Can you start a Dutch Bros Franchise in 2022?
Written by: Parth Parth
Last Updated by
Rocio Somoza: November 10, 2022
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Download NowDutch Bros or Dutch Bros. Codee is an American drive-through coffee chain. It was founded by Dane and Travis Boersma and is headquartered in Grants Pass, OR. It primarily operates in the Western United States. Also, it is majority-owned by Travis Boersma, the executive chairman. Joth Ricci is its President and CEO.
The company was founded when Travis suggested opening a coffee cart to sell espresso when their farm suffered from poor business. Dane financed the operation with $12,000 he made from running a Dairy Queen Franchise on an espresso machine and a single pushcart, which they set up in downtown Grants Pass. The name Dutch Bros was chosen in honor of their immigrant grandparents.
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How is a Dutch Bros Franchise positioned in the Food and Beverage industry?
The Food and Beverage industry in the USA accounts for 13% of all manufacturing employment in the country. Around 1.46 million people are employed in this industry. Food franchises make up to 36% of the total franchise establishments in the USA and it is expected to create 1.6 million more jobs by 2027. The annual growth rate in the industry is around 2% and the EBITDA multiplier is around 3x for a single restaurant. Multiples can go up to 7x for 5+ restaurants.
One of the benefits of buying a coffee shop is that very little industry-specific knowledge is required. Many first-time business owners buy coffee shops and this industry is very popular among first-time franchise owners. There is a lot of information about general business practices as well as coffee shop specifics, so the learning curve is less steep. Any owner in the industry is expected to be knowledgeable in the specifics of coffee, trends, and coffee-related drinks.
The coffee shop industry is characterized by high turnover and discretionary spending. This industry has experienced a period of rapid expansion over the last decade. The existing competition in the industry is expected to intensify. Industry profitability is expected to increase, recovering from the decline early in the period. International expansion is anticipated to be the largest source of revenue and profit growth.
How to start a Dutch Bros Franchise?
Unfortunately, if you’re looking to start a Dutch Bros franchise, you are in tough luck. Dutch Bros does not offer franchises anymore. However, if you’re looking to buy existing franchises or want to get an idea of the industry, read on.
Operations
Most of Dutch Bros’ stores are drive-thru stands. Each of them sells hot and cold drinks, including non-coffee-based drinks, and other baked products. The company started franchising in 1999.
In 2008, Dutch Bros moved to an internal franchising model that required prospective franchisees to have worked for Dutch Bros for a minimum of three years. This resulted in a 97 percent continuity rate among franchises; between 2010 and 2015, only three percent of all Dutch Bros franchise locations closed. In 2017, Dutch Bros stopped franchising altogether. They only open company-owned stores now.
As of June 2021, 264 Dutch Bros stores were franchised locations and 207 were fully company-owned. That is a total of 471 stores in the Dutch Bros network. The company has a history of buying out franchisees that fall short of the company’s customer service standards.
How many Dutch Bros Franchises currently operate?
As of June 30, 2021, Dutch Bros had 471 locations across 11 states, of which 207 were company-operated and 264 were franchised. This is the most recent data and shows that there are about 44% company-owned outlets, and 56% franchised outlets.
Although the number of franchises has not grown significantly compared to the growth in company-owned outlets, the growth from 4 states to 11 states in a little over 3 years is quite promising and may point to Dutch Bros wanting to establish their presence in these states before they allow franchising in these states.
How much do a franchise owner make?
2021 Dutch Bros Estimated Store Sales: $1,536,585
| Initial Investment (midpoint) | %Profit margin of average franchise sales | Estimated profits | Time to recoup investment |
|---|---|---|---|
| $325,000 | 10% | $230,487 | 4 years |
| $325,000 | 15% | $307,317 | 2.75 years |
| $325,000 | 20% | $384,146 | 2.5 years |
Based on the median sales estimates for Dutch Bros’s locations, at an average of a 20% profit margin it will take around 2.75 years to recoup your investment. This is shorter than other franchise opportunities. You may not get a 20% profit margin which would elongate getting a return on your investment.
Many factors affect the sales, costs, and expenses of your Franchised Store. Such as the Franchised Store’s size, geographic location, menu mix, and competition in the marketplace. The presence of other coffee stores; the extent of market penetration and brand awareness that Dutch Bros stores have attained in your market. Also, the quality of management and service at your Franchised Store are major factors.
Is the Dutch Bros Franchise Profit Worth the Franchise Cost?
To assign a valuation multiple for Dutch Bros franchises, we leverage estimates from DealStats, a database of acquired private company transactions sourced from U.S. business brokers and SEC filings. We reviewed the larger franchise industry as well as selling price multiples for larger systems where more transaction data is available.
Under $1 Million Net Sales
- Estimated Selling Price = Net Sales – 0.31
$1 Million – $5 Million Net Sales
- Estimated Selling Price = Net Sales – 0.34
Over $5 Million Net Sales
- Estimated Selling Price = Net Sales – 0.89
When you go to sell a Dutch Bros franchise based on the median multiple of .34 and net estimated sales of $1,536,585, it would sell for $522,438. This is significantly higher than the midpoint investment of $350,000. This sale will recover your full investment at once.
The more franchises you own, the more earning potential you have as private equity firms become interested in your business instead of individual owner-operators.
How has Dutch Bros (NASDAQ: BROS) performed in the market?
Dutch Bros reported revenues of $238 million in 2019, $327.4 million in 2020, and $228 million over the first 6 months of 2021 before the company formally filed for its IPO in August 2021. The IPO raised $484 million, selling about 21 million shares for $23 per unit.
In the first quarter of 2022, Dutch Bros opened 34 new stores, bringing their total number of stores to more than 500 as of today. Total revenues grew 54.0% to $152.2 million as compared to $98.8 million in the same period of 2021. However, the company still ran a loss. Net loss was $16.3 million as compared to $4.8 million in the same period of 2021. That is almost a 300% increase in the loss the company suffered.
Commenting on this, CEO Ricci said that “we were not immune to the record inflation that surpassed our expectations and pressured margins in our company-operated shops. While we believe these margin impacts may be short-term, we have opted to take a more conservative stance regarding adjusted EBITDA for 2022 as we monitor our pricing and the escalating cost environment.”
Dutch Bros Inc., Condensed Consolidated Statements of Operations
| For the Year Ended March 31, | ||
|---|---|---|
| (in thousands, except per share amounts; unaudited) | 2022 | 2021 |
| REVENUES | ||
| Company-operated shops | $130,187 | $77,917 |
| Franchising and other | 21,969 | 20,868 |
| Total revenues | 152,156 | 98,785 |
| COSTS AND EXPENSES | ||
| Cost of sales | 121,167 | 66,508 |
| Selling, general and administrative | 45,214 | 35,986 |
| Total costs and expenses | 166,381 | 102,494 |
| LOSS FROM OPERATIONS | (14,225) | (3,709) |
| OTHER EXPENSE | ||
| Interest expense, net | (2,489) | (1,017) |
| Other income (expense), net | 221 | (53) |
| Total other expense | (2,268) | (1,070) |
| LOSS BEFORE INCOME TAXES | (16,493) | (4,779) |
| Income tax expense (benefit) | (214) | 43 |
| NET LOSS | $(16,279) | $(4,822) |
| Less: Net loss attributable to Dutch Bros OpCo prior to the Reorganization Transactions | – | (4,822) |
| Less: Net loss attributable to non-controlling interests | (11,332) | – |
| NET LOSS ATTRIBUTABLE TO DUTCH BROS INC. | $(4,947) | – |
| Net loss per share of Class A and Class D common stock: | ||
| Basic | $(0.10) | N/A |
| Diluted | $(0.10) | N/A |
| Weighted-average shares of Class A and Class D common stock outstanding: | ||
| Basic | 48,059 | N/A |
| Diluted | 48,059 | N/A |
What are some alternatives to a Dutch Bros’ Franchise?
Tim Hortons
Tim Hortons is a Canada-based company that sells coffee and other non-alcoholic beverages as well as baked goods, soups, and sandwiches. They were founded in 1984 in Ontario and have since grown, with 5,291 stores currently operating in the United States. Tim Hortons has recently pursued expansion into international markets, with 42 additional franchised locations in Latin America.
With a large presence in North America, Tim Hortons is Canada’s largest quick-service restaurant chain. Tim Hortons is a subsidiary of Restaurant Brands International (RBI), a Canadian Corporation. Notably, RBI also owns Burger King, Popeyes Louisiana Kitchen, and Firehouse of America.
A 15% profit margin would yield estimated annual profits of $158,144. This means it would take nearly 11 years to recoup your investment. While Tim Hortons is a growing company and has seen increasing gross sales, the 8-14 year timeframe that you could reasonably expect to recoup your initial investment may be a long time for one to wait.
Scooter's Coffee
Scooter’s Coffee is an American chain of coffee stores specializing in quick service of espresso drinks, smoothies, and baked goods founded in 1998 and has grown to about 250 stores in the United States. Boundless Enterprises, a Nebraska-based LLC, serves as the parent company for Scooter’s. The parent company also owns two affiliate companies – Harvest Roasting and Boundless Operations.
A 15% profit margin would yield estimated annual profits of $88,158. This means it would take nearly 9-10 years to recoup your investment depending on whether your store is a kiosk or coffeehouse. While Scooter’s is a growing company and has seen increasing gross sales over the past six years, the 7-14 year timeframe that you could reasonably expect to recoup your initial investment may be a long time for one to wait.
Biggby
Biggby is a community coffee shop chain with offerings of espresso beverages, sandwiches, baked goods, etc. Their franchise is generally operated from either a free-standing, storefront or strip center location or a prefabricated modular structure. Biggby has a very high focus on community integration which they credit for their economic recovery after COVID. Robert P. Fish is a Co-Founder and Co-CEO of Biggby since April 2016 along with Michael J. McFall. Both of them are managing members of Global Orange, Biggby’s associates.
A 15% profit margin would mean it would take nearly 4.5 years to recoup your investment. Based solely on the Franchise Disclosure Document, Biggby may be an exciting investment opportunity for potential franchisees. The company presents itself as an up-and-coming player in the industry focused heavily on community values and engagement. It is offering a chance to be a part of an industry that has been long present. While still in its early stages, Biggby Coffee’s growth seems to be accelerating.
Starbucks
Starbucks is a dominant force in the coffee industry, maintaining the highest share of the coffee shop market with 40% as of October 2019. Their total net revenue, according to their 2020 annual report, was over $20 billion in 2020.
One thing to keep in mind, however, is that Starbucks is NOT a franchise. The majority of their units are company-owned. That means that earned revenue stays within the company and does not go to outside investors. The rest of their stores are licensed, where outside operators are allowed to use the brand’s trademark and sell their products but are not obligated to follow any specific business plan or rules. In exchange, licensees must pay a royalty fee to the company.
Overall, Starbucks is a very profitable company that operates both company-owned and licensed units. Even though the pandemic did take a toll on their earnings, their quarterly report shows that they were able to make a strong rebound in 2021 and will likely continue to do so.
Although the cost of coffee has increased due to limited supplies, the fact that Starbucks dominates the coffee beverage industry helps mitigate these risks and renders it a strong force in the broader food and beverage industry.
Conclusion
Since Dutch Bros is a publicly-traded company, you can buy its shares on the NYSE. Other than that, you might be able to buy an existing franchise. The company also ran a higher loss than last year, at a time when high sales in other brands are being driven by the recovery from the pandemic. This might point to poor management and organization of financials within the company and the franchisor’s financials should be closely monitored before buying an existing franchise.
The Food and Beverage industry does have other offerings you can look at. Find out more about those offerings in the Food and Beverage industry on VettedBiz.
