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Dutch Bros is willing to sacrifice same-store sales for better operations. Here's why

The drive-thru beverage chain’s same-store sales have been hurt by its aggressive building strategy. But it says it is building overall coffee market share by preventing long lines and poor service.
Dutch Bros coffee shops
Dutch Bros says it is building market share by opening more units to reduce long lines at its drive-thru coffee shops. / Photograph: Shutterstock.

Dutch Bros on Wednesday said that its same-store sales in the second quarter declined 3.3%, though they improved in June and even further in July.

That performance was worsened in part because the company has been aggressively building new locations. The company said that there was a 1.4% impact from “sales transfer,” or the loss of sales from older restaurants to newer locations built in the same market.

That sales transfer is worse (2.3 percentage points) at company locations, and in the company’s biggest markets.

And despite the challenging sales environment in recent months, the Grants Pass, Ore.-based company has no plans to slow down. That’s because company executives believe it’s better in the long run to sacrifice sales at some stores for improved overall service and better total sales in a market.

“We’re OK with that,” CEO Joth Ricci told analysts on Wednesday. “That’s an important piece of the business.”

So-called “fortressing” strategies have been around a while, but they’ve raised some questions from analysts and investors who worry that too many stores will dilute demand and hurt unit economics—particularly the much-watched same-store sales metric.

Yet by building more locations in specific markets, companies like Domino’s Pizza and Dutch Bros believe they can improve service with more locations, while also building overall market share.

Dutch Bros has been one of the fastest-growing restaurant chains in the U.S. in recent years, having opted to expand more aggressively in existing and new markets. The company began the year with 538 locations and expects to add another 130 by the end of 2022.

The company enters a new market and works quickly to build units there to establish a market presence. It has opened 61 new shops in Texas over the past 18 months, for instance.

It then continues to open new stores in existing markets to build a market presence and ensure that its existing stores aren’t under too much pressure. “Sales transfer helps ease demand-driven challenges at any one shop,” Ricci said. “These challenges may produce longer lines and potentially impact customer experience.”

By building new units, however, the company risks unit volumes and same-store sales. Ricci said that the company’s same-store sales in a large swath of California, from Bakersfield to Chico, was down 9.7%, hurt in particular by sales transfer to newer stores.

But he also said that customer response to those newer stores is positive. New units opened the past two years in Sacramento, one of the chain’s best markets, are averaging $2.7 million in unit volumes.

“When we start to do infill in that market, we’re going to naturally see some impacts that will improve overall customer experience,” Ricci said. “But it will knock down volumes.”

Yet, as he said, the company is OK with that, because it is building sales in entire markets. Ricci said the real measure is total revenue. The company grew top-line sales and market share in 26 of its 31 markets. And Ricci said that new stores overall are opening with average unit volumes of $2.1 million.

“Top-line sales are a really important measure of this because we are also working on growing market share,” he said.

From that standpoint, it's working. Revenues at the company jumped 44% to $186.4 million in the quarter. 

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