In the early hours of August 13, before I had even taken a sip of my second cup of coffee, Starbucks ( SBUX -3.29% ) The company made a surprising announcement that it had appointed Brian Niccol as its new CEO. Niccol previously served as the CEO of. Chipotle Mexican Grill is a popular fast-casual restaurant chain known for its Mexican-inspired menu items. ( CMG 1.03% ) Since 2018, the stock of Starbucks has significantly increased following the news, and I consider this reaction to be justified.
The stock of Starbucks had decreased by around 40% from its peak in 2021, and the blame is largely placed on the management. In September 2023, Howard Schultz, who had been the CEO for three terms, officially resigned from his position. Although he decided not to become the CEO for the fourth time, he openly expressed his worries about the future direction of the company.
In other words, Starbucks is experiencing a decrease in customer visits, especially at its stores in the United States. The company’s fiscal year 2024 began in October, and during the second and third fiscal quarters, there was a 7% and 6% decline in transactions at U.S. locations.
In a social media post earlier this year, Schultz highlighted that the issue for Starbucks was not just about the financial results, as even well-managed companies can have poor performance at times. The real concern was whether the management could accurately identify and address the underlying problems. There were doubts about whether Starbucks’ management was heading in the right direction.
Starbucks is making significant changes to address its issues by entrusting leadership to an experienced and effective individual, Niccol.
This could potentially be the announcement that Starbucks investors have eagerly anticipated.
When Niccol departed from Yum! Brands When Taco Bell joined Chipotle Mexican Grill in 2018, there was a significant challenge for the new member. The founder and CEO, Steve Ells, had established and grown the company with great care and affection. idea for a dining establishment Transformed into a large network with over 2,400 establishments. Despite Ells’ remarkable foresight, he did face some difficulties.
Chipotle’s systems and processes were frequently deficient, resulting in frequent virus outbreaks at its establishments. In contrast, things were more effectively managed under Niccol’s leadership.
Additionally, Chipotle experienced a significant increase in profits under Niccol’s leadership. In the year 2017, which was the final full year before Niccol took over as CEO, the company had a high level of profitability. profit margin In contrast, the profit margin was more than 12% in 2023 and exceeded 14% in the initial half of 2024, showing a significant increase from the current 4%. This impressive operating leverage reflects Niccol’s exceptional leadership skills and deserves high recognition.
CMG’s profit margin data by YCharts
Niccol is a fitting addition to a renowned brand like Starbucks. However, his hiring comes as a surprise. To provide some background, CEO Laxman Narasimhan officially assumed the role in March 2023 following a planned succession that began in September 2022. In essence, Narasimhan’s appointment was part of a well-thought-out strategy. Yet, the company is now transitioning after just 17 months.
Narasimhan stated that Starbucks was finding it difficult to appeal to new customers and attract them to the brand. Potential clients were not satisfied with the value offered. Consequently, in order to boost sales, the company aimed to provide additional promotional pricing to attract customers.
The board of directors of Starbucks made a surprising decision to remove Narasimhan and hire Niccol from Chipotle, indicating a disagreement with the current direction of the company, which probably relieved Schultz.
Niccol’s current situation with Starbucks is not as clear-cut as Chipotle’s situation in 2018, which was largely caused by their own actions. In contrast, Starbucks is facing a difficult operating environment that poses challenges for all companies in the industry. McDonald’s and other major fast-food chains are presently involved in a competition based on pricing strategies Providing increasing discounts to attract customers.
With that being said, it is important to mention that Chipotle has not followed its competitors in providing discounts or special pricing. As per Schultz, Starbucks should strengthen its image as a high-quality brand for customers. Considering Chipotle’s consistent high pricing, Niccol might be successful in maintaining Starbucks’ menu prices at a premium level without alienating customers.
Thankfully, I think there are some easy opportunities for Niccol to take advantage of at Starbucks. Around 60% of the company’s revenue comes from its large group of almost 34 million loyal customers who are part of the rewards program. However, in the second quarter, the management team observed a significant decrease in the number of completed orders, indicating that customers placed orders through the app but did not actually collect them.
According to Starbucks’ management, the main reasons these customers did not finish their orders were long wait times and order accuracy issues. While there was some improvement in Q3, management acknowledged that this operational issue is causing frustration among the brand’s most loyal customers.
If Starbucks can promptly resolve this operational problem, it will greatly strengthen their reputation as a top-tier brand. In my view, Niccol should prioritize addressing this issue as one of his main tasks, and investors can eagerly anticipate progress in the upcoming quarters.
