Starbucks on Tuesday ousted CEO Laxman Narasimhan, replacing him with Chipotle's Brian Niccol, who is being tasked to turn around the company as it contends with growing unionization pressures and slowing sales in back-to-back quarters.
The company faced immense pressure to make significant changes, both from activist investors and former CEO Howard Schultz, who posted on social media in May that the company needed a strategic overhaul.
Niccol, who is stepping down as Chipotle CEO to take over the coffee giant on Sept. 9, now has tremendous pressure to prove he can help the company out of its slump and reverse the decline in foot traffic. However, he may have a short time to make an impact due to a slowing global economy, according to Brian Mulberry, client portfolio manager at Zacks Investment Management.
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"If there is a substantial decline in the health of the U.S. consumer and the health of the U.S. economy, then that accelerates that timetable," Mulberry said. "So he might end up with a very short window to make a big impression."
Mulberry argued that Niccol's success at Chipotle could position him well to turn things around for the global coffee chain, crediting him with having a "keen eye for what issues need to be addressed" in times of crisis. He noted Niccol's experience helping better organize Chipotle after it paid $25 million to resolve criminal charges related to the company’s involvement in foodborne illness outbreaks that sickened more than 1,100 people between 2015 and 2018.
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Still, Mulberry and William Blair analyst Sharon Zackfia believe there are still major challenges ahead for the executive.
"Net profitability and future growth are the biggest issues I think he's going to have to take on directly, and it might make for some pretty big strategic changes to what the plan has looked like previously," Mulberry said.
For one, he noted that the previous regimes made a big bet overseas, both in China and Europe, and the company still has plans to grow to up to 9,000 stores in China by the end of next year.
However, given the weakness among the Chinese consumer, "the first question he has to address is: is that plan still appropriate in terms of what growth looks like?" Mulberry said.
They might also need to focus on the "declining margins that they've been experiencing over the last couple of quarters" due to input costs surging from raw coffee beans to labor expenses, according to Mulberry.
In a Monday research note led by Zackfia, William Blair analysts wrote that Niccol's tenure at Chipotle was "extraordinary," citing a near-doubling of sales, almost sevenfold increase in profit and near 800% increase in the stock price.
However, that does not diminish the fact that he is "inheriting a more challenged and complex organization," according to the note.
"Not only is Starbucks more than three times Chipotle’s size in revenue with a footprint spanning myriad countries, but current trends are also more challenged than when Niccol joined Chipotle," Zackfia said, adding that Starbucks’ same-store sales were down 3% to 4% globally in recent quarters versus Chipotle’s low-single-digit gains when Niccol started in 2018.
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Still, the analysts predicted that Niccol will "stick to what worked at Chipotle," which includes "honoring the brand, focusing on operations/speed, amplifying marketing messaging, and implementing a strict stage-gate process for new product innovation."
However, first and foremost, they believe Niccol will enter the company in a "listen-and-learn mode" and take his time before making any seismic changes.
