Can Starbucks welcome redemption?

Author: RockFlow

Key Points

① Since taking over as CEO of Chipotle in 2018, Brian Niccol has led the company's stock price to rise by 800% over six years, making it a miracle in the US stock market. On the day he agreed to become the CEO of Starbucks, the latter's stock price surged by nearly 25% (with a market value increase of over $20 billion).

② As a global coffee giant, Starbucks has fallen out of favor in the US stock market in the past year or two, with various operating indicators (such as revenue growth) not looking optimistic. The rapid revenue growth in the early days is no longer present, but the current profit margin is quite strong.

③ Starbucks is facing a serious midlife crisis. The root of all problems in recent years lies in "both success and failure are digital." Although the revenue scale is still huge, it has lost the "grand narrative" that investors can believe in. In order to find such a "narrative," it needs a leader with extreme foresight who also understands the various challenges of restaurant operations.

④ Niccol's resume shows his outstanding achievements in the restaurant industry. He led Chipotle through a large-scale transformation and successfully turned it into a rapidly rising fast-food empire. The next few months will be a crucial period for him to adapt to his new role and lead Starbucks into another future.

Over the past six years, a shining new star in the restaurant industry has sparked heated discussions in the US stock market. This restaurant is called Chipotle, and its CEO has led the company's stock price to rise by 800% over six years since taking office in 2018, with only 9 out of the S&P 500 index components outperforming Chipotle during the same period.

And on September 9th, Brian Niccol, the soul figure who helped Chipotle achieve this restaurant miracle, officially took office as the fourth CEO of the old coffee giant, Starbucks, within two years. On the day the news was announced, Starbucks' stock price surged by nearly 25% (with a market value increase of over $20 billion), and the stock price has not fallen in the past month. The market believes that Brian Niccol is expected to help Starbucks reverse the downturn of the past three years and return to an upward cycle. But will reality be like this?

The RockFlow research team will review the difficulties and crises surrounding Starbucks over the past few years, and combine the previous resume and achievements of the new CEO Brian Niccol to analyze the possibility of leading Starbucks back to growth.

1. What's wrong with Starbucks?

Starbucks was founded in Seattle in 1971 as a coffee bean wholesaler, and was later transformed into a coffee chain by Howard Schultz. What the Italians did not expect was that an American company would redefine espresso around the world.

In the early days, Starbucks provided the "third space" by opening more and more stores. In recent years, it has closely followed the new trends of online ordering, self-pickup/takeout delivery, and strengthened its membership system and reward activities to provide comprehensive services to consumers.

However, in the past year or two, Starbucks has not only fallen out of favor in the US stock market, with its stock price remaining in a volatile market, but its business model has also been threatened, with various operating indicators (such as revenue growth) not looking optimistic.

The following figure reflects the changes in Starbucks' revenue, profit, and corresponding growth rates over the past thirty years. Obviously, the rapid revenue growth in the early days has not been present in recent years (the gray line represents revenue growth, expected to be below 0% by 2024):

It is worth noting that although Starbucks' revenue growth has gradually slowed over time (even starting to decline), its current profit margin has increased and is far higher than the first twenty years after the company was founded (around 1994).

The main reason for the increase in profitability is that the company has become more cautious in opening stores, at least in the United States, and the sales of each store continue to increase. The shift to online ordering, self-pickup/takeout delivery has accelerated this trend, as the proportion of revenue associated with the latter has increased, the effective coverage of individual stores has expanded, and the need to expand the number of stores has decreased.

So why is the market concerned about Starbucks' stock price and future development?

This is a photo of Howard Schultz during his trip to Italy in 1983. After returning to the United States, he turned Starbucks into the world's first truly meaningful coffee chain.

Schultz saw that coffee shops were a part of Italian social life. Everyone would visit coffee shops at any time, and for them, coffee shops were not restaurants, but important places for relaxed chatting and socializing. This was an irreplaceable experience. In Schultz's idea, coffee was the medium, and the experience was what people spent money on. Starbucks conquered the world with the experience of the "third space."

But today, the concept of Starbucks that Schultz has instilled in the market for decades—coffee shops are places for friends and acquaintances to gather—is crumbling, and the reason is precisely the certain effectiveness of the online ordering business that Starbucks has vigorously developed in recent years. Currently, Starbucks' revenue scale is still huge and quite profitable. But it is losing (or has lost) the "grand narrative" that investors can believe in.

Not to mention, its future revenue growth and fundamentals are facing risks:

Some investors used to believe that the company's revenue could return to double-digit growth, and the only way to achieve this goal was for Starbucks to achieve greater success in emerging markets such as China and India. However, Starbucks has difficulty competing with local low-cost competitors (such as Luckin Coffee) in China, and its joint venture with Tata Group in India is also not going smoothly.

At the same time, with the continuous rise in product and labor costs, Starbucks' full range of products has always been expensive, and customers in emerging markets are unwilling to pay for them, even the most loyal customers in mature markets (such as North America) are beginning to reduce their consumption.

In order to find a new "narrative," Starbucks needs a leader with extreme foresight who also understands the various challenges of restaurant operations. As the former leader of Taco Bell and Chipotle, Brian Niccol clearly understands restaurant operations enough, but can he further prove his foresight and decision-making ability?

Currently, the market has a great deal of trust in him, as evidenced by the surge in stock price after the announcement of the news and the lack of a significant pullback in the stock price. However, before delving into his abilities, it is necessary to understand the specific situation he is facing at Starbucks.

2. The short tenure and thorny issues of the former CEO

Many companies, after a visionary founder retires and appoints a managerial CEO, often lose their soul, and Starbucks is no exception. After Schultz stepped down as CEO in 2000, he returned twice to solve problems and hire new leaders, but it is clear that the new CEO was not the right choice.

Niccol's predecessor, Laxman Narasimhan, had a very short tenure, taking over Starbucks in March 2023 for just over a year. During Narasimhan's tenure, several quarters of financial reports revealed many problems for Starbucks:

1) Declining sales: The company's sales declined for the first time in the 24Q1 quarter, with store traffic down 3% from the previous year.

2) Poor stock performance: During Narasimhan's tenure, Starbucks' stock price fell by more than 20%, indicating investors' concerns about the company's development direction.

3) Growth encountered difficulties: Starbucks' two main markets, the United States and China, both experienced declining sales, indicating that the company's global strategy is facing challenges.

4) Tense labor relations: Tensions between Starbucks management and unions continue to cause trouble.

5) Declining service quality: The uneven service quality of Starbucks stores in the United States has become an increasingly concerning issue for customers and investors.

Guess what measures he proposed to solve these problems?

Increase investment in the membership system and loyalty program, expand new product categories and menus, reduce indoor seating in coffee shops, and increase promotional efforts.

Subsequent facts have proven that these measures were completely ineffective.

Perhaps it was not Narasimhan's fault; he only tried to increase revenue and coffee sales as much as possible, find more ways to persuade consumers to pay, and overlooked the enthusiasm of Starbucks' loyal users.

In fact, the root of all problems for Starbucks in recent years lies in "both success and failure are digital."

According to its second-quarter financial report, this coffee giant saw a 6% decline in North American transactions, a 7% decline in international comparable sales, and a staggering 14% drop in same-store sales in China. The previous quarter's report was also very bleak, with global comparable sales down 4% year-on-year and store traffic down 6% (China being the second largest market after the US, with a same-store sales decline of 11%). It had predicted revenue growth for this year, but it did not materialize.

Why are fewer people going to Starbucks? Narasimhan attributed it to a weak economy. This does make sense, as other restaurant chains (McDonald's, KFC, Pizza Hut, etc.) have also reported declines in same-store sales.

To address the poor performance, Schultz recently posted an article on LinkedIn criticizing the Starbucks management and proposing some ideas on how to turn things around.

This post caught the attention of Starbucks fans and pointed out the real problems the company has faced in recent years—the successful digital strategy gradually shifted the company's focus to transactions rather than experiences.

Starbucks used to be a community center where people could hang out. The interior was beautifully decorated, baristas interacted warmly with customers, and it proved that the high prices were reasonable by providing decent products and a comfortable environment. However, in the US, 31% of sales are now completed through mobile orders. The mobile app has changed the way customers interact with the Starbucks brand and has had noticeable negative consequences.

The shift to mobile orders and grab-and-go means that the ambiance of the physical stores is no longer as important. Customers care about "how quickly can I get out" rather than "how long can I enjoy my time here." In other words, the increasing digitization of the business is slowly eroding the soul of the Starbucks brand.

More ironically, everyone is eager to place online orders for convenience, but the crowded orders have led to long wait times in physical stores, further exacerbating the deterioration of the in-store experience. And the work of the baristas has changed from being "skilled craftsmen" to assembly line workers like at McDonald's.

It's clear that digitization has changed Starbucks' DNA, and the following image perfectly captures this change:

Starbucks has shifted from "selling experiences" to "selling products." So it's now in a dilemma.

3. Strength and Possibility of Starbucks' New CEO

Niccol's resume shows his outstanding achievements in the restaurant industry.

He entered the Procter & Gamble brand department in the mid-1990s, and his first job after graduating from college was in Procter & Gamble's Scope mouthwash business. Because he quickly adapted to the role, his career path was very smooth, and he grew to become the marketing director, vice president, and chief marketing officer of Yum! Brands' Pizza Hut and Taco Bell, where he planned several well-known campaigns (such as "Live Más," etc.).

Niccol's tenure at Chipotle is particularly noteworthy. In 2018, when he took over as Chipotle CEO, the fast-food chain was in trouble due to an E. coli outbreak, with 20 customers hospitalized as a result. In addition, Chipotle's reputation was severely damaged due to a lack of emphasis on food safety and excessive promotions.

Niccol led the company to shift its focus, abandon promotions, and invest heavily in expanding the menu and operating hours. Under his leadership, Chipotle introduced well-received new products such as cauliflower rice and fried corn tortillas, and increased the number of stores from 2,400 to 3,400 (including entering the Canadian market). Since becoming Chipotle CEO in 2018, he has led this Mexican restaurant through a large-scale transformation and successfully turned it into a rapidly rising fast-food empire.

Currently, Niccol's entry into Starbucks is facing a series of complex challenges, including but not limited to:

1) Reversing the sales decline trend. One of Niccol's main tasks is to revitalize Starbucks' revenue growth. This may involve: updating the product list, improving operational efficiency, and enhancing the overall customer experience;

2) Improving the online ordering system. With the increasing importance of digitization, Niccol needs to enhance the functionality of the Starbucks mobile application, simplify the in-store pickup process for online orders, and reduce store congestion caused by a large influx of online orders;

3) Handling labor relations. Starbucks' unionization work will require Niccol to: establish a more collaborative approach with employees, address concerns about working conditions and benefits, and balance employee needs with the company's financial goals;

4) Balancing price and value. In an era of increasing price sensitivity, Niccol needs to find ways to maintain profitability without alienating customers, ensure that Starbucks' core customer base recognizes its value, and demonstrate the reasonableness of high prices through quality and experience;

5) Revitalizing the global market strategy. Faced with challenges from the US and Chinese markets, Niccol needs to develop targeted strategies for major international markets, address specific issues Starbucks faces in China, and discover new growth opportunities and emerging markets;

6) Coordinating the goals of aggressive investors. Niccol needs to balance the demands of aggressive investors with his own vision for the company, possibly by: demonstrating efficiency improvements in operations, conveying a clear long-term growth strategy, and achieving significant improvements in financial performance in the short to medium term.

With Brian Niccol at the helm of Starbucks, the company is at a critical moment. The next few months will be a crucial period for him to adapt to his new role and begin leading Starbucks into another future. The market is looking forward to a new chapter for Starbucks.

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