We delve into a hot IPO and the largest coffeehouse chain in the world and ask if Dutch Bros or Starbucks is a better investment today?
Sept. 21, 2021
The U.S. is the largest coffee consumer in the world with over 400 million cups sold daily. With a large market domestically and further afield, should investors buy the recently public Dutch Bros (NYSE: BROS) or industry stalwart Starbucks (NYSE: SBUX)?
Dutch Bros: Bull v.s. Bear arguments:
Dutch Bros is an operator and franchisor of drive-thru shops that focus on selling beverages with speed and superior service, founded in 1992 after brothers Dane and Travis Boersma opened a coffee cart.
In less than six years, it has grown from 254 shops in seven states to 471 shops in 11 states. Management stated that it will stay disciplined in its growth strategy, but its CEO Joth Ricci stated that it might expand “somewhere on the eastern seaboard in the next maybe three, four years.”.
Dutch Bros has had 14 years of positive same-store sales and maintained a positive 2% shop sales growth throughout COVID-19, where many coffee shops experienced a decline. The company has seen a 33% compound annual growth rate in revenue over the last three years, reaching $327 million in 2020 with a net income of $6.6 million. This high revenue growth looks to be continuing and in the first half of 2021 reported $228 million in sales.
The company has somewhat of a cult following, with customers referring to themselves as ‘Dutch Mafia’. It has a customer-centric approach, and co-founder Travis stated that “the most important thing for us was building customer loyalty”. Dutch Bros recently launched a reward app, which attracted 1.6 million-member activations within its first two months.
Dutch Bros faces intense competition from prominent players such as Starbucks, Dunkin Donuts, and independent coffee shops. There are low switching costs, and there are several factors that affect consumers’ choices.
The company’s net income decreased substantially year-over-year (YoY) from $28.4 million in 2019 to $7.2 million in 2020 due to investments and is something investors should keep an eye on.
Starbucks: Bull v.s. Bear arguments:
Starbucks is the most well-known coffee brand globally and has dominated the space for decades. It operates approximately 33,000 stores worldwide and continues to thrive.
It delivered a record performance in Q3 2021, with revenue coming in at $7.5 billion, an increase of 78% YoY. Starbucks’ global comparable-store sales returned to growth with an increase of 73% YoY. It reported earnings per share (EPS) of $0.97 driven by strong performance in the U.S. There is also a large runway ahead for the company, with management estimating that the global coffee market will reach $400 billion by 2024.
It has considerable pricing power due to its brand strength and customer loyalty. Due to the size and scale of Starbucks, it impacts trends in the industry and offers seasonal offerings at a premium price. The active members on its Starbucks rewards program increased by 48% YoY to 24.2 million members and these members accounted for 51% of the spend in its U.S. stores.
Starbucks continues to expand internationally, especially in China, where it currently has more than 5,000 stores with a target of 6,000 by fiscal 2022’s end. Management believes that it is still early for its business in China, stating, “we’ve never been more confident in the long-term growth opportunity”.
There is no apparent risk when investing in Starbucks, but it is important to note that no business is unbreakable. Starbucks must continue to evolve and adapt to changing consumer tastes and maintain its loyal customer base as if it doesn’t, the competition will pounce.
So, which stock is a better buy right now?
Starbucks appears to be a better buy due to its dominant market position, track record of success, and the re-opening of stores. There remains a question mark over Dutch Bros’ ability to continue this growth long-term as its in-and-out business model benefitted from closures due to the pandemic. Investors may also want to wait two quarters before investing to allow the hype to die down.
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