Starbucks' CEO Brian Niccol has more froth to deal with

Laxman Narasimhan just learnt it the hard way that a lot can happen over coffee – for coffee.

Before his ascent to the top at the iconic coffee chain, Narasimhan had gained deep understanding of the consumer goods industry over his 19-year stint at McKinsey & Company. He later honed his leadership skills across various roles at PepsiCo, and in 2019 joined Reckitt Benckiser Group Plc but quit in 2022 to join Starbucks. “His departure left many in the UK pissed off, as they had been grooming him to continue leading Reckitt. They felt he had left them in the lurch,” says a former CEO of a Fortune 500 company.

When he formally took over as the CEO at Starbucks in March 2023, the company was effusive. An official Starbucks statement mentioned that, prior to taking over, Narasimhan had been on a five-month unique immersion experience, travelling to work with employees in over 30 stores, manufacturing facilities, and support centres around the world, "earning his barista certification" along the way. “This immersion has bolstered Laxman’s understanding of Starbucks culture and values. In this time of learning and listening, he has already won the hearts and minds of our partners around the world,” Mellody Hobson, chair at Starbucks, had then mentioned.

But the honeymoon didn’t last for long.

His arrival at Starbucks came at a time of turbulence. Howard Schultz, who had returned to save the company for a third time, was eager to pass the baton. But under Narasimhan’s watch, Starbucks' stock plummeted 20% amid declining revenues. “The market's response was swift and brutal, as nothing irks analysts more than being blindsided by bad news, especially when they've been led to believe that everything is rosy,” says the CEO quoted earlier.

For someone who weaned away Narasimhan from Reckitt as the right man for the job, Schultz soon turned critical, raising concerns about the company's direction. He criticised the management for operational hiccups and a decline in customer experience, urging a return to what he termed as the "founder’s mentality." In a LinkedIn post, Schultz emphasised that Starbucks' fix needed to start at home, in the U.S. operations, with a maniacal focus on the customer experience — through the eyes of a merchant, not just data.

But the recent CEO shuffle seems more like an attempt to reinvigorate investor confidence than a solution to the core challenges the company faces. The Seattle-based coffee giant finds itself grappling with a market that has matured and, arguably, oversaturated.

In fact, more than seven years ago, analysts had already begun to see the strain in Starbucks’ relentless pursuit of ubiquity. In 2017, Montreal-based BMO Capital Markets had downgraded the stock, pointing out that the company had saturated the American market so thoroughly that it was now “competing” with itself.

Fast forward to today, and not much has changed.

The company’s struggles in its key markets, combined with the pressure from activist investor Elliott Management, have led to this leadership change. But can Brian Niccol, who brought Chipotle back from the brink, perform similar magic at Starbucks?

Niccol's challenges at Starbucks are far more daunting than those he faced at Chipotle. Starbucks operates a staggering 38,000 stores worldwide, compared to Chipotle's 3,500, mostly US-based restaurants. And while Chipotle was able to attract a higher-income customer base relatively insensitive to price increases, Starbucks must now figure out how to lure inflation-weary customers back into its stores, where a simple latte can cost upwards of $5. In a market where competition is fierce, and discretionary spending is tightening, this is no small feat.

Starbucks' revenue for the twelve months ending March 31, 2024, was $36.530 billion, marking a 7.45% year-over-year increase. In contrast, Chipotle saw a 13.61% increase, with a revenue of $10.205 billion for the same period.

Niccol’s success at Chipotle was not just about operational efficiency but also about employee engagement and customer experience. One of the most significant changes he implemented was a programme that paid employees' college tuition costs at certain schools, a move that helped nearly double Chipotle’s revenue. But recreating this success at Starbucks, where the operational scale and market dynamics are vastly different, will require more than just copying past successes.

Though Niccol’s appointment has sparked optimism on the Street with the stock gaining over 22%, the long-term success of Starbucks will depend on more than just a leadership change. The coffee giant must address its foundational issues — customer experience, product quality, and market saturation — if it hopes to remain relevant in an increasingly competitive and discerning market.

As Edward T., CEO of Slingshot Capital Inc, commented in response to Schultz’s LinkedIn post, that Starbucks’ coffee is often considered overpriced and of poor quality, especially when compared to more traditional coffee cultures such as those in Italy. The question is then: can Niccol really reverse the course of a brand that has lost its way in the eyes of its customers? The company’s strategic plan to grow to 55,000 stores globally may seem ambitious, for now.

“The reality of the macroeconomic environment in the US is that companies such as Starbucks, even with a strong brand, are facing significant consumer pushback. The industry dynamics have shifted, with both Coke and Pepsi experiencing a slowdown after years of price increases. Their CFOs have openly acknowledged that consumers are hitting a wall—they're simply not willing to pay more,” says the CEO mentioned earlier.

Niccol’s task is monumental. As Schultz notes, there are no quick fixes, only the arduous task of restoring trust and performance across the organisation. Whether Niccol can pull off this feat remains to be seen.

As for Narasimhan, he stands to get 1.5 to 2 times his $1.3 million salary and target cash bonus, adding up to about $10.6 million in salary and bonuses, according to Fortune.

Now that isn’t too bitter for stirring up a storm in a coffee mug.