Starbucks’ new CEO made shares soar

Starbucks Corp’s incoming chief executive officer Brian Niccol has spent the last few weeks visiting dozens of the company’s coffee shops. Poring over menus, store formats and the myriad options of drink preparations, the former Chipotle chief has been trying to get a handle on the world’s largest coffee chain before he officially takes the helm Monday.

Expectations are high. The company’s shares soared 18% after it named Niccol, ousting his predecessor, Laxman Narasimhan, after two consecutive quarters of sales slumps.

Now, Niccol faces problems ranging from lengthy order times and falling demand to union contract negotiations and pressure from activist investors. While Niccol was a star at Chipotle Mexican Grill, some on Wall Street have cautioned that Starbucks’ global footprint and complex business make turnaround efforts much more difficult than what he faced while leading the burrito chain.

In a statement, the company said that Niccol’s understanding of branding, operations and innovation makes him “the right person to drive Starbucks forward.”

Niccol focuses his energy on select projects with big payoffs, according to people who have worked with him. He directs staff to “make the big thing the big thing” instead of getting lost in a host of initiatives, one of the people said. That might be what workers, investors and latte drinkers are looking for as he tackles Starbucks’ most pressing problems.

Fewer orders

Starbucks’ sales have fallen in recent quarters — a shocking turn of events that garnered the attention of activist investors. The main culprit was a decrease in transactions as inflation-battered customers cut back on iced lattes. Starbucks has also raised prices, and some consumers are now questioning if it’s worth it to pay $7 for an apple crisp oat milk macchiato.

Niccol needs to “justify why the experience is deserving of a continued premium — or shift it and become more mainstream,” said Kevin McCarthy, a portfolio manager at Neuberger Berman, which owns shares of Starbucks. The company has also been targeted by boycotts over its perceived stance in the Israel-Hamas war, and Niccol will have to figure out how to “extract the brand” from that conversation, McCarthy said.

Abby Roach, a portfolio analyst at Allspring Global Investment, which also owns Starbucks shares, said Niccol needs to position the coffee chain to launch new products that draw visitors in but don’t overwhelm stores. For one potential approach to the issue, Roach pointed to Chipotle’s chicken al pastor, which consists of the chain’s grilled chicken with a different sauce. The idea is to take an existing product and tweak it only slightly to offer a new flavor without adding more work.

Slow-drip service

Regular customers are grappling with extended waits, to the point where some give up on placing a mobile purchase after seeing the estimated time. To Starbucks, that means millions in lost sales.

The slowdown stems in part from a surge in complicated drinks, along with a jump in mobile orders: Customers find it’s easier to hyper-customize their beverages on the app without a line waiting behind them. Baristas also say stores don’t have enough workers. Starbucks has said it updated its labour allocation model to ensure sufficient capacity and has improved the drink-making process to save time.

Analysts and investors are encouraged by Niccol’s track record at Chipotle, where he rolled out a second assembly line for digital orders to relieve pressure on restaurant staff. One Starbucks retail worker, who asked not to be named discussing their employer, said Niccol should slow down the onslaught of mobile traffic. Baristas have reason for hope on this front: Chipotle has limited the number of digital orders that can come in over a given time period so workers don’t get swamped.

Still, it may not be enough. “This is like, if you build it, will they come?” said Eric Gonzalez, an analyst at KeyBanc Capital Markets, referring to lapsed customers.

China strategy

Starbucks’ China unit has struggled since the pandemic, saddled by the country’s economic slowdown and fierce competition from lower-priced competitors such as a resurgent Luckin Coffee Inc. And while there’s nothing Niccol can do about the local property crisis or gloomy job market, he’ll still have to decide how Starbucks navigates the problems. The market is the company’s biggest, along with the US.

Starbucks owns and operates Chinese stores itself rather than using a third party as it does in many other international markets. In July, the company said that it was in the early stages of exploring “strategic partnerships” in China, but it’s still not clear what that means exactly. Activist investor Elliott Investment Management has pushed the company to continue the review.

While Niccol has extensive experience in turning US restaurant companies around, he has limited international exposure. Chipotle is largely focused in the US, compared to the 80 markets that Starbucks operates in. “It’s a question mark, for sure,” KeyBanc’s Gonzalez said.

Niccol will need his marketing chops to make Starbucks the go-to choice for Chinese consumers, who traditionally prefer tea. He’ll have to “drive consumers towards drinking not only more coffee, but drinking more of Starbucks’ coffee,” said Allspring’s Roach.

Worker morale

Whatever turnaround plan he adopts, Niccol has to ensure there’s buy-in from the rank and file, Neuberger’s McCarthy said. Morale among some workers has taken a hit in recent years from the company’s aggressive pushback against unionization, its response to boycotts, and frequent changes at the top.

Starbucks has said Niccol is committed to building a culture where workers feel valued. Those who have worked with him say he’s skilled at hiring talented people and helping them grow into bigger roles.

Meanwhile, Niccol’s previous stance on unions has garnered scrutiny internally, Bloomberg reported. An arrangement that allows him to continue living in California and travel to the Seattle headquarters via private jet has also raised eyebrows. Starbucks has said it will continue to negotiate in good faith with the union and that Niccol will spend most of his time in Seattle.

Several employees who spoke to Bloomberg on the condition of anonymity said they don’t care where Niccol works from — as long as the company doesn’t crack down on its three-day in-office requirement and lets remote workers maintain that status.

The Schultz effect

This is something that Niccol has dealt with before: At Chipotle, he took over from founder Steve Ells, who left the company within two years. Now he’ll have to contend with Howard Schultz, the longtime Starbucks leader who built the chain into the behemoth it is today. Schultz no longer has a formal role at the company, but he’s known for hovering around and weighing in — both in public and in private. Niccol is only the second external CEO the coffee chain has ever had, other than Narasimhan, whose tenure lasted for about 18 months.

Niccol, of course, arrives with more power than his predecessor ever had — he’ll be chairman as well as CEO, and he won’t have to train under Schultz before being allowed to set strategy, as was the case with Narasimhan. But he’ll probably still hear from the Starbucks patriarch, who remains one of the company’s biggest shareholders.

One former colleague says Niccol is well positioned to deal with this challenge, saying he’s very diplomatic and will lend Schultz a keen ear.

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