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Financing

Dutch Bros speeds development, thanks to its low turnover

The coffee chain has expanded eastward, including its first location east of the Mississippi, thanks to lower-than-average turnover, which is almost “non-existent” at the regional operator level.
Dutch Bros expansion
Photograph: Shutterstock

Dutch Bros, the newly public beverage chain, opened 23 new shops in 2021, which was a record for the chain. It has continued that pace this year, having already opened 25 shops during what is traditionally a slow period for new development. The openings include the chain’s first location east of the Mississippi, in Nashville.

Dutch Bros can expand like this, CEO Joth Ricci said, because of low turnover. “We are not a real estate company,” he told investors on Tuesday, according to a transcript on the financial services site Sentieo. “Our primary focus is not site availability, it is people development. When we commit to growth numbers, we do so because we are confident in the readiness of our operators.”

The company has already had substantial growth in shop count as it is. Dutch finished 2021 with 538 total units, divided roughly evenly between company-operated and franchised shops. That’s 168 more than it operated at the end of 2019. Dutch now expects to open another 125 locations this year.

Dutch Bros, based in Grants Pass Ore., has expanded recently in more eastern markets including Texas, Oklahoma and Kansas—though Ricci has noted that the chain is also expanding in Southern California, which is as big or bigger than any of those other markets. It also opened in Nashville earlier this year, pushing the chain even further to the east.

The new shops, and the chain’s 10.1% same-store sales growth, drove revenues 55.8% higher in the fourth quarter. The company reported a loss of nearly $10 million, due in part to $10 million in equity compensation. Dutch Bros’ earnings did not meet investor expectations, however, and the stock fell 5% Wednesday.

Labor availability is an underrated component of expansion strategies. A company cannot open a new unit, after all, if it cannot staff one. Yet Dutch believes its culture has helped it weather the current labor challenges.

Ricci did say that surging infections from the omicron variant did cause some issues in January. The company had less than 1% downtime in the fourth quarter, which “ticked up slightly” in January. But that has since quickly subsided.

The company used pooled staffing and cross-trained crews, which allowed operators to cover shortages at one store or another.

And the company has generally avoided the broader labor problems that have hit the industry.

“We have not experienced the staffing challenges of The Great Resignation,” Ricci said. Shop-level turnover was 56% in the fourth quarter, which was down from where it was in the third quarter, he said. Turnover rates are twice that or even more at many other fast-food restaurants.

Among regional operators, however, “we have virtually nonexistent turnover,” which he said was due to its “people-first culture” along with career development opportunities and financial incentives the company provides its employees.

Dutch Bros promotes its operators from within and expands only when its people are ready to take that step—which helps translate the drive-thru chain’s operating culture from one location to the other.

Ricci said Dutch has more than 200 fully qualified regional operator candidates who grew up in the system and are “ready to run a market.” The candidates worked their way up from “Broista” in company and franchised shops, have an average tenure of 6.5 years and can support the development of as many as 1,000 locations.

The company has another 900 candidates in its leadership pathway program. “We believe that our employees’ continuous improvement, both personally and professionally, improves retention and positions Dutch Bros to win,” Ricci said.

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