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 half of coffee-based beverages, a quarter energy drinks, and then a quarter 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 three to four 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'll 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, just wanted to share a little bit about our multi-year 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 two 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.
Hello, everyone. I'm Greg Francfort. I'm the restaurant analyst at Guggenheim. I probably dropped the ball on the introduction here, but it's Christine Barone and Josh Guenser. Christine has been with the company for about 18 months.
Two years.
Two years now, okay, and Josh for six to nine months.
Almost a 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? What did you want to change and what changes have you made that really put your imprint on the brand and the growth?
I'll start with the most important things were right, and so it's my job to continue to enhance those. 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. Continued and enhancing those things. I think most importantly, our people systems. 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. 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 you don't change because it's really working and the most important things were right. And then I think as we looked 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 pieces were enhancing marketing and some of these sales layers that we're driving.
So the number one 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 a third of the business is in the morning, a third of the business is in the midday, and a third of the business is in the afternoon. And when you look at the broader beverage market, really half of that business is in the morning. So we've had just an incredible opportunity to look at that morning and day part and understand why our customers might want to come to us more often. And the biggest reason is they want more shops.
The other two 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?
Yeah, we're seeing a couple of things that are really impactful. So the first thing is we're 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 as 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 a 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.
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-up window, which is on the other side of our shop. And so what mobile order does is 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've 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 of what 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 multi-year build for the next 2026 and 2027 and 2028?
Yeah, 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 two 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 three muffin tops and we have a granola bar, and so the goal with our food test right now, we're just testing eight 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 super fast experience.
And maybe Josh, just with this level of growth, clearly that's being driven off of 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 stores?
Yeah, 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 900-1,000 sq ft box standalone 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-$800,000 build cost. So we've been really focused on driving down that upfront, that per-unit CapEx. We 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-$1.8 million for new shop AUVs. And we're doing about 30% shop level margins in year two. 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 taken us some time to shift to the build-to-suit, but we're certainly making some progress in that way.
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 entrance over the last 12 months, 18 months into Florida. How has that gone? You have six stores today. How has that gone? By the way, there's one 20 minutes away if anybody wants to go.
Everybody should go.
But how has that gone and how are you choosing what cities to enter into the state?
Yeah, so we have a market planning function where we really look at the state holistically, then look at each market and understand where do we want to be 10 or 15 years from now. I mean, the number of shops we'll have in Orlando will be very high. But what are the first couple of shops we want to have? And then how do we want to pace that growth over time? And so one of the things, we entered Texas really rapidly. It's actually we have the largest number of shops in Texas of any state in the U.S. right now, and we had zero shops there four years ago. So really rapid growth. We've got about 200 shops in Texas right now.
And in looking at all of that data and how do we actually really refine the timing of when we open, so allowing that first shop to build up and to really build within its community, and then coming to open another shop and then build up within that unique community. And we've learned a lot about where our customers will drive from to come see us, what their patterns look like, and how do we build those and incorporate that into our real estate strategy. I think the other thing we've done a lot of work on too is in these states we're a brand new brand. And although a lot of 22-year-olds in Florida have probably heard of us, that there is so much more of the community that we need to meet and introduce ourselves to.
And so we've done a lot with paid media and really learning how to rapidly come into a community and build our base, partner with local colleges, with local high schools, and make sure that they know that we're there. We also do a lot of give-backs to the community. And so those are local give-backs that our operators will partner with local organizations and both get our brand out there, but really become a vital part of the communities that we go into.
One of the things that's driven, I think, has been the last two or three quarters you've seen a big improvement in your new store productivity. Can you maybe give us an update on what the year two and year three growth looks like off of maybe the year one AUVs?
We haven't shared specific overall growth targets. I guess what I would say is the shift that we've seen in our new shop productivity really has been a function of all of the work that Christine highlighted there. Really, the shift that we've seen in our market planning approach, how we go into each individual market, being very thoughtful about our site selection as we move into those markets. And then finally, the paid media that we've been driving in those markets to drive brand awareness. One thing that we became very aware of is that we have very low brand awareness in some of these new markets relative to some of our more established markets. And we found that that paid media strategy has been very effective in driving and increasing brand awareness and helping improve the overall productivity of those shops.
And then Christine, one of the things you talked about was just this loyalty program. And I think it's 67%-68%; it's almost 70% of your sales. How do you use that program to basically drive new customer visits or drive frequency? And do you see a big difference in terms of visitation of that customer versus a non-loyalty customer?
Yeah, so if we look at our loyalty customer, that is the most effective way to really communicate with our customers, tell them about new drinks we have, tell them about offers we have, all of those types of things. So the goal is to just use paid media really to drive up brand awareness, to find new customers who are not as familiar with Dutch Bros or have never been to a Dutch Bros. So we use paid media, and then we get those customers into our Dutch Rewards program. And as we shared, 67% of our transactions are with Dutch Rewards members. And if you think about that rapid growth, we are really getting people into our rewards program very quickly.
I guess that customer, is there a certain level of frequency at which they come? Or is there a certain level of frequency maybe at which it makes sense to be able to drive the frequency to a higher level?
Yeah, so I think that one of the things we do with our rewards program is we look at what different customer behavior looks like. And we say, well, this person actually looks a lot like this person, but they're not coming in the afternoon and they are. So maybe we should give them an offer to try us out in the afternoon, or maybe they'd love to try one of our energy drinks because they haven't tried that category of beverage yet. So there's all different types of things we can do to help them really deepen their relationship with the brand, to have a full understanding of all of the different products we offer and when they might want to come visit us.
Maybe if we could just shift a little bit to the cost side of what we're seeing, maybe without going into 2025 guidance or anything like that, coffee's up a lot. Can you maybe help people understand how you hedge against that, what the traditional market looks like for that?
Yeah, so we historically and typically would price coffee out 12 to 18 months. What we've shared is that we haven't seen a meaningful increase in our coffee costs through Q3, nor did we expect a meaningful increase as a result of coffee in 2024. But we had shared that it's possible that it would have an impact in 2025, assuming prices remained elevated. I think it's important contextually to remember that although we are a coffee company, it actually makes up less than 10% of our total COGS basket. So dairy is an important factor. We have obviously syrups and other elements as well. So it's an important commodity for us. It is up, as you pointed out, quite high. And as you said, it could create some pressure in 2025.
Could you maybe talk through what you're seeing from a labor cost perspective and a labor dynamic and what that sort of level of inflation has been like for your business?
Yeah, I mean, certainly from an overall labor perspective in 2024, the biggest impact was California, as all of us faced the higher wages there. We did take some price to help offset the dollar impact of that increase, but certainly had a margin impact for our business. Overall, certainly we're very conscientious about making sure we're taking care of our people and paying a very fair wage, but also making sure that it's an attractive job for people to have, and we continuously look to make investments in our folks throughout, even beyond what's changing in overall minimum wages.
Did you see any impact from California? I mean, the $20 restaurant minimum wage is just specific to the restaurant industry. How has that played out now with nine months of information on the consumer dynamic and the sales dynamic? What have you seen now that we have some maybe more results on the state?
Yeah, I would share that California is an incredibly attractive market for us. We're continuing to grow in California. California already had high wages, so we grew up on the West Coast and the Pacific Northwest, and so have grown up with high wages and high minimum wages. And I do think that it is a market that we want to continue to expand in, and we've done quite well. And I feel we have been happy with what we've seen.
Christine, one of the things that I think people are trying to figure out is, as they look for the next year or two, aside from maybe some of these sales drivers, what do you think are the biggest things that you can change? And maybe what's not well understood about the story?
Yeah, I think that going to a Dutch Bros and feeling what it feels like is actually really important. I think there are so few experiences that we have throughout our day that truly make us a little bit happier, a little more upbeat after we leave those experiences, and that's what we're incredibly focused on, so I think for us, this is an incredible brand. We have great people, and staying super focused on just a couple of things is actually what we're focused on.
Yeah. I think we're coming up on time, so I might leave it there. Thank you guys for coming, and if you don't go to a Dutch Bros or if you haven't been to one, please go to the one 20 minutes away. It's very close, so thank you guys for the time.
Thank you.
Thank you.