The battle for Salad and Go’s former drive-thru locations raises a bigger question for investors: when does growth become too expensive?
7 Brew has outbid Dutch Bros for 73 former Salad and Go locations, offering roughly $143 million for the portfolio after Dutch Bros had previously agreed to acquire up to 65 locations for $105 million. Dutch Bros declined to raise its offer and is now the backup bidder, while 7 Brew’s transaction awaits final court approval. (Axios)
At first glance, that looks like a loss for Dutch Bros.
Maybe it isn’t.
For investors, the important question is not how many new stores a company can open. It is how much capital it must deploy to open them, and what those stores subsequently earn on that capital.
Dutch Bros’ original $105 million proposal worked out to roughly $1.62 million per potential location before conversion and other costs. 7 Brew’s $143 million bid for 73 sites comes to roughly $1.96 million per location, although differences in the locations and terms mean those figures are not directly comparable.
That distinction matters because Dutch Bros already has unusually attractive store economics.
The company reported approximately $2.2 million in trailing average unit volume in the second quarter. Company-operated shops generated a 30.6% contribution margin, while company-operated same-shop sales increased 8.3% and transactions increased 3.4%. Total revenue grew 32.5% year over year. (Dutch Bros Investor Relations)
Historically, Dutch Bros has built its growth story around strong returns on new shops. At the time of its IPO, the company illustrated year-two cash-on-cash returns ranging from approximately 35% for ground-lease developments to 75% for build-to-suit locations, based on the assumptions it used at the time. Those numbers are several years old and current development costs are higher, but they illustrate an important part of the Dutch Bros model: growth has historically been attractive because the underlying shop economics were attractive.
That is where the Salad and Go auction becomes more interesting.
If Dutch Bros had followed 7 Brew toward $143 million, the company would not simply have been buying growth. It would have been raising the amount of capital that those locations must earn back before the acquisition creates economic value.
Consider a simplified example. At approximately $1.96 million per site, 7 Brew would need around $294,000 of annual store-level cash contribution per location just to generate a 15% unlevered return on that purchase price. A 20% return would require about $392,000, and a 25% return roughly $490,000.
And those calculations are generous: they ignore conversion expenses, equipment, pre-opening costs and potentially other capital necessary to turn former salad restaurants into coffee stands.
That doesn’t mean 7 Brew overpaid. These aren’t empty parcels. Salad and Go’s small, drive-thru-oriented footprint made the locations unusually compatible with beverage operators, potentially saving considerable time associated with finding sites, securing entitlements and developing new locations. (Fast Company)
It also means 7 Brew appears serious.
The privately held chain has significant financial backing. Blackstone made a growth investment in 7 Brew in 2024 specifically to support its rapid national expansion. (Blackstone)
For Dutch Bros shareholders, that creates two competing interpretations.
The bullish interpretation is that management demonstrated capital discipline. Dutch Bros had a price at which the Salad and Go portfolio made sense, a competitor exceeded it, and Dutch Bros walked away rather than allowing a desire for growth to override return requirements.
There is evidence supporting that view. Dutch Bros’ latest annual filing says the company is pursuing a mid-teens annual shop-growth rate while using tighter underwriting standards for new development. It also explicitly identifies finding suitable drive-thru sites as an important constraint on expansion. (SEC)
In that sense, losing the auction could ultimately prove to be a blessing. A company capable of opening attractive locations organically has little reason to pay almost any price simply to accelerate the process.
The bearish interpretation is that the competitive landscape is changing.
7 Brew isn’t merely another coffee chain. It is a well-funded competitor pursuing many of the same consumers, the same drive-thru format and, quite literally in this case, the same real estate. Dutch Bros itself warns investors that competitors adopting similar drive-thru and beverage strategies could hurt its business. (SEC)
And the broader economic backdrop makes the return question more important.
The American economy remains resilient, but the Federal Reserve’s latest survey found consumers increasingly sensitive to prices while businesses continue dealing with elevated costs. Energy, transportation and other input pressures remain significant, and uncertainty about the direction of inflation and interest rates persists. (Reuters)
Coffee is ultimately discretionary spending. If consumers pull back, aggressive store expansion becomes considerably less forgiving: new stores still require capital even if traffic and sales fail to meet underwriting assumptions.
Dutch Bros enters that environment from a position of strength. Its Q2 numbers show rising transactions, strong same-store sales and approximately 31% company-operated shop contribution margins. (Dutch Bros Investor Relations)
But investors shouldn’t judge the company simply by whether it reaches 2,000 stores—or how quickly it gets there.
The better question is what Dutch Bros earns on every dollar required to get there.
Walking away from Salad and Go may have cost Dutch Bros 73 desirable pieces of drive-thru real estate. It may also have prevented the company from winning an auction at a price where the economics were no longer compelling.
Meanwhile, 7 Brew has demonstrated that Dutch Bros will have a well-capitalized competitor bidding for both customers and locations.
Which side of that trade ultimately matters more is now something investors will have to decide.
By Jack Sparrow