Dutch Bros wants to take it easy on its customers in 2023.
The Grants Pass, Ore.-based drive-thru coffee chain’s prices were 11% higher in the fourth quarter than they were a year ago, price hikes the company felt it had little choice but to take given the rising cost of commodities such as cream. With those costs expected to ease this year, the company is hopeful to avoid taking any more price this year.
“When you’re taking double-digit price in a year, you’ve got to be careful before your price points start to run into a territory where you start paying $12 for lattes,” CEO Joth Ricci said in an interview. “That doesn’t sit well with me.”
More companies may need to consider this option heading into 2023. While there has been relatively little consumer pushback on pricing—and, according to Technomic many customers appear to be getting used to the higher prices—the uncertainty of the economy make it important for companies to keep price hikes to a minimum. Restaurant menu prices rose 8.3% year over year in January, but more companies are starting to express a desire to hold the line on price increases going forward.
“It’s an important year to be sensitive to the consumer,” Ricci said. “They were very good to us last year. We received very little pushback on pricing.”
“I think we’re right on the line of where we should be,” he added. “But I prefer not [to take more price] if I don’t have to.”
For Dutch Bros, the high prices last year were necessary to offset high costs. The company’s adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, fell 32% in the first half of 2022 but recovered in the second half. Dairy costs alone rose 25% in the first half. The higher prices helped recover some of the costs, executives said.
They didn’t offset lower traffic. Same-store sales declined 0.6% in the period, in part because the company continues to build locations in busier markets. Traffic in the period declined 7%, a slowdown from the 3% decline in the third quarter, though executives said the company’s shops were lapping the busiest quarter of 2021. Dutch Bros stock declined more than 10% on Thursday.
The company believes that its costs are at peak and should be easier this year.
“There’s a lot of challenges to profitability,” Ricci said. “We have taken a very conservative approach to profitability this year. We’re going to run this business like it’s another challenging year on profit and stay very disciplined in how we do things.”
One reason Dutch Bros is reticent to take much pricing this year is a change in its loyalty program. The company is decreasing the number of points customers earn going forward, which will make it more difficult for them to get free drinks. The change was designed to reflect higher prices.
The company did not want to take more price after making the change to its program—which has generated little pushback, Ricci said. But Dutch also wanted flexibility to be more targeted with some of its rewards.
For instance, if the company is seeing weak energy drink sales in California, it can use its rewards program to convince customers in those markets to get some. “We want to put more flexibility into the program, give us dry powder to invest in individualized market-level business programs,” Ricci said.
Still, with margins expected to be tight this year with fewer prices increases, Dutch Bros is looking at operational improvements. For instance, the company is rolling out a beverage tap program that could improve operations in its locations. It is also working to encourage more of its customers to load funds onto its app.
Dutch Pass, as the company calls its payment program, can on its own speed service. “If we can get more people to pay with Dutch Pass, we can remove the unnecessary part of the transaction with somebody bumbling around for a credit card or cash, and just make a quick scan of a QR code and move through the line,” Ricci said.
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