After Starbucks Corp. reported two quarters in a row of slipping sales figures — the first negative sales since the peak of the pandemic — external pressure mounted from activist investors to make some big changes and avoid a further backward slide for the coffee chain.
But while activist investors Elliott Management and, allegedly, Starboard Value, were in talks with the Starbucks executive board to figure out how to get back on an upward trajectory, the company abruptly announced on Tuesday the immediate departure of CEO Laxman Narasimhan from the company, to be replaced next month by Chipotle Mexican Grill CEO Brian Niccol.
This surprising announcement catapulted Starbucks’ stock by 21% Tuesday morning, as investors look forward to a new era for the company following Narasimhan’s rocky CEO tenure of just 17 months. Niccol’s reputation precedes him as the CEO of Chipotle for six years, during which time he “Taco Bell”-ified the fast-casual burrito chain, after three successful years as CEO of the Yum Brands chain.
While many of Chipotle’s industry peers struggle with dwindling traffic as customers are becoming choosier with where they spend their dollars, Chipotle is having no such issues. This past quarter, revenues and same-store sales were up by double-digits, driven largely by an increase in transactions. Chipotle is achieving all of this without dipping into heavy discounting — a differentiating strategy for the brand that Niccol said, “is not built on promotional prices” but rather is built on “great culinary exactly how you want it with great speed.”
The question is, can Niccol bring some of that same magic to Starbucks? In making the move from Taco Bell to Chipotle in 2018, Niccol was hopping from one limited-service Mexican chain to another and could apply similar principles to Chipotle, particularly in growing a more robust digital business with a strong online marketing presence. But making the move to helm the largest coffee chain in the world is a larger career jump.
Industry experts seem optimistic with the move, with analyst Mark Kalinowski lauding Starbucks for “acting quickly” after developing “buyers’ remorse” for hiring Narasimhan as CEO (a choice that was largely made by the outgoing interim CEO Howard Schultz).
Placer.ai noted that Starbucks and Chipotle’s traffic over the past six months represent divergent lines on a graph, with Chipotle’s traffic on an upward trajectory over time, and Starbucks dwindling to double-digit negative numbers by July.
“Niccol’s ability to drive visits was apparent during his time at both Taco Bell and Chipotle, spurred by new menu innovations, engaging marketing campaigns, and improved restaurant operations,” Placer.ai head of analytical research R.J. Hottovy, said in a statement. “Chipotle has outperformed the quick-service restaurant space the past several years, and we’d expect new products and advertising campaigns to be a focus early in his tenure at Starbucks.”
Besides traffic numbers, one aspect of Niccol’s Chipotle resume that should pique investors’ interests is his experience in improving labor throughput for the fast-casual brand. Niccol has cracked down on store-level throughput by ensuring that frontline workers, particularly at high-volume stores, have the resources necessary to deal with peak lunch hours and can improve both order accuracy and wait times.
This has been a particularly thorny issue for Starbucks, which has been struggling to keep up with consumer demand at high-volume stores and dealing with issues like mobile app outages and customers leaving items in their virtual shopping carts during peak times. While Starbucks has introduced some frontline fixes as of late like the new Siren Craft System, Niccol could help the company get back to operational basics to simplify work for baristas and improve the customer experience.
This “back to basics” strategy has been touted by former Starbucks CEO Howard Schultz who took to LinkedIn in May to provide constructive feedback for the struggling brand, lamenting that the company is “doing too much too soon,” and stating that Starbucks should get back to “a maniacal focus on the customer experience,” starting with an overhaul of the Starbucks mobile order and pay platform.
Investors also think that it might have been a mistake to enter Starbucks into the discounting wars when the company rolled out combo meal deals in June — a territory it had previously avoided.
Strategic business adviser John Rossman said that Narasimhan “diluted the Starbucks brand” by giving into the temptations of the value meal during a tough consumer spending period. “Succumbing to the investor’s dilemma,” Rossman said, could be a long-term problem for the Starbucks brand, which has always leaned into its position as a premium brand rather than as a value player.
In looking to the future, Niccol does have his work cut out for him, as “fixing” Starbucks’ problems will likely take more than just improving operational basics. As Sean Dunlop, senior equity analyst at Morningstar, pointed out, part of Narasimhan’s downfall could have largely had to do with poor timing. When Niccol steps into the CEO role in September, he will inherit not only a soft consumer environment, but also a tough market in China and ongoing tensions with the company’s growing union.
In short, Niccol is a monumental addition to the Starbucks executive team, but he also has his work cut out for him.
Contact Joanna at [email protected]m
