Dutch Bros' strong margins give the company flexibility as wages are set to soar

The drive-thru beverage chain’s shop profit margins soared last quarter, to 31%, thanks to a combination of price hikes and efficiency. It will help with California wages set to increase next year.
Dutch Bros
Dutch Bros expects its margins to moderate as it makes investments in manager pay. | Photo: Shutterstock

Apparently, profits give companies more flexibility to do things like make investments or withstand an oncoming 25% increase in base wage rates.

This is the lesson from Dutch Bros, the Grants Pass, Ore.-based drive-thru beverage chain. The company on Tuesday said that its profit margins from company-operated stores increased 540 basis points over the past year, to 31% of revenues.

That’s remarkably high for an industry where anything over 20% is considered outperformance. For Dutch Bros, the profits give the company “flexibility.”

“Where we’re sitting today is a general expectation of a good place to be,” CFO Charles Jemley told analysts on Thursday, according to a transcript on the financial services site AlphaSense. “We also talked about having flexibility and the power of this four-wall model being so strong and allowing us to adapt to conditions changing in the market.”

Those “conditions changing in the market” are wages in California, one of the chain’s biggest markets. The company finished 2022 with 127 of its more than 600 locations in the state. Next year, those locations will have to pay workers at least $20 an hour.

That will be a 25% increase from the $16 an hour that workers in those shops average now. “We are actively looking at productivity and other options,” Jemley said. He added that the company is deciding whether to protect that margin percentage or whether to protect the absolute amount of profits it gets from stores.

“We’ll continue to thoughtfully examine our wage and incentive structure at the shop level and make appropriate investments there,” Jemley said. “That’s why the 31% margin that we’re showing today is so powerful because it does allow us the flexibility to deal with navigating those things.”

The margin came from a variety of sources, including 120 basis points from lower food costs, 230 basis points from improving labor costs and 110 basis points from occupancy costs. Executives said it was due to pricing, which was up 8% and which helped the chain generate a 4% same-store sales increase. They also said efficiency improvements inside the shops helped with other costs.  

And executives said it’s helped that they are building more shops in cheaper markets such as Texas, where costs are not so high.

All that said, these margins are unlikely to stay at this level even before the company has to start paying higher wages in California. That’s because the company has already planned to invest in shop manager wages and investments this November that will cost the company $1.5 million to $2 million by the end of the year.

The company believes those investments are necessary to improve operations.

“We’re making sure we’re making the right investments in labor to grow our sales to make sure that we keep our lines at the length that our customers enjoy,” Company President and incoming CEO Christine Barone said.

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