After debuting on the public markets to strong gains at the end of 2021, Dutch Bros (BROS -1.04%) has seen its shares plummet. The stock had a volatile 2023, even though it ended up rising by 12% last year, a gain that underperformed the S&P 500.
But it's always good to adopt a long-term approach when investing in the stock market. As we look out a decade from now, where could this up-and-coming coffee stock be?
The best possible outcome
It's not a surprise that investors are probably most drawn to this stock because of its growth potential. Dutch Bros added 159 net new locations to its footprint in 2023, which represented 24% year-over-year growth. The current count of 831 is significantly higher than 370 at the end of 2019.
The company's drive-thru format, primarily in the western and southern parts of the U.S., has caught on with consumers. Dutch Bros emphasizes drink customization, continuous menu innovations, and increased accessibility and convenience that seem to be working.
Management has huge ambitions. They have set a target to have 4,000 stores open within the next 10 to 15 years. That would translate to a nearly fivefold increase in the store base. I think the best possible outcome for Dutch Bros is to have 4,000 locations open by the end of 2034.
As the company scales up to reach this figure, its revenue and same-store sales will likely be rising at a rapid clip. And this is exactly what shareholders would want to see from a retail business.
Dutch Bros reported operating income of $44 million in the first nine months last year, resulting in a low margin of 6%. As you can imagine, with so much capital being invested toward opening new stores, profitability has been an afterthought. With the possibility of 4,000 stores open a decade from now, earnings should skyrocket. And this will prove that Dutch Bros is a financially viable enterprise.
At this point, the leadership team could even consider more favorable capital allocation policies. This includes the possibility of paying out dividends or repurchasing shares, both of which can boost shareholder returns.
It won't be easy
Now that we've gotten the most optimistic outcome out of the way, let's look at why I think things will be extremely challenging for Dutch Bros over the next 10 years.
The most important factor that will get in the way is the intense competition in the industry. A jaw-dropping 80% of new restaurants fail within the first five years. To Dutch Bros' credit, though, it has already created a proven model with a meaningful nationwide footprint.
But just look at some of the players that the company competes with. There's the juggernaut that is Starbucks, which has over 16,400 stores in the U.S. Starbucks is one of the most powerful brands in the world. It's a household name, and it has been extremely profitable for a long time.
Even though Starbucks is already ubiquitous, its executives have plans to open about 3,500 new stores in the U.S. This likely means that Dutch Bros will have to compete with Starbucks when it comes to finding favorable locations for new locations. That won't be easy.
There's also competition from the likes of McDonald's, Dunkin' Donuts, and Restaurant Brands' Tim Hortons, not to mention the unlimited number of independent and local coffee shops that consumers enjoy. This makes me lack confidence in Dutch Bros ever reaching its 4,000-store target.
It's also going to be extremely capital-intensive for the business to build more locations, particularly as most of the stores are not franchised. Consequently, I worry that the company will need to raise capital to fund this growth, as it doesn't have a long and consistent track record of positive earnings.
Even though the stock is 64% below its peak price, I'm not buying Dutch Bros shares right now. There's simply too much uncertainty as we look out over the next 10 years.
