Thanks to its outsize growth potential, Dutch Bros (NYSE:
BROS) has drawn keen interest from some investors as a possible
long-term holding in a diversified portfolio. However, this upstart
drive-thru coffee chain has yet to reward shareholders. The stock
currently sits some 64% below its all-time high and just a tad
above its 2021 initial public offering price. There's still hope,
though. Should this business make substantial progress toward
management's goals, the shares might be a big winner. However, I'm
here to tell investors they should just forget about Dutch Bros
altogether -- and consider an already dominant coffee stock
instead. Cracks under the surface Investors love to see companies
grow, and Dutch Bros has been doing plenty of it, opening 39 net
new locations in just the third quarter alone. This brings its
total store count to 794, which is up from 641 a year ago. Clearly,
aggressively opening new locations is a key part of the leadership
team's strategy, as it sees the potential for 4,000 stores one day.
To its credit, Dutch Bros does possess some attractive qualities
that have supported its success. For starters, the company's stores
are drive-thru only, which caters to the convenience and
accessibility factors that consumers became so used to thanks to
the coronavirus pandemic. This can drive greater volume per store,
while at the same time limiting overhead costs because there is no
indoor seating. Additionally, Dutch Bros operates a franchise
model. This means part of the capital to fund growth comes from
third parties. Done successfully, this setup can be very lucrative.
But despite these positive attributes, I see glaring red flags that
investors need to pay attention to now. Dutch Bros' impressive
store growth can easily mask weak same-store sales gains. This is
one of the most important metrics for any retail business as it
looks at the change in revenue at locations open at least 15
months. In the third quarter, this figure rose by just 4%, a
possible indication that Dutch Bros could be saturating the markets
it's currently in. I also don't see the presence of an economic
moat for this business. Dutch Bros is small enough that many people
in this country, especially those in the eastern half of the U.S.,
have likely never heard of it. This gives it poor brand
recognition. And due to aggressive store investments, profits
aren't anything to write home about so far. This business posted an
operating margin of 6% through the first nine months of this year.
Dominating the industry The areas that Dutch Bros lacks are exactly
where Starbucks (NASDAQ: SBUX) shines. In its most recent fiscal
period (fourth quarter of 2023, ended Oct. 1), the world's biggest
coffeehouse chain saw its same-store sales rise by 8% in North
America, a faster pace of change than Dutch Bros reported. You'd
expect the smaller, earlier-stage business to post faster growth
than the massive Starbucks. This could be a sign that Starbucks has
more levers to pull, whether via its top-notch tech foundation or
through employee productivity training, to boost its store-level
sales volume. Next, Starbucks indeed possesses an economic moat,
which is supported by its incredibly strong brand. This is without
a doubt one of the most widely recognized consumer brands in the
world. And it helps Starbucks charge premium prices for its food
and beverages. The company isn't done growing, either. Starbucks is
already one of the largest restaurants concepts on the face of the
planet, with 38,038 stores worldwide, but management has set a
target of having 55,000 locations by 2030. It's not hard to have
confidence in this goal due to the fact that Starbucks has a proven
playbook that it simply needs to replicate. For long-term investors
looking to own an already successful business that still has
meaningful potential, Starbucks clearly looks like the better stock
to own than Dutch Bros. 10 stocks we like better than Starbucks
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December 4, 2023 Neil Patel and his clients have no position in any
of the stocks mentioned. The Motley Fool has positions in and
recommends Starbucks. The Motley Fool has a disclosure policy. The
views and opinions expressed herein are the views and opinions of
the author and do not necessarily reflect those of Nasdaq,
Inc.