News

Starbucks ( SBUX ) investors are on a caffeine high.

News that Chipotle's ( CMG ) Brian Niccol, 50, will replace Laxman Narasimhan as CEO sent the shares soaring 23% on Tuesday. Niccol will take the helm on Sept. 9, while Starbucks CFO Rachel Ruggeri will serve as interim CEO to bridge the gap.

Niccol brings "the confidence of the investment community and the leaders around him," BTIG analyst Peter Saleh told Yahoo Finance over the phone.

But the fast food veteran will need to hit the ground running. Among his to-do list: turning around Starbucks' flagging US sales, reestablishing its footing as a premium coffee player, upping menu innovation, and increasing speed of service.

Niccol, whose past experiences were primarily focused in the US, also has to contend with a massive Chinese business heading in the wrong direction.

To add to the pressure, two famed activist investors, Elliott Management and Starboard Value, have entered the scene in the last two months.

Wall Street pros say that unlike Narasimhan, who lasted less than 18 months on the job, Niccol will have more rope due to his track record.

"He's going to be given a lot more authority to make changes to the business, more time than Laxman, more resources, and he's definitely gotten the confidence of the investment community because he's done it before," Saleh added.

Chipotle's stock has jumped over 770% since he joined as CEO in March 2018.

Niccol, who led the burrito chain's comeback from its E. coli outbreak crisis, could engineer a new chapter for Starbucks.

"We see similarities between Chipotle's 2018 turnaround for a premium brand, and what Starbucks needs in 2024 to improve traffic," Andrew Charles of TD Cowen wrote in a note to clients.

The company is facing headwinds from all sides, as US consumers become more discerning amid high prices and recessionary concerns.

In its latest quarter, US same-store sales declined 2%, while foot traffic dropped 6%.

"We are operating in a challenging consumer environment," Narasimhan said in his last earnings call. "We see volume increase at home in our ready-to-drink business," as consumers opt for groceries over eating out.

New items like popping boba-like pearls and iced energy drinks had big launches but the effect didn't last, said Bernstein analyst Danilo Gargiulo.

"After the first week [of the boba release], the level of repeat transactions was not as high," Gargiulo told Yahoo Finance. "People were trying it the first time, but not trying it again."

There hasn't been a real hit since the Pumpkin Spice line in August-October 2023, per Charles. He is optimistic that could change under Niccol given his history of "on-brand menu innovation" at Chipotle like new proteins, quesadillas, and digital-only offerings.

A new image for a struggling brand

What's Starbucks' identity these days? The once-iconic brand has been battered by boycotts on social media and tussles with its unionized workers.

The company is also struggling with its perception of pricy drinks and slow service, as well as ineffective marketing and rewards programs in the age of digital ordering.

Its active rewards members were up 3% year over year in Q2 to 33.8 million, but lower than the 34.3 million it saw in Q1.

Niccol, a former CMO at Yum! Brands ( YUM ) owned Pizza Hut and Taco Bell, will need to overhaul Starbucks' image to gain a new generation of fans.

Niccol could "help Starbucks better identify its brand identity and better utilize marketing to create brand buzz," Charles wrote.

Increasing throughput, or how fast customers can get in and out of the store, is sorely needed to improve business.

Starbucks' Siren Craft System , intended to simplify the drink-prepping process, showed some early signs of promise, but shareholders are looking for bigger improvements.

Narasimhan said the company planned to roll out a refit for its espresso machines later this quarter, which would "improve espresso throughput by up to 15%."

"Early assessments demonstrate the capability to drive a 10- to 20-second wait time reduction," he said.

Under Niccol, Chipotle has been known for its throughput, with transactions up 8% in its latest quarter. It's been testing a dual-sided grill at 10 restaurants over the last year.

"The grill can cook the chicken and steak in under half the time ... with consistent execution and the same sear and char," Niccol said on an earnings call.

The grill is set to roll out to an additional 74 high-volume restaurants this year, with further expansion in the future.

"We believe a similar playbook can be implemented at Starbucks that will complement automated equipment efforts," Charles wrote.

China, its second-largest market, has been Starbucks' worst-performing segment. In Q3, same-store sales fell 14% compared to last quarter when they were down 11%.

Narasimhan said the team is in the "very early stages" of exploring joint ventures and strategic partnerships in technology, real estate, and supply chain.

In a client note, Bank of America analyst Sara Senatore said Starbucks has been affected by industrywide struggles.

"Intense competition is the natural state of restaurant markets and even the strongest brands are not insulated," she said. "The direction of SBUX's China same-store sales growth is strongly correlated with those of other global brands. And all are correlated with macro factors (GDP)."

Niccol will have to win over customers against local competitors like Luckin Coffee ( LKNCY ) amid rising nationalism and unstable macroeconomic conditions. The company still aims to have 9,000 locations in China by 2025, from its current 7,306 stores.

Wedbush analyst Nick Setyan has doubts that Niccol can move mountains like he did at Chipotle, given Starbucks' long-entrenched problems and the overall consumer environment.

"Unless he has the power to change macro headwinds, to bring the lower-income customer back to Starbucks, I'm just not sure what the game plan can be," he told Yahoo Finance.

Setyan said he's "a big skeptic here in terms of what Brian Niccol can bring; I think the challenges are much bigger."

He anticipates it will take roughly three quarters to see some kind of results from Niccol.

Saleh calls it a "different beast" than what Niccol has dealt with before, but said he "can't think of many other leaders that would have been a good fit for this company."

He projected any benefits from a turnaround won't be realized until 2026.

And this could just be the beginning of a larger shake-up at Starbucks, per CFRA analyst Sean Dunlop.

"We suspect that between his own excellent record and investors' deep discontent with the status quo, Niccol should have carte blanche to make sweeping organizational changes," Dunlop wrote in a note to clients.

—

BrookeDiPalma