Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How This Coffee Chain Scaled from 1 to 100 Locations
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- Lucas: So there's this coffee chain that started as a single walk-up stand in Grants Pass, Oregon, in 1992. Today it has over 900 locations across 18 states and it's still adding about 150 new stores a year. I am talking about Dutch Bros Coffee. Luna: I have seen their drive-throughs with lines snaking around the block. But I never really understood how they scaled without becoming just another generic chain. Lucas: Right, and that is exactly the question. The conventional wisdom in food service is that if you want to grow fast, you franchise aggressively. Dutch Bros did something different. For the first 25 years, they didn't franchise at all. Every single location was company-owned. Luna: Wait, so they grew to several hundred stores entirely corporate? That is a massive capital commitment. Lucas: It is. They financed it through retained earnings, debt, and eventually an IPO in 2021. But the reason they resisted franchising for so long was culture. The founders, the Boersma brothers, believed that if you hand the keys to a franchisee, you lose control over the customer experience. Luna: And that is a real risk. I have seen chains where franchisees cut corners on ingredients or service to boost margins. It dilutes the brand. Lucas: Exactly. So Dutch Bros kept everything in-house and focused on what they call 'the Dutch Luv' — their term for the energetic, friendly service they want at every window. They train every employee in that ethos, and they promote from within aggressively. Luna: But at some point they did start franchising, right? I feel like I have seen Dutch Bros in cities far from Oregon. Lucas: They did, but only in 2018, and only in a very controlled way. They introduced what they call 'operating partners' — essentially franchisees who must be existing employees or have deep operational experience. They don't sell licenses to passive investors. Luna: So the person running the franchise actually knows how to run a stand. That is smart. Lucas: It is. And even now, about 60 percent of their locations are company-owned. The franchise component is a growth accelerator, not the core engine. That balance is rare in the industry. Luna: What about site selection? Coffee is hyper-local. How do they choose where to put a new stand? Lucas: They are obsessive about drive-through volume. Dutch Bros locations are almost all drive through only — no indoor seating. So they look for intersections with high traffic counts, good visibility, and easy in-and-out. They use demographic data but also send scouts to physically count cars. Luna: That kind of boots-on-the-ground diligence is something a lot of chains skip once they get big. They just run the model off a map. Lucas: And that is where they make mistakes. Dutch Bros has a surprisingly low failure rate. They have closed fewer than 10 locations in their entire history. That is under one percent. Luna: That is remarkable for a chain that size. Most quick-service restaurants have a closure rate of 10 to 20 percent over a decade. Lucas: Part of that is the real estate discipline. But part of it is also the operating model. Each stand is relatively cheap to build — about 400 to 500 thousand dollars — and they have a simple menu. They don't sell food, just drinks. That keeps inventory and labor costs predictable. Luna: So the unit economics are strong from day one. That must make expansion less risky. Lucas: It does. And they have been very disciplined about same-store sales growth. Even as they add 150 stores a year, same-store sales have grown year-over-year in most quarters. That tells you the new stores aren't cannibalizing the old ones. Luna: How do they avoid cannibalization? In a dense metro area, you can't just keep adding drive-throughs without stealing your own traffic. Lucas: They use a 'trade area' model. They map out the radius around each existing stand and don't open a new one inside that zone unless the population density justifies it. In practice, that means they cluster in growing suburbs and exurbs rather than competing with themselves in the same intersection. Luna: That is a very different strategy from Starbucks, which puts stores on every corner deliberately to saturate. Lucas: Completely different. Starbucks uses saturation as a competitive moat — they make it hard for any other coffee shop to find a good location. Dutch Bros uses selective density to keep per-store volumes high. The average Dutch Bros stand does about 1.7 million dollars in annual revenue. That is well above industry average for a drive through only concept. Luna: So the lesson for any service business trying to scale is: don't just clone locations. Think hard about where you put them and how you preserve the experience. Lucas: Exactly. And that brings us to another key piece: employee culture. Dutch Bros is known for high energy, almost cult-like enthusiasm. They hire for personality, not just coffee skills. New hires go through a two-week training program that is as much about values as it is about recipes. Luna: I have heard they have a 'fun' committee at each stand. That sounds silly but it probably matters for retention in a high-turnover industry. Lucas: It does. Quick-service restaurants average 150 percent annual turnover. Dutch Bros is around 80 percent — still high, but half the industry norm. And they promote heavily from within. Many of their regional managers started as baristas. That creates a career path, which keeps people invested. Luna: And when employees stay, customers get consistent service. That consistency builds loyalty. Lucas: Right. The brand has a very loyal following. Their app has over 6 million active users. They use it for rewards and targeted offers, but also to gather data on what drinks are popular in which regions. That helps them tweak the menu locally without adding complexity. Luna: It sounds like they are very deliberate about every decision. They didn't just get big by accident. Lucas: No, they didn't. And the contrast with other coffee chains that tried to scale too fast and crashed is instructive. Remember when Coffee Bean & Tea Leaf tried to expand beyond California and lost its identity? Or when Peet's bought Caribou and struggled to integrate? Dutch Bros avoided those traps by staying focused on a single concept and executing it well. Luna: So the takeaway is: scale with discipline. Keep your culture intact. Choose your locations carefully. And don't franchise until you are ready. Lucas: And even then, do it on your own terms. If today's conversation was useful to you, it's worth noting that the reason we can do this ad-free is listener support. People who find value here sometimes chip in at buy me a coffee dot com slash fexingo. It helps keep these episodes coming. Luna: Yeah, it's a small gesture that makes a big difference. We appreciate everyone who does. Lucas: So back to Dutch Bros — one more interesting angle. Their supply chain. They roast their own coffee in a facility in Grants Pass. That gives them control over quality and cost. Most chains outsource roasting to a third party. By owning it, they protect margins and consistency. Luna: Vertical integration at scale. That is hard to pull off, but if you can, it is a huge advantage. Lucas: It is. And they are now building a second roasting plant to keep up with growth. That's a capital expenditure that most chains would rather avoid, but Dutch Bros sees it as essential to the brand promise. Luna: So the blueprint is: own the experience, own the supply chain, own the real estate decisions. That is a lot of ownership. Lucas: It is. But it's also what makes the business durable. Dutch Bros went public in 2021 at a valuation around 4 billion dollars. Today, even after the market reset, it is still valued over 3 billion. That is a testament to the model. Luna: Do you think their approach could work for other service businesses? Like not just coffee, but maybe a car wash chain or a pet grooming franchise? Lucas: Absolutely. The principles are industry-agnostic: maintain quality control, hire for culture, promote from within, and expand slowly into adjacent markets where you know the demographics. It's not flashy, but it works. Luna: It's the tortoise versus the hare, but the tortoise ends up with 900 stores. Lucas: Exactly. And that is the scaling story we like to highlight on this show — not the overnight unicorn, but the steady build that stands the test of time.