Fast-growing coffee purveyor Dutch Bros (BROS -0.97%) naturally draws comparison to Starbucks (SBUX 1.00%) as a fellow coffee chain that started in the Pacific Northwest and harbored nationwide (and worldwide) ambitions.
While these comparisons are indeed apt, there's another high-growth consumer stock that Dutch Bros is beginning to remind me of: Domino's Pizza (DPZ 1.36%), one of the great growth stocks of the past decade. With a return of over 1,000% over the past 10 years, Domino's has done well for investors. Dutch Bros is growing revenue and store count at rapid rates, just like Domino's has done.
Here is another underrated but key reason that Dutch Bros looks like the next Domino's based on a page it's taking out of the Michigan-based pizza chain's playbook.
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Fortress Dutch Bros
Dutch Bros recently reported 44% revenue growth during the second quarter of 2022, which thrilled the market. Within the results, Dutch Bros also reported a same-store sales decline of 3.3%. Same-store sales growth is a key metric for evaluating restaurant and retail stocks, and measures the sales growth of locations that have been open for over a year or more.
Sometimes companies can report great revenue growth but falling same-store sales growth, which can be a cause for concern as it means growth at its existing locations is drying up. Perhaps customers are moving on after the initial excitement about the new location in town has faded, or maybe they just aren't going as much. But there is more to the story here when you dive deeper.
Dutch Bros CEO Joth Ricci says much of this decline in same-store sales is due to sales transfer. Critics may call sales transfer "cannibalization" as it means that same-store sales are declining because some of their sales are being absorbed by a new location nearby.
This sounds like it would be a counterproductive strategy, but Domino's has shown a blueprint for making it work over the years. Domino's calls this strategy fortressing in which the company builds many stores in the same geography. It looks like Dutch Bros may be taking a page out of Domino's playbook by, for example, opening 61 locations in Texas over the last 18 months.
Why does fortressing work?
While cannibalizing same-store sales doesn't sound desirable, building a fortress around an area can actually be good for the company as a whole. Fortressing helps Domino's in terms of delivery coverage, enabling delivery drivers to make more frequent and shorter trips, which doesn't apply to Dutch Bros. But overall, the concept has advantages for Dutch Bros as well.
Ricci says that entering a new market with a heavy presence helps Dutch Bros to accelerate brand awareness. Fortressing also helps to ease demand concerns. For example, if there is sky-high demand for Dutch Bros' products when it arrives in town, one location may not be able to meet the demand, and the company could lose sales if drive-through customers are put off by the idea of waiting in line for a half hour. Having another Dutch Bros location nearby helps to solve this problem and keeps these incremental sales in the system.
Former Domino's CFO Stu Levy has said that Domino's strategy is to be as close to the customer as possible and that customers aren't going to come in for carryout if they are 30 minutes away from their nearest Domino's location. So perhaps same-store sales decline somewhat when there are multiple stores nearby, but it helps the company as a whole as it ensures it doesn't lose out on sales in these types of situations and that potential customers don't slip through the cracks.
Building up a strong fortress in an area can also help to gain market share from competitors that don't have as heavy of a presence.
Can Dutch Bros become a growth monster?
Domino's has been one of the market's ultimate growth stocks over the years, returning over 1,000% to its shareholders over the last decade, so Dutch Bros shareholders like myself certainly wouldn't mind seeing the company become the next Domino's. There are currently about 6,600 Domino's locations in the U.S. as of August 1, and the company has plans to grow to 8,000 stores.
Dutch Bros is much smaller than Domino's, with just over 600 locations, and plans to get to 4,000 shops over the next 10 to 15 years. With torrid revenue growth, a rapidly growing store count that is expanding across the country, and a similar penchant for fortressing, Dutch Bros looks like it is taking a page out of the Domino's playbook, which isn't a bad way to become one of the next monster growth stocks if it can keep executing and maintain the momentum it has built so far.
