Dutch Bros is expanding rapidly in Southern California. | Photo: Shutterstock.
California raised the minimum wage fast-food chain restaurants are required to pay their workers on April 1, to $20 an hour, a 25% increase overnight.
That’s been tough on California-heavy chains. Well, except for Dutch Bros.
One out of every five locations of the drive-thru beverage chain is in the state. Yet, despite higher labor costs, the Grants Pass, Oregon-based company actually improved store-level profitability.
Company-shop contribution margins increased 50 basis points to 30.8% of sales last quarter.
“Our wage rates did go up in California,” CEO Christine Barone said in an interview with Restaurant Business. “But we just have very attractive unit economics in California.”
California is indeed a difficult state both to operate in and to figure out. The regulatory environment is challenging. The fast-food wage was implemented in April 1, a rare dramatic, overnight increase in low-end wages that represented a shock to the system for the limited-service restaurants required to pay it.
Once more, it was restricted only to those types of restaurants, meaning independent or full-service restaurants, gas stations and retailers were not required to pay the rate. That means the customer base isn’t necessarily able to pay the higher prices restaurants are charging to fund those rates.
The result has been higher prices at limited-service restaurants in California and weaker traffic than the national average, according to data from Placer.ai.
Yet the state’s economy remains too big for national restaurant chains to ignore. And some of the chains with a heavy presence in the state have suggested they are doing better than they anticipated since the law went into effect.
That includes Jack in the Box and Del Taco, two of the most California-heavy chains among major fast-food brands.
Dutch Bros by comparison doesn’t have as many locations in the state, and it is growing aggressively in many other parts of the country, notably Texas, which is now a bigger market for the chain, according to Restaurant Business sister company Technomic.
But California is still an important market for the chain, both historically and in the future. Dutch Bros has a heavy presence in Northern California, home to some of its most important markets. And the company continues to add locations in the Southern part of the state.
“We’re super excited to continue growing in California,” Barone said. “We had two really big openings in California the first half of the year, and just see such great customer reception.”
It’s also a lesson in the importance of unit economics. Dutch Bros enjoys average unit volumes of more than $2 million, a strong number for a drive-thru beverage concept. The chain’s 4.1% same-store sales growth last quarter helped offset whatever increase in labor costs the company had to pay.
Companies that are able to keep customers coming in, even at higher price points, can more easily withstand the higher wage rates.
Dutch Bros is a well-known brand in California, having operated in the state for years. That brand awareness has helped the company withstand the cost challenges coming out of the state, at least so far.
“California is one of our mature markets,” Barone said. “I think that’s helpful.”
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