Six points Brian Niccol should repair at Starbucks as he takes over as CEO

Brian Niccol steps in as CEO of Starbucks on Monday, taking up because the espresso large’s gross sales droop and inventory value falls.

Starbucks tapped Niccol in August to take over from Laxman Narasimhan, who held the place since March 2023. Niccol had served as chief government of Chipotle Mexican Grill since 2018, turning across the fast-casual chain after a collection of foodborne sickness outbreaks and main it by way of the pandemic. Earlier than Chipotle, Niccol was CEO of Taco Bell, which Yum Manufacturers owns.

On the day that Starbucks introduced Niccol’s appointment, shares of the espresso large soared greater than 24%, one of the best day ever for the inventory. Wall Avenue analysts additionally cheered the information, calling him a “dream rent” and a “corridor of fame restaurant CEO.”

“Brian deeply understands manufacturers, operations and innovation, and has a permanent dedication to supporting the retail groups who serve clients in retailer. We sit up for the contemporary concepts that Brian will carry to our enterprise,” a Starbucks spokesperson mentioned in an announcement to CNBC.

Niccol comes from a advertising and marketing background and began his profession at Procter & Gamble. He then moved to Yum Manufacturers in varied advertising and marketing positions earlier than ascending to steer Taco Bell. That advertising and marketing experience was helpful when he joined Chipotle and can doubtless additionally show beneficial at Starbucks.

However as he takes over Starbucks, Niccol is coping with a bigger and extra advanced enterprise than Chipotle. The burrito chain’s gross sales reached $9.9 billion final yr; Starbucks had $36 billion in income in fiscal 2023. And whereas the overwhelming majority of Chipotle eating places are within the U.S., greater than half of Starbucks cafes are outdoors of North America.

Turning across the sprawling Starbucks enterprise will not be straightforward.

Niccol is anticipated to share extra particulars about his plans for the chain on the corporate’s fiscal fourth-quarter earnings name, which can doubtless happen on the finish of October.

Listed below are the six issues that Niccol wants to repair at Starbucks:

Like most restaurant chains, Starbucks has been mountain climbing its costs lately in response to inflation. Final yr, it appeared as if the espresso large was in a position to escape the identical shopper value sensitivity that was hitting different restaurant corporations, like Outback Steakhouse proprietor Bloomin’ Manufacturers.

Nevertheless, the final two quarters have proven that Starbucks clients are pulling again. Executives have mentioned they’re shedding occasional clients, who’re in search of out worth as an alternative. These customers can reduce Starbucks espresso out of their budgets and as an alternative get their caffeine repair at dwelling or from rivals with cheaper drinks, like Dunkin’ or McDonald’s.

This summer season, Starbucks has been attempting to carry again clients by leaning on promotions, like half off any personalized drink on Fridays. However reductions can eat into earnings, making it difficult for eating places to seek out the fitting steadiness.

As CEO, Niccol should determine learn how to decrease costs — or persuade customers {that a} latte is value $6.

In recent times, Starbucks has credited youthful customers for the growth in chilly espresso that has boosted its income and revenue. On the identical time, Gen Z has additionally led pushback in opposition to the espresso model as soon as seen as progressive.

For many years, Starbucks cultivated a picture as a caring employer and a company ally, boasting about its superior advantages for baristas and assist for liberal causes like same-sex marriage. Nevertheless, that identification started shifting as the corporate fought to curb the unionization motion that hit its cafes, beginning in 2021.

The baristas main the cost to unionize had been youthful and vocal about sharing their views on social media. The union combat additionally led to different controversies, like arguments over retailer managers eradicating Satisfaction decorations or confusion concerning the firm’s stance on Israel’s offensive in Gaza, which led to a boycott.

Earlier this yr, Starbucks Employees United and the corporate defrosted their relationship and resumed contract negotiations. However many youthful customers now have a unique picture of the corporate, creating an identification disaster for the model that Niccol and his workforce might want to remedy.

Cellular orders account for roughly a 3rd of Starbucks’ U.S. orders. At many Starbucks areas, although, it looks like they’ve fully taken over, irritating clients and baristas alike.

Chipotle noticed the rise of digital ordering early, investing in secondary meeting strains devoted to on-line orders and different methods to maintain operations environment friendly. However Starbucks hasn’t made the identical investments, leading to operational points and a worse buyer expertise. It has been rolling out new gear that can automate some drink-making duties, however the course of has been gradual.

On their face, digital orders provide clients a extra handy manner to purchase their drinks. However baristas have complained that they will overwhelm shops, notably throughout promotions. Clients are additionally extra prone to order extra sophisticated drinks on the app, piling on the syrups, foams and different add-ons that increase earnings however take longer to make. And people who favor to order in individual will wait longer as baristas steadiness assembling digital orders.

Perhaps most significantly, the shift to cellular ordering has eroded Starbucks’ in-store expertise as what longtime CEO Howard Schultz billed as a “third place” between dwelling and work, including to the model’s identification disaster.

The pumpkin spice latte, a perennial bestseller, returned in August and is reportedly already driving site visitors progress for Starbucks. However newer additions to the menu have not fueled the identical pleasure.

Its foray into power drinks with an iced line failed to stay with clients, presumably as a result of the drinks had been solely accessible in Starbucks’ giant “venti” dimension. A spicy extension of its common Refreshers likewise garnered adverse reactions on-line. And whereas the chain’s lavender line was “extraordinarily profitable,” based on Narasimhan, it wasn’t common sufficient to reverse U.S. site visitors declines throughout its fiscal third quarter.

At Chipotle, Niccol ramped up the chain’s new product pipeline, resulting in the introduction of common limited-time gadgets like carne asada and long-awaited additions like quesadillas. Whereas it was a far cry from Taco Bell’s frenetic menu innovation, it was a serious change for Chipotle, serving to drive site visitors to its eating places and convincing customers to pay extra for his or her protein choices.

At Starbucks, Niccol should lead the cost to determine what new meals and drinks will get clients excited once more.

China is Starbucks’ second-largest market, nevertheless it is likely to be the espresso chain’s largest headache proper now. Starbucks mentioned its same-store gross sales in China fell 14% in its newest quarter.

The nation’s gradual rebound from the pandemic has been adopted by a sluggish shopper atmosphere and a rise in native rivals, which frequently undercut Starbucks on value. For instance, rival Luckin Espresso, totally recovered from an accounting scandal, has overtaken the Seattle-based firm because the espresso chain with the most important footprint in China.

In late July, dealing with strain from activist traders like Elliott Administration, then-CEO Narasimhan mentioned Starbucks was exploring strategic partnerships for China. That step might imply partnering with a tech firm — or forming a three way partnership with a neighborhood associate who might deal with day-to-day operations.

Now, with Narasimhan out and activists pacified, Niccol should resolve learn how to sort out the corporate’s China enterprise. Can the chain return to its former glory out there, or is it time to take step again after 25 years?

For roughly 1 / 4 of a century, on and off, Schultz has been accountable for Starbucks, the Seattle-based firm he changed into a worldwide espresso behemoth. After his newest stint as interim CEO from 2022 to 2023, he vowed by no means to return as chief government and relinquished any formal function on the firm.

Nonetheless, the espresso chain has lengthy struggled to shrug off his affect, even when Schultz is not formally within the C-suite.

He is been vocal concerning the chain’s latest struggles, airing his views first in a public LinkedIn put up after which on a three-hour episode of the “Acquired” podcast. Mellody Hobson, who ceded her place as chair of the Starbucks board to Niccol, saved Schultz within the loop about discussions to oust Narasimhan, his handpicked successor, and to rent the Chipotle CEO in his stead. Schultz additionally owns a 2% stake in Starbucks.

Prior to now, Schultz’s affect has been blamed for the corporate’s succession points, just like these of Disney. And regardless of his retirement, traders have remained involved about his stage of involvement with the corporate, pressuring the inventory.

Niccol arrives at Starbucks as each CEO and chair, and with six years of expertise main a restaurant firm after its founder stepped down. Solely time will inform if that is sufficient to beat Schultz’s shadow.