Dutch Bros (BROS 0.04%) and Starbucks (SBUX -0.35%) have a lot in common -- both started in the Pacific Northwest and Starbucks has spread across the world, while Dutch Bros, which started 21 years later, is beginning to spread across the United States. Both serve up coffees, lattes, and a growing array of cold beverages.
There are some key differences as well -- Dutch Bros locations are primarily drive-thrus, whereas Starbucks has embraced becoming the '"third place" outside of home and the office where customers can come to drink coffee, work, and socialize.
Furthermore, it seems unlikely that we will see a drink with a name like the OG Gummybear or the Vampire Slayer on Starbucks' menu anytime soon. If Dutch Bros can continue to grow along the same path that Starbucks has, it would be a great investment for Dutch Bros shareholders as Starbucks has climbed to a $100 billion market cap while growing to nearly 35,000 locations worldwide.
Here's another key way that Dutch Bros is beginning to become more like Starbucks -- the growth of its digital loyalty program.
Image source: Getty Images.
Digital expansion
Starbucks has an enormous digital loyalty program with about 27 million members. Going digital with its rewards program was a game-changer for Starbucks as it allowed it to remove the friction of physically buying a gift card and loading it with rewards. These members are responsible for about half of U.S. order volume.
Dutch Bros is much smaller than Starbucks, but it has quickly grown its own Dutch Rewards loyalty program to 4 million users, with 450,000 new participants joining in the second quarter. Dutch Bros has about 4,000 Dutch Rewards Members per shop. You may be wondering why this matters, since people are going to buy their coffee whether it's with an app or not, right?
Why does it matter?
Starbucks' and Dutch Bros' digital loyalty programs drive increased sales. Starbucks' loyalty members spend about three times as much as nonmembers. Dutch Bros finds that approximately 63% of its sales come from Dutch Rewards members. Dutch Bros says that Rewards members who also use its Dutch Pass (a feature that allows them to pre-load funds into their Dutch Rewards app) spend 10% more than other Rewards members.
Digital loyalty programs help Starbucks and Dutch Bros drive sales by personalizing offers and promotions, and by reconnecting with lapsed customers. During the second quarter, Dutch Bros began to use Dutch Rewards to reach out to these lapsed users and experienced an increase in traffic as well as an uptick in members who were active over the last 90 days, indicating that this outreach works.
Unparalleled customer connections
Dutch Bros and Starbucks can also use the data gleaned from these apps to offer promotions that are tailor-made to the individual customer, something that would have been unthinkable in the days before digital membership began. Dutch Bros CEO Joth Ricci says that during the quarter, Dutch Bros started to roll out customized offers that "personalize member experience and drive trial frequency and upsizing."
The direct customer insights and the one-on-one engagement that these apps enable can help Dutch Bros connect with customers who haven't been to the store for a while, get them to try new products, and make promotions more efficient. Ricci states that, "We are encouraged by the early results of specific campaigns, particularly those featuring our Rebel category, and look forward to expanding on these to unlock value."
The unparalleled amount of data on customer behavior that these apps generate gives Starbucks and Dutch Bros insight into patterns based on time of day, time of year, weather, and more, allowing them to optimize and adjust operations and marketing strategy accordingly.
Even more room for growth
Starbucks and Dutch Bros have gotten great traction with these apps so far, but there is still plenty of runway ahead for more member growth. Dutch Bros says that membership is about 15% higher in its legacy markets than in markets it has newly entered, indicating that more members are likely to join in newer markets as they become more familiar with Dutch Bros.
Similarly, Morningstar finds that while Starbucks has a titanic 27 million membership base, it is only about 33% penetrated, meaning that there are tens of millions of customers worldwide who could still join.
The next monster growth stock
Dutch Bros could eventually become the next Starbucks by spreading across the United States and, perhaps, the world. Right now, Dutch Bros has about 600 locations and is aiming to reach 4,000 over the next 10 to 15 years, so it has a long way to go before it comes close to Starbucks' North American footprint, which includes over 17,000 stores. Like Starbucks, Dutch Bros is smartly utilizing its growing scale to invest in its digital loyalty program.
Not that long ago, companies wouldn't have been able to dream of a solution that allows them to re-engage with old customers, get cutting-edge insights into customer trends, and seamlessly tailor promotions to individual customers. But now, Starbucks and Dutch Bros are using these tools to expand and energize their growing customer bases.
This digital success is a key reason why Dutch Bros is a top growth stock and why it has a chance to become the next Starbucks.
