Better Buy: Dutch Bros vs. Starbucks

Dutch Bros (BROS) and Starbucks (SBUX) have both significantly underperformed the S&P 500 recently, with BROS down over 27% in the last month. Analysts present contrasting investment theses: Dutch Bros is viewed as a high-growth opportunity, akin to early Starbucks, leveraging its efficient drive-through model, lower operating costs, and diversified menu. Conversely, Starbucks is in a challenging turnaround phase, addressing stagnating sales volumes, customer resistance to price increases, and international growth issues through a 'Back to Starbucks' plan focused on store quality and operational efficiency. Despite Starbucks' struggles, some investors see it as a long-term buy banking on brand strength and its 3.1% dividend yield, while others favor Dutch Bros' growth trajectory.

Analysis

Consumer-facing companies face significant headwinds, with Dutch Bros (BROS) and Starbucks (SBUX) both underperforming the S&P 500. BROS declined over 27% last month, and year-to-date, BROS is down 9% and SBUX is down 10.9%, contrasting with the S&P 500's 14.2% gain. This reflects broader consumer spending tightening on discretionary goods.

Dutch Bros presents a compelling growth narrative, akin to Starbucks' early expansion, with approximately 1,050 stores and a nationwide push since 2021. Its model emphasizes small-format, drive-through locations with lower operating costs and a diversified menu, where Rebel energy drinks comprised 25% of 2024 sales and are growing faster than coffee. This operational efficiency supports its high-growth potential.

Starbucks, conversely, is navigating a challenging turnaround, marked by stagnating sales volumes and customer resistance to price increases, alongside international expansion struggles. Its "Back to Starbucks" plan includes a projected 1% decline in North American stores by FY2025, 1,000 store renovations, and 900 nonretail role eliminations. This strategy signals a shift from growth-by-quantity to quality and operational efficiency.

Despite investor fatigue, Starbucks maintains a strong brand and has consistently raised its dividend for 15 consecutive years, now yielding 3.1%. While some view it as a long-term buy banking on eventual recovery, the immediate focus is on management's ability to execute its strategic shift and improve customer experience amidst competitive pressures.

Key Decisions for Investors

• Investors seeking high-growth exposure should consider Dutch Bros, given its early-stage expansion, efficient drive-through model, and diversified menu.
• For Starbucks, investors should evaluate the efficacy of its "Back to Starbucks" turnaround plan, focusing on management's execution of store quality improvements and cost efficiencies.
• Monitor broader consumer discretionary spending trends and their impact on both companies' sales volumes, especially regarding customer resistance to price increases.
• Long-term investors may find Starbucks appealing for its strong brand and consistent 3.1% dividend yield, provided they have conviction in its eventual recovery.