Why Starbucks Stock Could More Than Double Under Its New CEO

Starbucks stock rose 24.5% and Chipotle shares fell 7.5% after the burrito-retailer’s CEO Brian Niccol agreed to take over the coffee retail chain (beginning September 9), according to CNBC.

What a difference a CEO makes: The market capitalization impact of this leadership change totaled $27.2 billion on August 13 alone as Starbucks’ added $21.4 billion while Chipotle’s fell $5.8 billion, CNBC noted.

Starbucks CEO Laxman Narasimhan was booted from the job after 16 months during which time the company’s stock lost 22% of its value after a string of weak earnings reports.

Meanwhile, Niccol presided over a turnaround at Chipotle following a 2018 tainted meat scandal. His turnaround began in March 2018 — ultimately yielding expectations-beating growth that sent Chipotle stock soaring 760%, according to the Wall Street Journal.

Can Niccol preside over a similar rise in Starbucks stock? At Chipotle, Niccol doubled revenue during his tenure through the following elements of strategy:

• Retrained workers in safety and wellness protocols.
• Opened about 1,000 new stores globally.
• Introduced new technology to streamline time-consuming work — such as guacamole processing.
• Modernized digital and mobile ordering and introduced digital pickup lanes.

Rather than rigidly apply the strategies that worked at the burrito chain to Starbucks, Niccol should identify the core problem impeding Starbucks’ expansion and use his strategic and operational skills to accelerate the coffee chain’s revenue growth.

If Niccol can double Starbucks’ revenues, investors will be richly rewarded.

How Starbucks Struggled Under Narasimhan’s Leadership

Narasimhan began leading Starbucks in March 2023 and presided over a significant decline in the company’s stock price. The coffee chain’s stock fell 22% as the S&P 500 rise more than 36%, according to FactSet.

I was surprised Starbucks Founder and former CEO Howard Schultz had urged hiring Narasimhan as CEO because he had no experience leading a retail food chain. Instead, Narasimhan has previously been CEO of Reckitt — which owns brands such as Lysol and Mucinex. Once he became CEO, “he spent months learning about Starbucks’ business, including training as a barista,” reported CNBC.

Evidently, that was not enough for him to spur growth at Starbucks. In April, the coffee chain cut its financial outlook for the second time in 2024 “as traffic in its cafes slowed, cutting into sales and profit,” the Journal reported. Moreover, Starbucks faced intensified competition in China — a major growth market for the company.

In May, Schultz argued the company’s strategy was flawed. He wrote the company needed to “improve its mobile order and pay experience and overhaul how it creates new drinks to focus on premium items that set it apart,” according to a Schultz LinkedIn post featured in a CNBC report.

Starbucks began looking to replace Narasimhan. “Our board, a couple months ago, started to engage in a conversation about the leadership of the company, and I made an overture through someone to Brian, and he took the call,” Mellody Hobson, now Starbucks’ lead independent director, told CNBC on August 13.

How Niccol Turned Around Chipotle

Starbucks’ board is confident Niccol can turn around the business quickly. “But what we saw with Brian was someone who’s, quite honestly, been there, done that — through all sorts of market environments, all sorts of cycles,” Hobson told CNBC. “When I talked to him I remember him saying, ‘I know what to do,’ ” she added.

Niccol’s accomplishments are impressive. When he became CEO of Chipotle in 2018, he helped the chain rebound from “its foodborne illness scandal and led its restaurants through the pandemic,” CNBC reported.

More recently, while other restaurants reported a sharp decline in consumer spending, Chipotle bucked the trend — enjoying increases in traffic and sales, CNBC wrote.

Here are the key elements of Niccol’s turnaround strategy for Chipotle, which drove a near-doubling of the burrito-chain’s sales to $10 billion in fiscal 2023, Reuters noted:

• Overcame food safety problems by retraining restaurant employees on safety and wellness protocols during working hours.
• Added new stores — nearly 1,000 new stores globally were opened under Niccol’s tenure.
• Streamlined operations by cutting guacamole preparation time by 50% through automation and sped up cooking by adopting robotic dual-sided grills.
• Modernized ordering by upgrading the quality and efficiency of the burrito chain’s digital and mobile ordering platforms.
• Added digital order pick-up lanes. Of the 271 new restaurants the company opened in 2023, 238 of them had one — dubbed a Chipotlane.

Chipotle’s Problems In 2018 Differ From Starbucks’ Issues In 2024

Niccol must identify and solve a different set of problems at Starbucks than he did at Chipotle. “Starbucks is a much more complicated model than Chipotle, with company and licensed stores, domestic and international locations, and a significant presence in struggling China,” BTIG analyst Peter Saleh wrote in a report featured by CNBC.

Starbucks has more internationally licensed locations than Chipotle, which mostly operates owned restaurants in the U.S.. Moreover, Starbucks locations in China, the company’s second-largest market, have continued to struggle due to local competition and a lagging economy, noted the Journal.

Additionally, while people still want Chipotle’s burritos, consumers’ economic concerns have reduced their desire for coffee — which could be Niccol’s biggest problem. “His challenge is to connect with a new customer,” Wedbush analyst Nick Setyan told CNBC.

“Aside from the power to change the direction of macro headwinds, we view the shareholder euphoria (as expressed in the share price this morning) as premature,” Setyan added.

Investors should hope Niccol recognizes and solves these different problems. There is a lesson in the bankruptcy of Bed Bath & Beyond — where the board hired a CEO from Target who proceeded to apply what worked at Target to a very different company with disastrous results, according to a May 2023 Forbes post. Bed Bath & Beyond filed for bankruptcy in April 2023.

If Niccol does not heed such lessons, he could end up misapplying what worked at Chipotle to Starbucks.

Can Niccol Accelerate Starbucks’ Revenue Growth?

To be sure, most analysts expressed great optimism about Niccol’s ability to turn around Starbucks. Here are some reasons why:

• Niccol can replace Schultz. “Brian is likely the one restaurant executive that has the gravitas to address the Howard Schultz Founder ‘overhang’, ” Evercore ISI analyst David Palmer told Reuters.
• Niccol can do what he did at Chipotle for Starbucks. “Starbucks picks up a hall-of-fame restaurant CEO, and his appointment … suggests a new era is under way,” TD Cowen analyst Andrew Charles told Reuters. “We see similarities between Chipotle’s 2018 turnaround for a premium brand, and what Starbucks needs in 2024 to improve traffic.”
• Niccol will fix Starbucks. “I cheered at the Starbucks news … the stock has been a colossal disappointment, as has Laxman … Brian Niccol just worked magic at Chipotle … he did all the right things and really drove the company using Chipotle lanes, through the use of digitization … Niccol will fix Starbucks,” Nancy Tengler, CEO of Laffer Tengler Investments, told Reuters.

Investors should be guardedly optimistic because a turnaround at Starbucks will hinge on Niccol’s ability to bring back consumers with new offerings and a more compelling store experience.

“While some of the slowdown can be attributed to a more sluggish consumer cutting back, much is also the result of a worsening store experience and a lack of innovation in areas like food,” GlobalData analyst Neil Saunders wrote in a note to investors featured by the Washington Post.