Dutch Bros (NYSE: BROS) has a ton of potential as a growth stock. The company is expanding its sales footprint at a pace that makes it one of the fastest-expanding brands in the fast-food industry. Management plans to launch as many as 165 new locations in 2024, boosting the store base by 20%.
There are major trade-offs to investing in a company that’s this early in its growth story, though. It’s an especially risky proposition in the restaurant industry, which is known for weak profit margins and high rates of failure as consumers’ tastes shift from one year to the next.
Most investors are better off focusing on established and profitable businesses. Let’s take a look at why you might like McDonald’s (NYSE: MCD) and Starbucks (NASDAQ: SBUX) more than the fast-expanding Dutch Bros business right now.
1. McDonald’s earns its profits
It’s no exaggeration to say that Mickey D’s has the fast-food marketing process all figured out. The company has been serving up its Big Mac sandwich for over 50 years and thrived through several recessions and many shifts in consumer tastes during that time.
You don’t have to worry about a surprise sales decline seriously hurting this massive global business. In contrast with Dutch Bros and its projected $1.2 billion of revenue in 2024, most Wall Street pros see McDonald’s generating $25 billion in the same period. A huge portion of that revenue comes from stable franchise fees, royalty fees, and rent income, too.
Profits aren’t a concern as they might be with Dutch Bros. In fact, McDonald’s is pushing its profitability to new highs toward a blazing 50% of sales (compared to Dutch Bros’ 5%). That figure sat at 30% of sales just a decade ago, so McDonald’s is still finding ways to squeeze more efficiency out of its global platform.
2. Starbucks for a double shot of growth
Choosing Starbucks over Dutch Bros isn’t going to force you into the growth compromises that you might expect when purchasing an established, mature business. The coffee titan is expanding more quickly at its existing locations right now, after all, having boosted same-store sales by 5% last quarter, compared to Dutch Bros’ 4% rate. It has plenty of room to add to its huge store base, as well, despite having blanketed most metro markets with its cafes.
Starbucks is pushing into more rural locations, for example, with help from its expanding drive-thru presence. Toss in a thriving international business, and you’ve got some excellent growth avenues for the coming years. The chain added 550 locations in the last quarter to push its total to just below 39,000.
You might be tempted to prefer Dutch Bros, given its far smaller sales base of below 900 locations spread across 16 states. Reaching even a fraction of Starbucks’ U.S. presence in a decade would translate into massive growth.
But the market leader is clearly the less risky choice, both for its large and stable sales base and caffeinated growth potential. Coffee fans continue to find reasons to frequent its cafes at a faster rate and spend more during every visit. As a result, when you look back in a few years, you’ll likely be happy to have put Starbucks (or McDonald’s) stock in your portfolio over Dutch Bros shares.
Should you invest $1,000 in Starbucks right now?
Before you buy stock in Starbucks, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Starbucks wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of February 5, 2024
Forget Dutch Bros: Buy These 2 Profitable Fast-Food-Chain Stocks Instead was originally published by The Motley Fool