Dutch Bros likely wants to keep 7 Brew out of some locations almost as much as it wants the locations. | Photo: Shutterstock.
Last week, we wrote about the $105 million that Dutch Bros is proposing to pay for 51 closed Salad and Go sites, plus as many as 14 more in which it would only take over the leases.
And then 7 Brew jumped in with comments that its bid was better, setting up a potential fight in the bankruptcy of the shuttered salad chain between two fast-growing, drive-thru beverage chains.
Ironically, Salad and Go would likely not fetch anywhere near $105 million if it was an operable restaurant chain. It is literally worth more dead than alive.
Yet the two chains not only need the sites for themselves. They need those sites to keep their competition from taking them. That is not an insignificant consideration for either chain.
Separate for a minute the two types of sites. Salad and Go effectively has two large groups of locations. The first set, in places like Arizona and Nevada where the chain’s locations continued to operate, is comprised of strong sites with good traffic.
And then there are the locations in Texas and Oklahoma, many of which are, well, not so good. Many of the sites “were not as accessible to automotive traffic and visible to customers as the Arizona locations,” Salad and Go said in a court filing. Dutch Bros’ price for the 14 locations it may take over there? $50. Most of my shirts cost more than that.
(Side note: Salad and Go’s fateful Texas expansion decision wasn’t just a grow-too-fast problem, it was a grow-too-fast-and-dumb problem.)
The $105 million for those 51 sites is not insignificant. To put that into perspective, Dutch Bros generated $54 million in net income in the first six months of the year. So it’s paying an amount roughly equivalent to its expected annual profit this year.
It’s also more than $2 million per location. Add to that the amount that Dutch Bros will likely have to pay to convert those locations into Dutch Bros units, and the expense is significant.
Dutch Bros’ average unit volumes are $2.1 million and its restaurant-level profits are 24%. So the chain will likely need four-plus years to pay these locations off. That’s not explicitly bad, but it’s generally north of the type of payoff many companies like to see, and it suggests Dutch has other reasons for acquiring the sites.
Dutch Bros quite obviously knew that 7 Brew was the other company gunning for the locations. And the structure used to negotiate the price inflated the amount they were willing to pay, resulting in the high bid.
First, finding that many available sites in key markets is a huge benefit to both chains, which are working furiously to open as many locations quickly. It’s not every day that 50-some locations that fit your business model to a T come available all at once, after all. There is a premium attached to that.
Keeping the other guy out is a side benefit. For Dutch Bros, Arizona and Nevada are crucial markets. So there is some incentive to keep its competitor from making a big push in the location where it’s headquartered. And 7 Brew, of course, would love to open a bunch of locations in its competitor’s backyard.
At the same time, there is some real risk in pushing the envelope to this extent on new unit expansion.
Companies often win or lose based on decisions they make when opening new locations. Spend too little, and they may not have sites good enough to generate the sales they need. But if they spend too much, through leases or up-front investment, and profitability becomes a potential challenge.
And the breakneck pace of development often leads companies to make mistakes during the process.
Years ago, MOD Pizza pushed ultra-fast development in its bid to beat rival Blaze Pizza to the title of country’s largest fast-casual pizza chain. And then it imploded coming out of the pandemic.
We’re not saying that will happen here. Both Dutch and 7 Brew have growing average-unit volumes and businesses that are far more conducive to long-term success than was fast-casual pizza. But the battle playing out between the two chains is most certainly playing out in lease negotiations all over the country. And the company that wins those negotiations may not always be the winner in the long-term if it cost them profitability down the line.
