Can Dutch Bros Become the Next Starbucks?

It hasn’t been a fun time for Dutch Bros (BROS 1.85%) shareholders. Since hitting a peak in November 2021, the stock has cratered 62% as it tries to regain its footing. Perhaps the initial excitement surrounding this growth stock has calmed down a bit.

But that price performance hasn’t prevented some of Dutch Bros’ most bullish supporters from hoping it can become the next Starbucks. Is this even a possible outcome? Let’s take a closer look.

Energized by rapid growth

Dutch Bros just reported its 2023 financial results, and unsurprisingly, its growth took the spotlight. Revenue jumped 31% from 2022. And the business opened 160 net new stores during the 12-month period, bringing the total to 831. The company, which has a strong presence in the western and southern parts of the U.S., is gaining customers thanks to its customizable beverage offerings and accessible store formats.

Management sees huge potential in the years ahead. They’re optimistic that Dutch Bros can have 4,000 locations open one day. That would translate to a nearly five-fold expansion from the current footprint. Surely, revenue will be astronomically higher at this level of scale.

While it makes sense that a business like this, which is in full-on expansion mode, is investing aggressively in growth opportunities, investors have something to be encouraged about. Dutch Bros reported adjusted net income of $50 million in 2023, a huge improvement from the $25 million posted the year before.

Wall Street analysts expect the bottom line to improve. Consensus estimates call for adjusted earnings per share to increase at a compound annual rate of 21% over the next three years.

Shares trade at a price-to-sales (P/S) multiple of 1.9 right now. That’s down significantly from a couple years ago. And it represents a discount to Starbucks’ P/S ratio of 2.9. Should Dutch Bros successfully executive its plan, the valuation is likely to get a boost.

Don’t mess with the leader

With 38,587 stores scattered around the globe, Starbucks reported fiscal 2023 (ended Oct. 1) revenue of $36 billion. Just in the U.S., the business has 16,466 locations that raked in $6.6 billion in sales last fiscal quarter. This is the dominant leader in the retail coffee industry.

Consequently, I’m not so sure Dutch Bros can ever become Starbucks one day. That would require revenue and the store count to rise 26 and 20 times over, respectively. That’s a monumental task.

Protecting Starbucks’ competitive position is its incredibly powerful brand, which is the key source of its economic moat. According to Interbrand, this intangible asset alone is worth $15 billion, making it one of the most valuable in the world. It allows Starbucks to charge premium prices for its products, while at the same time driving customer loyalty and repeat purchases.

Despite its massive scale, Starbucks isn’t sitting around idle, as it has its own expansion plans. Executives hope to have 20,000 stores open in the U.S. over the long term. That includes the introduction of more of what management calls “purpose-defined stores,” including drive-through and delivery-only outfits.

And that means that on its quest for growth, Dutch Bros will undoubtedly be forced to compete more directly for favorable real estate with Starbucks. That seems like a difficult task, given that Starbucks has the financial resources, marketing capabilities, and superb digital foundation to excel.

Because of its rapid growth, Dutch Bros is receiving a lot of attention. But investors should seriously temper expectations if they think the small coffeehouse chain can one day get to Starbucks’ level.