Mobile app, China are challenges

Brian Niccol steps in as CEO of Starbucks on Monday, taking over as the coffee giant’s sales slump and stock price falls.

Starbucks tapped Niccol in August to take over from Laxman Narasimhan, who held the position since March 2023. Niccol had served as chief executive of Chipotle Mexican Grill since 2018, turning around the fast-casual chain after a series of foodborne illness outbreaks and leading it through the pandemic. Prior to Chipotle, Niccol was CEO of Taco Bell, which Yum Brands owns.

On the day that Starbucks announced Niccol’s appointment, shares of the coffee giant soared more than 24%, the best day ever for the stock. Wall Street analysts also cheered the news, calling him a “dream hire” and a “hall of fame restaurant CEO.”

“Brian deeply understands brands, operations and innovation, and has an enduring commitment to supporting the retail teams who serve customers in store. We look forward to the fresh ideas that Brian will bring to our business,” a Starbucks spokesperson said in a statement to CNBC.

Niccol comes from a marketing background and started his career at Procter & Gamble. He then moved to Yum Brands in various marketing positions before ascending to lead Taco Bell. That marketing expertise was useful when he joined Chipotle and will likely also prove valuable at Starbucks.

But as he takes over Starbucks, Niccol is dealing with a larger and more complex business than Chipotle. The burrito chain’s sales reached $9.9 billion last year; Starbucks made $36 billion in revenue in fiscal 2023. And while the vast majority of Chipotle restaurants are in the U.S., more than half of Starbucks cafes are outside of North America.

Turning around the sprawling Starbucks business won’t be easy.

Niccol is expected to share more details about his plans for the chain on the company’s fiscal fourth quarter earnings call, which will likely take place at the end of October.

Here are the six problems that Niccol needs to fix at Starbucks:

Like most restaurant chains, Starbucks has been hiking its prices in recent years in response to inflation. Last year, it looked as if the coffee giant was able to escape the same consumer price sensitivity that was hitting other restaurant companies, like Outback Steakhouse owner Bloomin’ Brands.

However, the last two quarters have shown that Starbucks customers are pulling back. Executives have said they’re losing occasional customers, who are seeking out value instead. Those consumers can cut Starbucks coffee out of their budgets and instead get their caffeine fix at home or from rivals with cheaper drinks, like Dunkin’ or McDonald’s.

This summer, Starbucks has been trying to bring back customers by leaning on promotions, like half-off any customized drink on Fridays. But discounts can eat into profits, making it tricky for restaurants to find the right balance.

As CEO, Niccol will have to figure out how to lower prices — or convince consumers that a latte is worth $6.

In recent years, Starbucks has credited younger consumers for the boom in cold coffee that has boosted its revenue and profits. At the same time, Gen Z has also led pushback against the coffee brand once seen as progressive.

For decades, Starbucks cultivated an image as a caring employer and a corporate ally, boasting about its superior benefits for baristas and support for liberal causes like same-sex marriage. However, that identity began shifting as the company fought to curb the unionization movement that hit its cafes, starting in 2021.

The baristas leading the charge to unionize were younger and vocal about sharing their perspectives on social media. The union fight also led to other controversies, like arguments over store managers removing Pride decorations or confusion about the company’s stance on Israel’s offensive in Gaza, which led to a boycott.

Earlier this year, Starbucks Workers United and the company defrosted their relationship and resumed contract negotiations. But many younger consumers now have a different image of the company, creating an identity crisis for the brand that Niccol and his team will need to solve.

Mobile orders account for roughly a third of Starbucks’ U.S. orders. At many Starbucks locations, though, it seems like they’ve completely taken over, frustrating customers and baristas alike.

Chipotle spotted the rise of digital ordering early, investing in secondary assembly lines dedicated to online orders and other ways to keep operations efficient. But Starbucks hasn’t made the same investments, resulting in operational issues and a worse customer experience. It’s been rolling out new equipment that will automate some drink-making tasks, but the process has been slow.

On their face, digital orders offer customers a more convenient way to buy their drinks. But baristas have complained that they can overwhelm stores, particularly during promotions. Customers are also more likely to order more complicated drinks on the app, piling on the syrups, foams and other add-ons that boost profits but take longer to make. And those who prefer to order in person will wait longer as baristas balance assembling digital orders.

Maybe most importantly, the shift to mobile ordering has eroded Starbucks’ in-store experience as what longtime CEO Howard Schultz billed as a “third place” between home and work, adding to the brand’s identity crisis.

The pumpkin spice latte, a perennial best-seller, returned in August and is reportedly already driving traffic growth for Starbucks. But more recent additions to the menu haven’t fueled the same excitement.

Its foray into energy drinks with an iced line failed to stick with customers, possibly because the drinks were only available in Starbucks’ large “venti” size. A spicy extension of its popular Refreshers likewise garnered negative reactions online. And while the chain’s lavender line was “extremely successful,” according to Narasimhan, it wasn’t popular enough to reverse U.S. traffic declines during its fiscal third quarter.

At Chipotle, Niccol ramped up the chain’s new product pipeline, leading to the introduction of popular limited-time items like carne asada and long-awaited additions like quesadillas. While it was a far cry from Taco Bell’s frenetic menu innovation, it was a major change for Chipotle, helping drive traffic to its restaurants and convincing consumers to pay more for their protein options.

At Starbucks, Niccol will have to lead the charge to figure out what new food and drinks will get customers excited again.

China is Starbucks’ second-largest market, but it might be the coffee chain’s biggest headache right now. Starbucks said its same-store sales in China fell 14% in its latest quarter.

The country’s slow rebound from the pandemic has been followed by a sluggish consumer environment and an increase in local competitors, which often undercut Starbucks on price. For example, rival Luckin Coffee, fully recovered from an accounting scandal, has overtaken the Seattle-based company as the coffee chain with the largest footprint in China.

In late July, facing pressure from activist investors like Elliott Management, then-CEO Narasimhan said Starbucks was exploring strategic partnerships for China. That step could mean partnering with a tech company — or forming a joint venture with a local partner who could handle day-to-day operations.

Now, with Narasimhan out and activists pacified, Niccol will have to decide how to tackle the company’s China business. Can the chain return to its former glory in the market, or is it time to take step back after 25 years?

For roughly a quarter of a century, off and on, Schultz has been in charge of Starbucks, the Seattle-based company that he turned into a global coffee behemoth. After his latest stint as interim CEO from 2022 to 2023, he vowed never to return as chief executive and relinquished any formal role at the company.

Still, the coffee chain has long struggled to shrug off his influence, even when Schultz isn’t officially in the C-suite.

He’s been vocal about the chain’s recent struggles, airing his views first in a public LinkedIn post and then on a three-hour episode of the “Acquired” podcast. Mellody Hobson, who ceded her position as chair of the Starbucks board to Niccol, kept Schultz in the loop about discussions to oust Narasimhan, his handpicked successor, and to hire the Chipotle CEO in his stead. Schultz also owns a 2% stake in Starbucks.

In the past, Schultz’s influence has been blamed for the company’s succession issues, similar to those of Disney. And despite his retirement, investors have remained concerned about his level of involvement with the company, pressuring the stock.

Niccol arrives at Starbucks as both CEO and chair, and with six years of experience leading a restaurant company after its founder stepped down. Only time will tell if that’s enough to overcome Schultz’s shadow.