bit brighter than when you started with Dutch Bros. And that's really because of our amazing Broistas, that every time you come through that drive-thru, they want to remember your name, they want to remember your drink, or if you're new, they want to introduce you and help you find your favorite beverage. So I think all of those things are really helping us grow.

When you think about the value proposition as well, that's probably been a noisier part of just broader food service and the beverage landscape over the past 18 months as things have become more promotional, generally speaking, and then less so. I mean, how do you want to maintain the Dutch value proposition as it relates to the peer set? And do you equate that simply with the price point? Or are you thinking about that as a layer of the overall value as it relates to service, speed, price?

Yes. So I do think our value proposition is overall what you're getting for your experience and then what you're paying for that. So there's a lot of different elements in how we think about value proposition. When we look at where we are based across a whole range of competitors, we are doing incredibly well from a value proposition perspective. And we think that's a number of things. I think I'll come back to the service a number of different times here, but I think it starts with that experience that you're having. We also have a relatively large drink size compared to some others. So our medium is a 24-ounce iced beverage. 87% of our drinks are iced. So that's quite relevant. So I think that drives a lot of value. And then I think, in particular, in the beverage space, the rewards program is an important driver of how customers think about value proposition. And so when you get that free beverage after you've come a number of different times because beverage is highly frequent, it really helps to drive kind of how you think about that overall value proposition. And then as we think about kind of where our positioning is, I think, that we across this industry are probably exiting a stage of where we've had some higher price growth and, I think, entering something where everyone is going to be really thoughtful about price. We're taking very little price this year. I think we're just incredibly pleased with where the value proposition is and how our customers are feeling about coming to Dutch Bros.

So when you hear from customers, I mean, I know it probably skews very positive in the feedback that you get. But where are the areas that they really would like Dutch to improve?

Yes. So as we look across and what our customers are asking for, some of the initiatives we're rolling out are exactly kind of what they are asking for. So one, they, at times, would like our lines to be a little bit shorter. So when we go into new markets, it's a very lucky problem to have that we're at over 1,000 shops and are still having incredibly long lines in some of our shops. So we do want to get our customers through those lines quicker. And in many cases, we'd like to open shops close to those shops so that the lines can be balanced between a couple of shops. The other thing our customers have asked a lot for the #1 thing that our customers were asking for in our app was for mobile order. So when they downloaded the app, they didn't understand why we didn't have mobile order. So that was a super important initiative for us to roll out last year and continues to be something that our customers really love, that functionality in the app. And then finally, our customers are asking for food. And so when they're busy in the morning, they don't want to stop at two places. They don't have to wake up early to get a breakfast sandwich while they're getting their coffee. And so that is another thing that we're incredibly focused on as we think about making sure our customers are happy with what we're doing.

Let's go deeper into each of those because I think they're really important topics. So on throughput, can you talk about the initiatives going on behind the scenes on throughput? And also maybe within that context, I think your COO just departed, I think it was last week. I may be losing track of time. Kind of if you're thinking of backfilling that position or what the context is there.

Yes. So we are incredibly focused on throughput. What we're doing right now is really basic blocking and tackling. So we're ensuring that our labor deployment matches where our demand is, so looking at that in a way. We're also focused on peak speed throughput. And so we have a speed dashboard that our teams can look at. They can understand where was their peak speed and then how will that -- how are they measuring against that each week and each day. And then as far as kind of what we're looking at from a company perspective and some of the restructuring that we did was really looking at kind of getting more detail-focused in the operations space. We recently hired a Chief Development Officer that we moved into being part of the senior leadership team with our incredible focus on development. We shared that we would add at least 160 shops this year. Having Brian Cahoe on our senior team was really important. We also moved some of our customer experience into marketing so that all of our customer focus is together in that one area. And so we decided to refocus that role on a Chief Shops Officer role.

On mobile ordering, it has been interesting to watch it evolve. I know it's been a short time frame. But I think you've talked about some of your newer markets having a higher mix of mobile than legacy markets, which is kind of not intuitive when you think about it. I mean, what do you think is happening in newer markets or some of the newer markets where you're seeing that outsized penetration?

Yes. So one -- and I think that, that is one of the things that in hindsight makes a lot of sense as we're rolling this out, that mobile order has been a part of the beverage space for quite some time. And I think as customers establish patterns and what -- if mobile order is really important, they actually decided to go to someone else instead of us in some of our markets. And as we go into newer markets and are meeting customers for the first time, we have mobile order. And so those customers are joining us and continuing to come to us. But we do think that there's still an opportunity in those more mature markets where we've been for a while with established routines to find those customers who might love Dutch Bros, but who decided not to come to us because we didn't have that commerciality.

How are you communicating or raising awareness of mobile ordering?

Yes. So we're doing a couple of things. So one, within our app, that it's pretty obvious now that you can order. And as we've turned it on, we've sent messages to those various markets. We also put messages on the back of some of our stickers. So that might be something we should talk about. We have these awesome sticker days. We have sticker collectors out there. So we do a Sticker of the Month drop. We also do special stickers like from Mother's Day so you can celebrate your mom and get her sticker when you come and get your drink, and it's become a pretty special part of the culture. But we do put that mobile order messaging on the back of a lot of our stickers as well to help grow that. We also have wayfinding signage. So as you come into the drive-thru, you'll see the mobile order signage, things like that, so you can know, oh, maybe next time I might like to mobile order or if I'm in a rush. But I would say we've been pretty thoughtful about the pace of the penetration within the shops has worked really well for our operations and for our Broistas. So we're happy with that pace. So we've been thoughtful about we don't really need to do too much to shout it from the rooftops because we're happy with the pace that it's going at right now.

And can you talk about, from an operational standpoint, how you handle mobile? Because there have been some other companies that have had challenges maybe incorporating mobile with drive-thru and walk-in. And I know you don't necessarily have walk-in, but you have walk-up.

I can start and you can finish. So as far as mobile order, it actually incorporates quite well within our systems. So we have a kitchen display system within all of our shops. And the way that we take orders in our drive-thru lane is with iPads. And so you'll have a Broista standing out there that greets you and says, hello, what can I get? Let me walk you through the menu. And they're actually then sending that order into the shop. So from a mobile order perspective, it's worked quite easily in that the Broista sending the order in from the iPad is just like a customer sending an order in from their phone. They pop up on the kitchen display system, and then our Broistas that are inside start making the drinks. And so I do think that we have a setup that's made it really easy to integrate mobile order within our existing systems. The other piece is we've been very, very thoughtful from a labor perspective, that it's -- I think it can be tempting for some to say, well, we don't have the order time anymore so we can reduce the labor required in our shops. What we've done as we've rolled out mobile order is we're reinvesting that in our hospitality, in our service. And so our Broistas really have the time to make every single person's visit special.

Can you -- so moving on to food. What have you learned so far about the expanded food offering?

Yes. So we're really, really, really in the early innings of food. We shared at the end of our Q1 call that we're in about 32 shops now testing food. I think for us, we start everything with a number of criteria as to how we think about what a rollout could look like and what we're looking at from a success perspective. The first thing is always how does this work for our Broistas? Does this make their life easier? Does this make our customers happier? And so we start with that. So as we roll things out, we're consistently doing surveys, talking to our Broistas, trying to understand how everything is working. The second piece is we obviously have a number of financial metrics and customer metrics that we're looking at as we roll out the testing, and we are looking at ensuring that the food works really well within our current cycle time. So we want to continue to increase the speed of our transactions. And so whatever we're doing from a food perspective, it really has to fit within that cycle time.

When you think about it operationally, just to level set with everybody, are you actually assembling breakfast sandwiches? Is this -- is it adding operational complexity behind the scenes?

No. So what we're doing is we're basically reheating. And so we do require some new equipment. We are putting some ovens into our shops. We're putting some freezers into our shops and then we're getting some tongs and paddle to pull things out of the oven. But our Broistas have been really successful operationally... [Technical Difficulty]

I think we lost Christine's mic.

I'll just talk louder.

Yes, it's off.

Maybe it just died. I think it ran out of batteries.

I mean, I can -- Christine, here, let me give you mine, and I'll just stand up.

We'll trade.

Okay. Team work makes the dream work. Thank you. So on the initial food platform, I think there's an 8-ish offerings, if I'm not mistaken. And it's breakfast-focused. I think that makes sense. There's a lot of opportunity for you to grow your morning daypart. Is there an opportunity over time as well to kind of move more into like snacking or other time of day meal occasions?

So we're just starting. We have 4 food items in most of our stores today. So we've got 3 muffin tops and a granola bar. So this is moving from 4 to 8. I think that as we think about doing something like this, it's really important to make it work operationally first. And so before thinking about expanding things, we want to get it right with what we have. Our strategic goal in rolling out food is as you look at the morning daypart, food is important. And what's important there is those hot items that contain eggs and protein and things like that. And so having the lowest number of SKUs, the lowest amount of complexity, that can help us really take that incremental opportunity.

And how do we think -- and maybe this is a Josh question, but from a margin standpoint, I mean, food is inherently lower margin, but then you have the opportunity to have a higher average ticket and leverage all those fixed costs in the box. So as you kind of think about that as we move into '26 and beyond, how is food likely to impact the margin structure of the company?

Yes. I mean, so one is it's a little early to tell just given as we're landing the overall SKU portfolio pricing and cost structure. But certainly, as you think about -- we're looking at this as a way to drive incremental beverage occasion. So we see this as hopefully driving that incremental transaction, in addition to a higher ticket that should be able to leverage a fixed cost structure. So I think from a gross margin perspective, oftentimes, food is a lower gross margin product. But with the ability to add incremental transactions and incremental ticket, we see this as nicely overall accretive.

And then going back to expansion because clearly, you have the opportunity to grow the unit-based sevenfold, I think is the most recent target. Do you feel that there's any kind of arms race in your space? There's a lot of beverage competition, maybe a little bit less from CosMc's these days. But there is a lot of interest in the beverage segments. You've obviously put out this goal to double your unit base in a short time frame. But you're also doing it primarily company-owned, which is different than some of your peer group. So what are the advantages and disadvantages of the company-owned mindset in your opinion?

Yes. So as we look at company-owned, again, I think what we are doing is we have been around for over 30 years. We are building an incredibly enduring brand. We believe that our growth has to start with people being ready that when it comes down to it, there are so many coffee shops in this world, right, and so many beverage shops in this world. But what really drives differentiation between the different brands and the different concepts? And we believe we have an incredibly differentiated model because of our people. And so despite others growing out there, we are going to be really, really focused on our growth being predicated on when our people are ready to grow. We have a pipeline of operators, that's our position that sits just above the shop, of about 400 folks. And they have an average of 7 years of tenure with Dutch Bros, and they are ready to grow into a new community and open a new market. And I think that the level of enduring brand, that level of service we can provide because we are opening every single shop with someone who knows and loves the brand and is committed to being a part of our growth is something that's a huge differentiator from and is something that we're deeply committed to and would not accelerate our growth beyond our ability to add people. That being said, we've been very successful in growing that pipeline of operator talent. And each operator can support like 3 or 4 shops. So you take that 400 that we have today, that's a lot of shops that we can grow into.

Can you talk about, as you raised that ultimate target -- or maybe it's the intermedium target, we'll see like as we get there, but what was the gating factor that was kind of removed that got you to a bigger TAM today than at the time of the IPO?

Yes, there's a few things I'd put in there. I think initially at the IPO, we had put a time-bound target on there, so limited over a 10-year horizon. It was looking at a narrower portion of the United States, so not the full country. So we've expanded that across the full country, taken the time-bound off. I think the piece I'd add to that is we've added a lot more data and insights into our ability to identify what that TAM could look like based on our recent openings, based on the resources we've put in that space. So I feel like we have a lot better insight into how we think the brand could grow over time and then certainly have kind of expanded the overall aperture from what we had previously.

Are there any markets that Dutch has had a slower-than-expected ramp? And if so, is there any causal factor that you've been able to identify?

Slower than -- what I'd say is there's been a lot of conversation around how we initially went into Texas. So Texas was a market we went into with very deep penetration in open stores, very close to one another in quick sequence. And what that didn't allow us to do is to build up the brand awareness and build up the longer lines in some of those shops that might have otherwise developed a little bit more brand awareness. So we've taken those learnings and have applied that to our growth as we've continued to expand across the U.S. So I think that's maybe an example of where we've learned that we can take a slightly different approach, not changing the TAM, but just changing the sequence of how we're going to approach openings.

Yes. It's a good segue into brand awareness generally because I think one of the elements over the past maybe 18 months that's been a big unlock is kind of doing more effective marketing. So can you talk about how that has improved brand awareness in markets like Texas and how that's maybe widened the customer occasion set or the funnel of customers that are coming in?

Yes. So when we look at marketing, we have made a number of changes over the last 2 years. So one, really bringing in a focus on innovation. And so that is a natural buzz driver for us. So we'll have long-term platform innovation. But we'll also do fun things that pop. Like for April Fool's Day, we did a Pickleback Rebel. And there's a lot of controversy over whether or not it was real or not, and then you came to the shop and you could actually get a Pickleback Rebel. And then we got lots of demands to keep it for longer because it was so good. So I think things like that really help drive the fun and the buzziness of the brand. We also do, in addition to our sticker drops, we do fun merch drops. We just had a bestie bracelet. We do rubber duck drops, all kinds of fun things that you get just a little extra fun with that beverage that you come to pick up. We've also increased our stance in paid media. And we were doing an amount of retargeting and, we've really shifted that to going to find customers who may not know what Dutch Bros is but have a Dutch Bros close to them. So we identify those customers. And then we find once someone has come in for their first visit, that they are typically very pleased with that first visit. And so now our goal is to get them into the Dutch Rewards program so we can speak with them directly. And we've been really successful doing that. So even with our very high new shop growth rate, we keep increasing the amount of our transactions that come from that Dutch Rewards program. And we ended Q1 with 72% of our transactions with our Dutch Rewards members. So all of those things have really been a nice shift in marketing that has helped us drive that transaction growth and our new shop brand awareness.

Yes. Can you talk about -- actually, your rewards is still pretty new and it's digital form. Can you talk about like where you are on that journey in terms of segmentation and personalization? Are you in the first inning, second inning? I mean, where are we in the game? And are there any areas where you think you're just -- you've done kind of a better-than-expected job and any areas where you think, boy, that just -- there's a lot more learnings here that we need to still harvest.

Yes. I would say on Dutch Rewards, we're really at the beginning of the journey. So we did do some shifting at the beginning of 2023, where we took some of the value out of the base rewards program to really allow us to use points to drive different behaviors with our customers, introduce them to new platforms, have special bonus points for coming at different times of the day. And we've found that to be really, really successful. So -- and I think with that, we are in the early innings of personalization. We're still at a point where a lot of the offers are really to the whole base but starting to segment things like, oh, we see a customer kind of start to change their behavior, can we send them a little point offer to understand why are they changing their behavior or is there something to incent them to come back? So all of those things, I would say, we're really quite in the early innings. And then as far as things working, I think we've actually been pleasantly surprised with how well everything works together and kind of builds on each other. So I think having things like mobile order separate from innovation, separate -- the concert of all of the things at the same time, I think, is really adding up to us seeing the strong performance that we're seeing.

And then I think we have time for maybe one more question. So I'll end with coffee and tariffs, because why not? So I think we -- well, anybody who's following coffee knows that it's a pretty expensive commodity these days, maybe a little bit more expensive if there are tariffs on it. So can you talk about your coffee cost exposure, how you're thinking about that? And just as we think about tariffs and potentially impacting the build-out costs of locations, are there mitigating efforts that you can do there?

Yes. So on the coffee front, just for those that are less familiar with the brand, coffee represents a little less than 10% of our total commodity basket. So certainly, we are a coffee company, but it is a relatively smaller portion of our total COGS. We did expect -- we've seen coffee prices elevated for the last several months and have locked in the majority of our coffee needs for the remainder of 2025 here as of the end of Q1. So feel like we have pretty good line of sight to what that will look like within the guidance we provided for overall EBITDA and margin implications. We did factor in the inclusion of the impact of tariffs. So we are sourcing all that coffee from 3 countries that would be subject, I think, currently to a 10% import tariff, although that's very dynamic and one we're following closely. So I do feel like we have the ability to absorb that and it's something that we'll continue to watch here. Coffee prices have been volatile over the longer history. And when we see spikes like this, historically, they've tended to normalize back to the average. As it relates to build costs, again, through as recent as we can get anyway, the thoughts have been that for 2025, it would have a fairly minimal impact given what we've got in terms of construction underway, items that we purchased, products that we purchased. But obviously, that's been a very dynamic conversation as well. So we'll continue monitoring plus we didn't see how that could impact.

Well, we'll have to check our e-mails after this meeting and see if there's any new tariff news. So thank you, everyone, for joining.