Okay, so I'm Sharon Zackfia. I'm very happy to have with us today from Dutch Bros, President and CEO, Christine Barone, and CFO, Josh Guenser. Dutch is one of the fastest-growing restaurant brands in the U.S., with its consumer appeal illustrated by 17 straight years of positive same-store sales and healthy AUVs of roughly $2 million. Courtesy of high-margin beverages, the inherent efficiency of its drive-thru model, well-rounded day part utilization, and strong sales, Dutch's unit level margins are best in class at roughly 30% last year, excluding pre-opening, and we think the runway is vast from the current count of units, which we'll talk about in a minute. We're going to go through a little bit of an overview, and then we're going to do a fireside.
Before Christine goes through a few slides, I, of course, need to drive website traffic, so please check out williamblair.com for a complete list of research disclosures and potential conflicts of interest. Thanks.
Awesome. And then we have our disclaimer slide. And then just wanted to start a little bit to talk about who Dutch Bros is. So, we are a drive-thru beverage company. About half of our sales are in the coffee space, and the other half are half mix of our proprietary Rebel energy drinks, and then teas and lemonades and smoothies and other beverages like that. We have a very small food offering, so we really are more of a more of a pure beverage company. We are now in 17 states. We just opened Florida at the beginning of this year and now have 3 shops in Florida. We've been on a very rapid pace of growth. So we have opened 500 shops in the last 5 years.
So although we are 32 years old, we've had a lot of growth in the last couple of years. We also have incredible people systems, so every single time we open a new market, it's with an operator that has been with Dutch Bros for quite some time. So we have operators in our pipeline ready to go open new markets, about 375 of them, who have been with the company an average of seven years of tenure. They go and open one market, introduce Dutch Bros to that new market, and then they expand their shops in that market. We started out a little bit more as a franchise system, but now we're company-owned. So about 66% of our shops now are company-owned, and the majority of our growth is company-owned.
We have an incredible group of franchisees that have been with us a long time. They all started as Broistas. That was a requirement and continue to grow as well, although the company-owned growth is at a definitely a faster pace at this point. We also believe the potential for Dutch Bros is just incredibly strong, so the density in which we can go into a market is quite high. We think we have an incredibly long growth runway ahead of us. Goal is to reach about 4,000 shops sometime in the next 10-15 years. And then just wanted to highlight, we just had a great Q1, so 10% same-shop sales growth. We had our 11th consecutive quarter of opening 30+ shops.
We also had really great revenue growth, so 39% revenue growth, with profitability, so 120% adjusted EBITDA growth that went along with that. And then thinking through kind of what drove that growth, and, you know, I think as we look at the broader market and potentially others are seeing some softness, I think we're in a very unique space in this market. We had some great innovation this quarter, so we launched protein coffee, which in an iced medium has about 20 grams of protein. We also launched strawberry boba and vanilla honey boba this quarter. Both of them did so well that we've kept protein coffee on the menu and have kept strawberry boba on the menu as well. We also have a very strong rewards program.
So despite very rapid growth, we are adding rewards members at a very rapid pace. 66% of our transactions are with our rewards members, and so we have an incredibly effective channel to really talk to our customers and share with them new news and what's coming. And then we've also are just really starting to do a lot of paid advertising. It's still a very small percent of revenue, but, but overall, trying to build our brand awareness as we go into new markets. So in the state of Texas, we have almost 200 shops now. A little over 3 years ago, we had 0. So we've almost built an entire concept in the state of Texas over the last, last couple of years.
Also, we have a number of priorities for this year. So, we've been continuing with this rapid growth, have just awesome data now on how our shops perform. So getting tighter as we go into new markets on understanding what our AUVs are and where they're going to be. We've also been building out a market planning function to continue at this rapid pace of growth. We've shared that we believe we'll have 150-165 new shops open just this year. And then finally, mobile order and pay is a big initiative for us. So despite that incredibly high rewards penetration, we don't have mobile order and pay yet.
And so we are in the very early stages of testing that and hope to have that capability in the majority of our shops by the end of the year. A little bit about our executive team. So with our rapid growth, we have been adding new folks to the team. But some of them have been around for a very long time. Travis Boersma here is our co-founder and is quite involved in the business and is really our North Star in many ways for the business. Sumitro Ghosh joined the team in January of this year, has a Starbucks, Yum! and Nike background, as noted here.
Tana Davila joined the team last summer as our CMO, and she's been with a number of different brands. Josh is also new to the team, and you'll get to hear from him later, Starbucks and MOD background. And then Jess Elmquist is new to the team as well. He was with Life Time Fitness and really helped them as they grew and built their presence across the U.S. We also have Brian Maxwell and Kristin Schmidt, who have been with the company for 30 years, and have been such an important part of our history and our growth and building the incredibly strong culture that we have at Dutch Bros. With that, I'll turn it over to Sharon for some questions for us.
Great. That's, that's a great lead-in, because I think one thing that would be helpful to start with is since we, there are so many new members of management, including both-
Yeah
... of you being relatively new. Can you talk about what the new C-suite's kind of top priorities are for Dutch? And maybe contrast that with the prior priorities kind of in the years prior to going public.
Yeah, absolutely. So I think, you know, as we look at kind of our history over the last couple of years, we've been in a huge state of very high growth. And so, you know, is bringing in new folks on the management team, and it's been very smooth transitions, so folks haven't left to go other places. Charley Jemley, who's been our CFO for a number of years, Josh and I both worked with in a prior life, and it, you know, is staying on to help us out for a lot, and it's really the same across all of the positions. So very smooth transitions that we're very grateful for.
As far as priorities go, I think we have been on just such a rapid pace of growth and happened to have a pandemic during that. I think unlike some other brands, a drive-thru beverage concept does very well during a pandemic, right? So, so we actually had rapid growth and couple that with rapid sales growth and then making sure that we could really just keep our shops open during that time. So that was a lot of the priorities that we were working through over the last couple of years. I think now we're in, you know, the world's in a more stable place, and as we settle into our growth rate, it's really about continuing to build the processes and systems underneath everything to continue to scale our brand.
Across the leadership team, I think one of the priorities in adding folks was having people who have been at much larger scale and know where we're going and know what that looks like, but also still are entrepreneurial and scrappy and have been at smaller brands or smaller places, so kind of can bridge that gap. I think that as you grow a company at a rapid pace, scaling decision making is super important and understanding kind of where you are on that curve, and really all of the new leaders in the business have that, have that in spades. We've also invested a lot in, in the new leaders in ensuring that everyone has a very robust shop experience. They go through the full Broista training, so they, they know how to make all of our beverages.
Sumi, in particular, really spent his first two months just in the shops with our teams, understanding kind of what they most want and what's going to help them grow. And then immediate priorities, which I just went through, you know, I always believe that in a business like this, everything we do gets filtered through one shop, and so you have to be so thoughtful about what priorities you want to do, and you can't do a whole lot when you want—because your, the shop needs to execute every day. They need to smile at their customers and make sure they're enjoying that time. And so really, we're very focused this year on mobile order and then building up the team and systems to support the business and to support our Broistas.
I think, I keep forgetting to turn the mic on. How many people in the room have actually been to a Dutch, just out of curiosity? Okay. I think it's probably helpful. I mean, your momentum has been very different than others that are publicly traded in the space, and frankly, just the broader restaurant category. You went through some dynamics behind that, but can you just talk about, like, what how the kind of touch and feel of Dutch is different than maybe like a Starbucks or a Dunkin' or other brands that people might be more familiar with in the room?
Absolutely. So, our brand is really about service. You know, as Trav will say, we're in the relationship business, not the beverage business, and that, what I have been absolutely just amazed and surprised by is the consistency of that service across, you know, our first shops in Grants Pass, Oregon, and our shops today in Kansas and Kentucky that are all new, and it's really about that growing from within. And so it's a very deep service model, even though it's drive-thru. So a couple of things. We don't have a squawk box. If you pull through the drive-thru, you're actually greeted by a person, and they'll ask you how your day is, they'll ask you what you want to drink.
If you want to be guided through choosing your drink, you'll have a full conversation, and then we have a really unique model at our drive-thru window. So when you're sitting at the drive-thru window as the Broista there, you never turn your back to the customer in the car. And I think, one of the observations that we have all had, it's very rare when you go through a drive-thru, when the person at the window is also looking to see who are the passengers in your car. Do you have a dog? Is there a kid in the back? And they're also engaging not only the driver of the car, but they're also engaging the entire car.
And I think that, both for our Broistas and for our customers, that point of connection, where we've all been through a really interesting couple of years in this world, but to have someone who's genuinely and authentically has the time and, wants to connect with you, is, is something really, really special. And we see that in our shops as well, that our teams are looking, you know, to join Dutch Bros because they like that sense of belonging. They feel like they're a part of really an incredible team, that has the right amount of time, to both make your drink perfect, but also engage you at the level that you want to be engaged.
Yeah. I mean, the only thing I might add is if you were to drive up to a Dutch Bros, more often than not, you're going to be greeted by somebody that's right in your car, but we've got music playing. The team is having a great time. It's generally a younger group of people that are working in our shops. They're having a lot of fun. I can tell you, just having worked in them, they're having a lot of fun inside. That energy comes out, and they're greeting you with that same level of energy. So it's just a really fun and energizing environment, and they want to engage and bring people into that. So as customers come through, we're inviting you into that same kind of experience that they're having inside the shop.
It's just the fun energy and experience that comes along with just getting a beverage.
I think the other thing that's really different is we invest an incredible amount of time and energy into training and ensuring kind of the quality of what we're doing is really great. I mean, this flow check test is, like, very hard to pass.
You actually have to really invest some time in studying and getting things right. One of the things I'm most impressed as if I go make drinks with a Broista is I will be told every time, like, what's wrong with my drink, and for, you know, a 20-year-old Broista to tell the CEO, "Hey, there's a drip on that cup, you can't serve that," that there we are doing something amazingly right. And so that, that's the part I love the most.
So you mentioned how quickly you built out Texas, going from, like, 0 to 300 or-
Two hundred.
200, sorry. Next 100, I just added-
Yeah. It, it'll get there.
0-200 over 3 years. You just entered Florida. Can you kind of compare and contrast how you might build out the Florida market versus, you know, how you built out Texas? Because I think, you know, part of what happened from the investor side of the equation-
Mm-hmm
... was Texas built out so quickly, maybe even a little bit ahead of demand, that it felt like there was some pressure on AUVs as a result.
Yeah. So, I think one of the main differences is that as we went into Texas and really started this rapid pace of growth, we had a lot of data from very mature markets on the West Coast. And I think oftentimes for many brands, like the differences between what you're going to do in California versus what you're going to do on the East Coast, there are differences. And, couple that with, in many of our markets on the West Coast, we've been around for 20+ years, and so it's a very, it's a mature brand that's part of the markets.
In going into a new market now, for Florida, we actually have all kinds of data now of going into Texas, and so we understand that as we're building a brand in a new market with a very different brand awareness than our mature markets, that the AUVs can start at lower levels. And so how do we think about that? Well, we look more, a little bit more at density. We have a really great understanding now of what customer segments are more likely to come to Dutch Bros, and so, a much-- I think as you grow, it's just natural that you have more data to make better decisions on where you go and more of a history that's going to be relevant for that next place that you go.
And so what that means for Florida is we will likely pace the density a little bit differently and really more of a refined strategy. I think the awesome thing about our model is it's highly variable, and it scales quite well. So even at AUVs that are a little bit lower than our kind of mature market AUVs, the margins are quite attractive, and so we can still drive returns. And there is something about putting density in a market that actually helps grow your brand awareness quickly. So when you get through those initial phases of building it, you know, our hope would be that that actually starts to ramp quickly over time. So with Florida, we're saying, like, a little bit the density, saying we might have put three shops within a five-mile radius in a span of three months.
Well, now we might do that over a span of 9 months or a year, and there might be shops that, you know, we go a little bit more towards the dense part of Orlando before we fill in all of the outside ring of Orlando. And so just thinking through differences like that. The other piece with COVID, and growing as rapidly as we did, we moved the portfolio from a CapEx perspective more to a ground lease, and away from build-to-suits. The CapEx on our part, $700, about $700K with a build-to-suit, and then $1.9 million with a ground lease.
The initial capital outlay, we've really increased on a per-shop basis to open rapidly during a period where there are a lot of supply delays and, you know, troubles with contractors, things like that. As that environment normalizes, we're going to look to move that back to more of a build-to-suit environment. We are finding today that there's a lot of hybrid as well, where a developer will do a build-to-suit, but because of interest rates and the financing environment, will also ask us for a contribution, and we feel that we're in a good place to be capitalized for this new environment that we're in today. Then finally, we're really working on the tools to grow brand awareness more quickly.
And so the investments we're making in paid media, understanding who our customers are, who's coming to us, and who looks like them, but they're not coming to us yet. And so introducing ourselves with more video, giving people more of an idea of who Dutch Bros is, so when they see that windmill that they're driving past, they'll stop and feel more comfortable in coming in to try us out. Another key one of the key pieces, when we launched our rewards program, we had a free beverage to launch it. We took that away for a bit and have brought that back because this is a very high-frequency business, and so getting that initial trial, especially in new markets, seems to be working well for us.
... And you mentioned the cost to build, but you're also working on value engineering regarding the restaurant operator side. Can you talk about-
Mm-hmm.
kind of where there are opportunities to take cost out of the box and how material that might be?
Yeah, so I wouldn't say that's going to be highly material. I think when you look at what's happened in the construction industry over the last several years, we've all seen pretty rapid price escalation. So we didn't make different choices about what we were putting in our shops. It was really the environment itself that drove those prices up. So we're always looking for things, I think, as we scale, you know, buying opportunities to, you know, buy things more at scale, things like that. But I wouldn't expect that there's a huge amount in the value engineering space.
The more material shift on our average capital per shop is going to be the point Christine referenced as we start shifting back towards that build-to-suit or some hybrid version of that. It's going to drive down the average CapEx per shop.
So I, you know, I'm particularly excited about the mobile order and pay. That's a well-worn path, you know, in the beverage business. Can be pretty, pretty materially, you know, creating a catalyst to a business that already has a lot of tailwinds. So can you talk about, you know, what you're seeing in test and what the unique differences are in a pure drive-through format versus kind of a multi-channel format like your peers have-
Mm-hmm.
and how you surmount those challenges?
Yeah, absolutely. So the majority of our new shops that we're putting in, the way that they're set up is they have a walk-up window on one side and then a drive-through on the other side, and then oftentimes that drive-through will be two double lanes that then converge at that drive-through window. The outside lane, we often build what we call an escape lane, and so your car can kind of go out before it gets to the window because one of the practices we already have without mobile order is we run drinks to the cars. So we'll greet you relatively early on in that line, and we'll go inside and make your drink and then bring it out to you.
Because we feel even if you're waiting to get to the window, that it's a lot of fun to have your drink as you're sitting there. So I think we're actually really well set up from a mobile order perspective, where we can direct customers to our walk-up window so they can park and walk up, which is what they're very used to doing at other brands. But we just have a walk-up window where you can have an interaction with our Broista and collect your drink.
And then through the drive-thru lane, if you choose that or if we have a shop that it's better to direct folks through that drive-thru lane, depending on the volume, we can potentially direct them to that outside lane where we can run drinks out, and then they can escape before they wait in the full line to go to the window. A couple of things about mobile order for us. So one, our differentiator is our service, and so as we think about what we're testing, we're in just a handful of shops right now, so we don't have data as to what this is going to look like financially for us or any of those types of things. We're really investing the time right now to get this right and to work with our service model.
So what we want with our mobile order and the way that we're rolling it out is to ensure that all of those interactions that you have with a Broista are the same. And so when someone will still approach your car, if you're coming through the drive-through, they'll say, "Oh, do you have a mobile order today?" or "Would you like to order from me?" And if you have a mobile order, you'll still say, "Oh, well, how's your day today? How's it going?" And you'll still have all that engagement. You'll still have the engagement at the window if you're going there. And so it's been very important for us to really get this right from that perspective. I think it's also very important for our Broistas. We want them to be incredibly successful in adding a new channel.
Things can change within the shop, and so we're investing a lot of time right now in understanding what's going well, what do we have to fix, how is this going to work for our teams? Because that's the most important part, and them being excited about us rolling out something new. I think one other thing that's important to note is we actually already have mobile ordering in a sense because our Broistas in the lines are standing there with iPads, and those orders are being sent into our production area in our shop. And so this, if Josh is a Broista and he's ordering, and I'm a customer and I'm ordering, they're going to show up the same on the KDS display that we have in the shops.
So from a production standpoint, this actually feels very familiar to our teams. First time I ordered, the team didn't know they had mobile order and made my drink anyway. That's how easy it was. So that was, that was pretty, pretty neat. And I think, but what we do, what we are really thoughtful about is, is given how widespread this is, mobile order, and how many of our customers are using it with other brands, that it could have it could be high volume pretty quickly, and so we need to understand what that volume is before we roll it out more widely, because that will change kind of how we do it. So if it's 5% of sales, it likely doesn't change a whole lot of what's going on in the shop.
If it ends up at 30% of sales, then it would change some things, and we'd have to think through a little differently. We also need to understand how the volume is going to switch between the walk-up window and the drive-through, and that again, just to make sure our teams are super prepared for what we think that it's going to look like when we turn it on. So that's the testing that we're going to do over the next several quarters to really get this right.
Are you thinking about with mobile order and pay, opening it up to everybody or just for rewards members?
So, we're still working through that. I mean, it's definitely, if you download the app, that's going to be the easiest way to do it. Today in our reward program, we don't require you to store payment or anything. You can if you like, and it makes, it makes the transaction faster. But I think the thought for us is typically to make this more universal, and, you know, to allow folks to do that. But I think downloading the app is, it is almost a requirement to be able to order really easily. So, so that's the piece I would share.
What's powerful is 66% of our transactions today are on our loyalty program, so we have a high percentage of the overall volume that's already coming through the loyalty program, and a lot of people are looking for this when they download the app, so.
Can you talk about speed? You know, when there's no Dutch around here, but when I go to Dutch, there's always a long line, which is an enviable problem to have. But can you talk about speed of service? And I'm sure you measure that and compare that, like, where you are now versus maybe a few years ago versus pre-pandemic, and if there are any opportunities in the box to automate or simplify any tasks for the baristas that would help improve that? 'Cause I'm sure you get some bulk of people just looking at the line.
Yeah.
and just saying, "I can't wait in that today.
We would expect that we do, although we don't have a measurement right now for bulk. You know, and what I would share from a speed perspective is we do believe there's an opportunity for speed. I would say we're at the very early stages of really even what is the best way to measure that for our teams and what are the best things to do. So we're very focused on mobile order. We do think, you know, the order time is something that is... It does take up time, and so, being able to redeploy folks to hospitality and to production versus taking orders is something that we're going to invest in as we roll out mobile order and pay.
Christine, you know I have to ask about food, and I-
I know it's not a 2024 dynamic, but you had a little bit of, you know, experience with food, if you will, at another coffee company. So how do you think about food potentially fitting in at some point with Dutch? Is there an opportunity there, particularly in the morning day part, you know, where you don't, somebody might not want to go to McDonald's and get an Egg McMuffin and then cross the street to go to Dutch?
Yeah. So as, as we look at that, potential opportunity, again, I think we are really focused on doing, you know, one or two things really right at a time, because these things are very big initiatives that, that take-- I think that when you, if you, if we were to go into the food business and in the morning, you all of a sudden are in a different competitive set. So you're not just competing with beverage companies, you're now also competing with all of the QSRs that are food first. And so I think being really cognizant and thoughtful that that is a new competitive set that from day one, at our scale, we would be competing with, means it takes a lot to get that right.
You also have to understand, well, who is our brand? Who is our customer? What would an offering have to look like? So, and then from a, from an equipment standpoint, you know, there would be fairly significant changes we'd have to make to the stores. It We would have to add some ovens, potentially, and freezer, things like that. So unlike mobile order, which you get the technology right, and then you really focus in on the operations, it can be rolled out somewhat quickly, but that is something that would be longer term. And I would say, you know, how we really evaluate any decision and look at that is we're looking across our day and saying: What are the occasions, that really Dutch Bros belongs in? and so who is our customer?
Where are they going for their morning food, things like that. Should we play in that space? Will it be good for our Broistas? Is it something that our customers want from us? And I think, you know, the potential thing about something like food that's interesting for us is we are likely missing a beverage occasion in the morning because of not having food. And so getting another beverage occasion is something that's more exciting than food attach. And so anyways, I think it's something that we are always evaluating things, but that is something that we have not finalized our evaluation on by any means and would be a big undertaking. And again, that first filter of: Does this work within our Broista environment?
Will this make them happy to come to work or not, and how would we do it in a way that would?
Okay, we have 1 minute and 23 seconds, so I'm going to sneak in one last question. Last question. I mean, people are just talking about price, right? Just in general, across the restaurant space. How do you think about pricing relative to your peers, and are you seeing any signs of the consumer kind of doing fewer add-ons or trying to manage their check a little bit more?
Yeah. So we, we didn't see anything in Q1 that, that concerned us. But we, you know, we're looking at all those things carefully, and we're certainly listening to, you know, the broader environment that, and what's going on. I think that when, when we look out over this year, I think we're in a really different pricing environment than we were even last summer, and that, being really thoughtful about, you know, customers are deciding right now of, of where to spend their wallet. And it seems to be what we're seeing is it's not like someone looks at their spending and cuts equally across, that they look at, well, what's super important to me? What is, what's bringing me joy? What do I need to do? What, what's fun?
That making sure that we really are focused on delivering an awesome experience and an awesome product is what's right, and we're going to be very, very thoughtful. You know, although we think that there is room in some places, I think we're going to be very thoughtful about where we would take that.
Great. All right, one second left. We'll see you at the breakout.
That was the most perfectly timed.
Perfect.