May 05, 2021 at 08:11PM

Dutch Bros Coffee is considering going public with an initial public offering (IPO) of $3 billion, Bloomberg reported Monday (May 3), citing unnamed sources “with knowledge of the matter.” The sources told the outlet that the matter is not decided — Dutch Bros may not go through with this IPO — but the company is currently in talks with advisers.

A minority stake of the company is currently held by private equity firm TSG Consumer Partners, which also holds a stake in Stumptown Coffee and a range of other companies within and outside the food and beverage space.

Dutch Bros Coffee recently made headlines with the instant success of its rewards program, Dutch Rewards, created in partnership with Paytronix, which drew 1.4 million users within its first month. In addition to offering loyalty points, the rewards app also features contactless payment options, both of which are features that encourage a significant share of customers to spend more on their order. As Paytronix CEO Andrew Robbins said in the release announcing this milestone, “The Dutch Bros app not only uses wallets and app stickers, but also has a level of gamification that shows the type of creativity that we love to see from our customers and partners.”

However, in the leadup to this potential IPO, it is worth noting that U.S.-based coffee shops are hardly a bull market right now. Research firm Allegra World Coffee Portal estimates that sales for U.S. branded coffee shops fell 24 percent during 2020, and that these sales will not return to pre-pandemic levels until 2023.

“The U.S. coffee shop market is enduring the worst trading environment in living memory,” Allegra Group CEO Jeffrey Young told Reuters in January. “However, with a changing political situation, mass vaccinations and operators rapidly adapting with new trading formats, there is light at the end of the tunnel. We expect trading to begin stabilizing from summer 2021, however it will take a number of years for operators to fully readjust to the ‘new normal.’”

Drive-Thru Strength

Still, Dutch Bros has benefitted, since the start of the pandemic, from being a primarily drive-thru business, a low-contact ordering channel that has fared well during the past 14 months. Rather than competing with coffee shop chains that push delivery, which Dutch Bros does not offer, and chains that center the sit-down experience, which represents only a small portion of Dutch Bros’ business, Dutch Bros focuses on its drive-thru strength.

“We have a niche in the market with the drive-thru,” CEO and Co-Founder Travis Boersma (one of the eponymous Dutch brothers) told Forbes in December. “It’s about 97% of our business.”

According to Allegra, 63 percent of U.S. consumers reported drive-thru as their favorite coffee shop purchasing method in 2020, a surge up from 48 percent in 2019.

Across the U.S., coffee shop businesses have been looking for ways to adapt to consumers’ changed behaviors in response to the pandemic. The National Coffee Association recently announced the results of its Spring 2021 National Coffee Data Trends (NCDT) survey, which found that drive-thru and app-based ordering are each up 30 percent since the start of 2020, that coffee preparation in the workplace is down 55 percent, that over 40 percent of Americans tried new types of coffee during the pandemic, and that 85 percent of coffee drinkers consume at least one cup at home each day.

To capture this rising interest in at-home coffee consumption and this willingness to try new coffee flavors, many brands have been pushing their coffee subscription programs. (Dutch Bros offers its own monthly subscription, but the program is not central to its product strategy.) In the crowded subscription space, brands must have a unique value proposition to thrive.

Customer Experience And Community

“We think really hard about how to create value for our subscribers and think about, how can we elevate and expand the experience beyond just getting a cup of coffee at home every day for caffeine,” Aditi Jain, senior director of global eCommerce for coffee subscription veteran Blue Bottle Coffee, told PYMNTS in a recent interview. “Blue bottle is niche — we have a niche audience. So for us it’s not just about a cup of coffee. It’s everything that goes around [the] cup of coffee, the whole café experience … It’s really hard to find a direct competitor, because very few brands have been able to scale specialty coffee in the way that Blue Bottle has done, not just in the U.S. but also globally.”

Meanwhile, even as it continues to invest in its digital channels, Starbucks is looking to the return of in-store experiences to drive sales’ recovery.

“Many of us … share a powerful craving for human connection, a desire to socialize and feel part of a community … and with vaccination programs under way and in turn consumer mobility, we have begun to see what we describe as the great human reconnection,” Starbucks President and CEO Kevin Johnson said on a recent call with analysts. “This is evidenced by our Q2 sales in the U.S., which fully recovered in the quarter.”

Recovery for the coffee shop sector may be well under way. According to data from the United States Department of Agriculture (USDA) Economic Research Service (ERS), sales for the beverage category “other” — a category comprised of beverages that are not sugary, not water, not alcohol and not carbonated, meaning that caffeinated beverages feature heavily in this category — were up 9 percent year over year in the final week of February 2021, surpassing $1 billion.

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