Joe McConnell
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The coffee grounds have settled on the Starbucks boardroom drama and a winner has emerged. Take a bow Howard Schultz.
In a major shakeup, the Seattle coffee giant has named current Chipotle boss Brian Niccol as its new CEO. He will replace Laxman Narasimhan, who is leaving immediately.
Niccol is widely regarded as the man behind Chipotle’s turnaround, and his appointment should (at least temporarily) quell Elliott Investment Management’s ambitions. The activist, who owns a stake in Starbucks, has been in talks with Narasimhan.
It’s Schultz who appears to be victorious: the former CEO, majority shareholder, and vocal critic of Narasimhan had opposed any deal with Elliott. The fact that Niccol’s appointment was not discussed with Elliott (but was with Schultz’s full support) suggests that the former may have been outsmarted.
The market made its sentiments clear. Starbucks shares rose nearly 23 percent, erasing losses for the year, while Chipotle fell more than 13 percent.
That, in part, reflects Niccol’s tenure at Chipotle. Since he took over in March 2018, the Mexican-inspired chain’s sales have more than doubled, reaching nearly $10 billion last year. Profits have risen 600 percent. Even taking into account Tuesday’s decline, those who bought Chipotle shares upon Niccol’s appointment would have gained 873 percent.
His experience would apply well to Starbucks’ problems in the United States: understaffing, customer frustration with long wait times, and tired-looking stores are execution problems rather than demand problems. They can be overcome: Starbucks needs to invest in staff and improve the operations and efficiency of its stores.
By contrast, the company’s problems in China, its second-largest market, are more entrenched. Competition from foreign and local brands is fierce, while the economy is slowing. Revenue at its 7,306 Chinese stores fell 11 percent in the fiscal third quarter through June.
For Niccol, the quick fix might be to slow down expansion plans in China. Starbucks has more than doubled its store count there in the past six years. BTIG analyst Peter Saleh estimates that Starbucks has been investing more than $400 million a year, or 20 to 25 percent of the company’s capital spending, to expand.
Fixing Starbucks won’t be as easy as Chipotle. The coffee chain is a much bigger beast, with 39,477 locations worldwide. Chipotle has just 3,530 locations, mostly in the United States.
But Niccol’s appointment will give the company some time to start addressing its U.S. problems and de-escalate its China problems. But his job comes with another complication: a backup barista who just scored what looks like a victory.
pan.yuk@Vscek.com
