America's Third-Largest Coffee Chain: Its Hot Sellers Are Barely Hot Coffee

Through customized cold brew energy drinks, Dutch Bros believes it has found the secret to attracting a younger customer base.

Dutch Bros is facing intense competition as giants like Starbucks and McDonald's enter the customized energy drink market. Once relatively unknown in many parts of the U.S., the coffee and beverage chain Dutch Bros has now become a thorn in the side of Starbucks.

According to market research firm Technomic, the brand, founded in 1992 by two Oregon farmers who left their family dairy businesses, has become the third-largest coffee chain in the U.S. by both store count and sales, trailing only Starbucks and Dunkin'. While Starbucks still holds about 48% of the U.S. coffee chain market by sales, smaller competitors like Dutch Bros have begun to erode its lead.

Dutch Bros has garnered a passionate following from Gen Z, thanks to its eye-catching, highly customizable energy drinks and various cold beverages. Popular items include the classic Gummy Bear Lemonade and the "Shark Attack" Rebel energy drink—a layered beverage featuring green, red, and yellow fruit flavors, with a large iced version containing up to 111 grams of sugar.

The chain, which operates 1,140 stores, does sell coffee, but hot beverages are a rarity. Approximately 90% of its products are cold drinks. Company executives state this aligns perfectly with how young consumers prefer to drink.

"The market is moving in this direction, and this is our core strength," said Tana Davila, Chief Marketing Officer of Dutch Bros.

Her mission is to help the Tempe, Arizona-based company maintain its edge in an increasingly competitive beverage landscape. In January, Starbucks announced plans to launch its own line of customized energy drinks, news which directly contributed to a drop in Dutch Bros' stock price. Meanwhile, McDonald's, after testing specialty sodas and energy drinks in select locations, plans to roll out a new line of cold beverages in the U.S. this year, with products featuring Red Bull showing particularly strong sales.

Currently, customized energy drinks account for approximately 25% of Dutch Bros' $1.6 billion in annual revenue.

Here is how Dutch Bros plans to compete and where the beverage battle is headed next.

Competing Head-On with Giants Question: The energy drink market is getting more crowded with big players like Starbucks and McDonald's entering. How do you maintain your advantage? Tana Davila: We see ourselves as the pioneer of customized, handcrafted energy drinks. This category started with customers wanting to add flavors to their energy drinks. Over time, we developed our own exclusive Rebel energy brand. We provide flavor bases and allow customers to freely add toppings. The energy drink market is growing much faster than coffee, and we have a significant lead in this segment.

Question: More brands are offering customization, but balancing it with speed of service is difficult. What makes your customization unique and why is it so important to the brand? Davila: Customization has been core to our brand since the beginning. Whether it's coffee, energy drinks, lemonade, tea, or soda, customers can mix and match almost anything. We have over 40 flavors that can be combined to create a unique taste.

We are currently promoting our Banana Bread Mocha, which can be made as a latte, mocha, or frost, and can include drizzles, cold foam toppings, additions like pearls, or even be made into a protein drink. The choices are nearly limitless.

Question: Where do you get inspiration for your flavors and trends? Davila: We monitor trends in grocery stores, the third-wave specialty coffee scene, and the cocktail world. For example, adding pearls to energy drinks—I first saw it in tea, but the real inspiration came from cocktails. Another example is cookie butter flavor, which is very popular with younger demographics.

Challenges and Innovation Question: What is the biggest challenge for the brand right now and how are you addressing it? Davila: The primary issue is convenience—stores not being close enough is a basic industry barrier. Other brands have more locations and are more accessible. Our strength, however, is extremely high member loyalty. We need to solve logistics and layout issues to enhance our market competitiveness.

Question: Only about one-third of your business occurs in the morning, with the rest concentrated in the afternoon and evening. Starbucks and Dunkin' are also competing for afternoon business. But as a coffee chain, don't you want to capture more of the morning market? Davila: Our sweet treats and energy drinks are naturally more suited for the afternoon. Our opportunity lies in cultivating morning habits. We asked our members what they need most, and pre-ordering was the top request. They worry about not having time to wait in line during the morning commute, and unpredictable wait times.

Question: Starbucks has had mobile ordering for years. Can you catch up? Davila: We don't have a goal of simply catching up; we want to offer a differentiated experience. Pre-ordering is currently available only to members, serving our overall membership strategy. This channel currently accounts for about 14% of orders.

Question: Your food sales are a much smaller percentage of revenue compared to Starbucks. Is this a problem you need to solve? Davila: Food is an important part of removing barriers to visiting our stores, especially for the morning daypart. In the past, we only had a few flavors of muffin tops. Now we've added a new baked goods line and introduced hot items, like two varieties of breakfast sliders. We aim to achieve the broadest appeal with the fewest SKUs.

Question: Restaurant brands are all competing for young consumers. How do you understand Gen Z and attract their spending? Davila: They consume a higher proportion of cold drinks, love customization, and appreciate friendly service—all areas where we excel. We have a heavy presence on social media and also offer promotional merchandise, like straw toppers and bumper stickers, which can be obtained with drink purchases.

Question: Do consumers really care about bumper stickers? Davila: They genuinely do, more than you might expect. It creates a sense of something different, an unexpected surprise.

Expanding Territory Question: Your store count grew by 16% last year, faster than most competitors. Does this pace of expansion put pressure on revenue per store? Davila: We support our growth through three key pillars:

Continuous innovation, launching market-relevant products like protein coffee; The Dutch Rewards loyalty program, with approximately 73% of transactions coming from members who earn points for free drinks—our version of discounts; Advertising in new markets, as there are still many consumers unfamiliar with us.

Question: How do you plan to change that? Davila: I sincerely hope we can become a household name. We started on the West Coast and are gradually expanding eastward, with plans to move into the Midwest and Northeast next. We are not afraid of dense clustering within a single market, rather than opening single, isolated stores.

We already have over 200 stores in Texas, most opened in the last two years. We have successfully built our brand, achieved scale, and realized high-density coverage and penetration there.