Starbucks (SBUX +22%) made headlines this morning by appointing Chipotle (CMG -12%) CEO Brian Niccol as its new Chairman and CEO. Laxman Narasimhan has stepped down as CEO effective immediately. Starbucks CFO Rachel Ruggeri will serve as interim CEO until Niccol takes over on September 9, 2024.
- Activist investor Starboard Value recently took a stake in Starbucks, following reports that Elliott Management had accumulated a stake worth up to $2 billion. These firms likely saw value in SBUX shares, which have dropped 30% from their mid-November 2023 highs. It's unclear how much influence these investors had on the new CEO hire, but a change at the top was evidently needed.
- Under Niccol's leadership at CMG, revenue nearly doubled, profits increased sevenfold, and the stock price surged by nearly 800%. Starbucks cites his expertise in brand focus, menu innovation, operations, and digital transformation as key factors for his appointment. Previously, Niccol led a successful turnaround at Yum! Brands' (YUM, Financial) Taco Bell Division.
- Turning Starbucks around will be challenging. With consumers increasingly seeking value, Starbucks' premium pricing has been a headwind. SBUX has missed revenue targets in each of the past three quarters and four of the past five, with weak comparable store sales. The company has been working on improving operations and supply chain, introducing new drinks with a focus on energy drinks, but has been criticized for being late to trends like energy and boba drinks.
- China presents another challenge. Starbucks has heavily invested in China but faces cautious consumer spending and intensified competition. Despite unprecedented store expansion, SBUX has seen a price war affecting comps and profitability. In Q3 (June), China posted -14% comps. Nevertheless, SBUX plans to open more stores.
Overall, Niccol's appointment is a significant move for Starbucks, reflected in the stock's price action today. While he hasn't outlined his plans yet, it's likely he will advocate for slowing down new store openings. Niccol is known for his innovative menu strategies, which Starbucks could leverage to stay ahead of trends. He had success with Taco Bell's menu and Chipotle's seasonal items.
Niccol also has a strong track record in digital ordering, which may become a focus area. However, the challenge remains in appealing to value-conscious consumers while maintaining the premium brand image. This might involve value pricing or pairing with food.
As for Chipotle, the stock has been under pressure since mid-June, and Niccol's departure adds to the weakness. Investors are concerned about losing Niccol and what factors influenced his decision to leave CMG.
