Janice R. Andrews
The financial world is accustomed to Starbucks Corporation (SBUX) igniting enthusiasm, and the company’s most recent upheaval has undoubtedly sparked a robust response. Starbucks’ stock shot up 23 percent on Tuesday with the news that Brian Niccol, the 50-year-old CEO of Chipotle Mexican Grill (CMG), will succeed Laxman Narasimhan as the company’s next CEO. The company’s CFO, Rachel Ruggeri, will act as temporary CEO while Niccol is ready to take over on September 9. Though investors are giddy with anticipation, Niccol has a difficult path ahead of him.
Investor Trust in Niccol’s Guidance
Brian Niccol is a good candidate for Starbucks’ leadership because of his shown performance. Since taking over as CEO in March 2018, Niccol’s stint at Chipotle has been distinguished by a remarkable recovery, with the company’s stock price rising by nearly 770%. Investors have faith in him because of his ability to lead Chipotle through a crisis during an E. coli epidemic and guide the company toward future development. BTIG analyst Peter Saleh claims that because of Niccol’s prior accomplishments and expertise, he already has greater authority and confidence than his predecessor.
“He’s going to be given a lot more authority to make changes to the business, more time than Laxman, more resources, and he’s definitely gotten the confidence of the investment community because he’s done it before,” Saleh said.
Niccol is entering a complicated and demanding situation at Starbucks, where he will need to handle a number of urgent problems in order to maintain the company’s development and reclaim its position as a top premium coffee brand, despite the investor trust.
Turning Around Falling US Sales
Reversing Starbucks’ falling U.S. sales will be one of Niccol’s most immediate problems. Starbucks is having trouble keeping consumers in the face of growing costs and unstable economic conditions, as seen by the company’s most recent quarterly report, which showed a 2% reduction in same-store sales in the United States and a 6% loss in foot traffic. More and more consumers are choosing less expensive at-home options over frequenting coffee shops, a move that has placed more pressure on Starbucks’ sales numbers.
Narasimhan addressed the harsh situation during his last earnings conference, saying, “We are operating in a challenging consumer environment.” He observed a rise in the ready-to-drink industry as customers chose to buy groceries rather than dine out.
Starbucks’ U.S. sales may be revived by Niccol’s experience at Chipotle, where he successfully implemented menu changes and digital-only offers. Nevertheless, Starbucks’ most recent attempts to modernize its menu—like adding iced energy drinks and pearls that resemble boba—haven’t been able to maintain consumer enthusiasm past the first launch stage. Experts such as Bernstein’s Danilo Gargiulo have noted that these new products failed to generate the volume of recurring business required to have a significant effect.
Reviving Service Speed and Brand Identity
Restoring Starbucks’ brand identity and enhancing the customer experience—both of which have been undermined in recent years—will be another big task for Niccol. The formerly well-known company has seen a number of PR disasters, such as social media boycotts and conflicts with its unionized employees. Starbucks has also had trouble with the public’s impression of its expensive beverages, sluggish service, and poor marketing and reward schemes.
Niccol will need to make use of his experience in marketing and brand management, which he developed while serving as Yum! Brands’ (YUM) chief marketing officer, in order to win back consumers. Niccol might “help Starbucks better identify its brand identity and better utilize marketing to create brand buzz,” according to Andrew Charles of TD Cowen.
Enhancing the customer experience at Starbucks will require increasing the throughput, or speed of service. Although the company’s Siren Craft System, which aims to make drink preparation easier, has showed early promise, additional significant advancements are required to satisfy investors. Later this quarter, Narasimhan announced intentions to implement a refit for Starbucks’ espresso equipment, perhaps resulting in a 10–20 second wait time reduction. Niccol’s background at Chipotle, where he implemented operational innovations like dual-sided grills to successfully boost transaction speed, may come in very handy in this regard.
Obstacles in China and Worldwide Growth
Starbucks faces challenges outside of the US market as well. China, the second-biggest market for the corporation, has proven to be an especially difficult area to operate in; same-store sales fell 14% in Q3 after declining 11% the quarter before. Amidst growing nationalism and a difficult financial climate, the firm confronts fierce competition from regional brands like Luckin Coffee (LKNCY).
Starbucks’ problems in China are a part of a larger trend that is impacting international restaurant companies, according to Bank of America analyst Sara Senatore. She noted that Starbucks’ performance in China is closely linked to more general economic variables like GDP development. “Intense competition is the natural state of restaurant markets and even the strongest brands are not insulated,” she added.
In order to recover market share in China, where Starbucks hopes to expand from 7,306 to 9,000 outlets by 2025, Niccol will have to devise a plan. This will include managing the challenges of operating in a market with fluctuating customer tastes and economic concerns in addition to competing against regional companies.
The Way Ahead: Can Niccol Meet Expectations?
Although Niccol’s arrival has generated hope, several observers are dubious about his capacity to duplicate the success he enjoyed at Chipotle. Wedbush analyst Nick Setyan voiced skepticism over Niccol’s ability to overcome the more general economic headwinds as well as the deeply ingrained difficulties at Starbucks.
“Unless he has the power to change macro headwinds, to bring the lower-income customer back to Starbucks, I’m just not sure what the game plan can be,” Setyan stated to Yahoo Finance. He said that it may take up to three quarters before Niccol’s efforts bear any real fruit.
However, there is hope that Niccol’s new outlook and shown leadership abilities can ignite the reforms that Starbucks needs to see. Based on his past performance and the mounting discontent among investors about the current state of affairs, CFRA analyst Sean Dunlop surmised that Niccol would be granted the authority to implement significant organizational changes.
“We suspect that between his own excellent record and investors’ deep discontent with the status quo, Niccol should have carte blanche to make sweeping organizational changes,” Dunlop stated.
Final Thoughts
Brian Niccol has a difficult assignment ahead of him when he assumes the CEO position at Starbucks, a company that has had several difficulties recently. Niccol will have to use all of his knowledge and skills to guide Starbucks toward a better future, from reviving U.S. sales and reinventing brand identity to tackling operational inefficiencies and negotiating the complexities of the Chinese market. Although investors are upbeat about the leadership transition, Niccol’s real influence will be tested in the upcoming months and years as he attempts to usher in a new chapter for Starbucks.
