Dutch Bros aims to be the next coffee giant amid competition from Starbucks, McDonald’s

Starbucks' (SBUX) and McDonald's (MCD) new concept CosMc's aren't getting in Dutch Bros' (BROS) way.

"Growing up in the Pacific Northwest with a strong competitor [Starbucks] in our backyard has just made us stronger," Dutch Bros CEO Christine Barone told Yahoo Finance at the ICR Conference in Orlando.

There's room for everyone to play as the coffee market continues to see an uptick. According to Mordor Intelligence, the overall market is expected to grow by 4% each year and reach nearly $34 billion in the US by 2029.

"There's been no evidence, if you look at Starbucks and Dutch, that they're hurting one another," Sharon Zackfia, William Blair analyst, told Yahoo Finance at the conference.

The drive-through coffee chain, which debuted on the New York Stock Exchange in September 2021, has continued to ramp up growth. Dutch Bros opened 159 new shops in 2023, and now has 831 shops across 16 states, the company announced Monday. Its same-store sales grew 4% last quarter, while Starbucks' same-store sales jumped 8% in the US.

So, why is McDonald's now getting into the game? "Exceptional" margins.

"It's not surprising that when you put out those kinds of margins, others look at it," Zackfia said. In Dutch Bros' Q3 2023 results, company-operated stores had a contribution margin of 31.0%, a year-over-year increase of 540 basis points.

Meanwhile, McDonald's and Starbucks, which tend to offer more sugary drinks, have "very different brand positions," Zackfia said.

Dutch Bros has a secret ingredient too — its super bubbly staff — which Zackfia said "is in their DNA."

"If you thought CosMc's was going to impact Dutch over the long scheme, you're negating the thing that Dutch has been able to do well, which is this customer service model," Zackfia said.

Barone said its employees, which it calls broistas, are at the core of its lofty goal to grow into a chain of 4,000 stores.

"Growth has always been predicated on our people," she said. Typically, when Dutch Bros opens a new market location, the operator starts with one shop. They'll then grow to four to seven shops over time to "fill the market," a concept known as fortressing, creating buzz behind the brand.

"You'll go into a market and build a long line and then pretty quickly open up a shop to take off some of that line," Barone said, noting it's a "delicate" balance to make sure you "don't take off too much of the line."

Regional operator positions are only offered to employees with history within the company, preserving its culture as it expands.

On Monday, the company also announced three new executives, including Joshua Guenser as incoming CFO, Sumitro Ghosh as incoming president of operations, and Jess Elmquist as chief people officer.

Barone said Ghosh's background in both real estate and operations is a unique mix that pairs well with the rest of the leadership team, many of whom have come from other quick-service chains like Starbucks, Yum! Brands, and P.F. Chang's.

However, Dutch Bros shares have trailed the market over the past year, dropping 8% over the last 12 months while the S&P 500 gained more than 21%. It priced its IPO at $23 a share and closed at $51.56 on its first day, but concerns about consumer sentiments amid rising interest rates and sticky inflation, along with fears surrounding weight loss drugs, have battered many food and beverage stocks.

When asked about the falling stock price, Barone said the company's focus is on "elevating the strength of our people experience and brand, employing the learnings from our real estate strategy, driving traffic, and consistently delivering on an incredible experience."

While a 2024 same-store sales guidance was not provided, TD Cowen analyst Andrew Charles, who hosted the fireside chat at ICR, said the firm expects low-single-digit growth.

"We view Dutch Bros traffic growth as a 'show-me' story following persistently negative traffic in 2022-23," Charles wrote in a note to clients, adding that the company "faces traffic undertow primarily due to challenges with lower income consumers during the discretionary afternoon daypart."

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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