Starbucks has shockingly moved on from its new CEO. You’ll never believe who his replacement is.

Early on August 13th — before I even started sipping my second cup of coffee — Starbucks (SBUX 22.13%) shockingly announced that it had hired Brian Niccol as its new CEO. Niccol was CEO of Chipotle Mexican Grill (CMG -11.45%) of 2018. Starbucks shares rose on the news, and I don’t think it’s an overreaction at all.

Starbucks shares are down about 40% from their 2021 highs, and I have (mostly) fault management. In September 2023, longtime CEO and board member Howard Schultz officially stepped down from his third term as CEO. But while he refrained from taking up the mantle for a fourth time, he publicly expressed concern about the direction of the coffee giant in his absence.

Simply put, traffic is down at Starbucks, especially at US locations. The company’s 2024 fiscal year began in October. And during the fiscal second quarter and fiscal third quarter, US transactions fell 7% and 6%, respectively.

As Schultz pointed out in a social media post earlier this year, it wasn’t so much the numbers that were the problem for Starbucks — bad quarters happen no matter how good management is. The problem was whether management could correctly identify the problem in order to correct it. And there were reasonable doubts that Starbucks management was on the right track.

Starbucks is now taking drastic measures to solve its problems, handing over the reigns to an operator and problem solver in Niccol.

Why this may be the news Starbucks shareholders have been waiting for

When Niccol moved away from Huh! trademarksTaco Bell joined Chipotle Mexican Grill in 2018, it had incredibly big shoes to fill. Founder and CEO Steve Ells has nurtured his beloved restaurant concept into a hot chain with more than 2,400 locations. But while Ells had been an exceptional visionary, he had his share of struggles.

Chipotle’s systems and processes have often been found wanting, leading to regular virus outbreaks in its restaurants. By comparison, things were much more under control under Niccol.

Moreover, profitability has skyrocketed for Chipotle with Niccol in the CEO seat. In 2017 (the last full year before Niccol), the company had a profit margin of just 4%. By comparison, the profit margin was over 12% in 2023 and over 14% in the first half of 2024. This operating leverage is spectacular and Niccol deserves a lot of credit for his leadership.

CMG Profit Margin data by YCharts

Niccol is a worthy hire for a brand as iconic as Starbucks. But this is clearly a shocking hire. For context, CEO Laxman Narasimhan only fully took over in March 2023, after an orderly succession plan that began in September 2022. In other words, Narasimhan was the result of a clear, methodical plan. But the company is moving on now, after just 17 months.

According to Narasimhan, Starbucks was struggling to attract new customers to the brand because those potential customers didn’t like the value proposition. Therefore, to stimulate sales growth, the company tried to offer more promotional prices to bring people.

By abruptly ousting Narasimhan and poaching Niccol from Chipotle, the board apparently disagreed with Starbucks’ current direction, likely to Schultz’s relief.

To be fair, Niccol’s situation with Starbucks may not be as straightforward as the situation with Chipotle in 2018. In turn, Chipotle’s struggles have been self-inflicted. But for Starbucks, this is of course a challenging operating environment for all players. For example, McDonald’s and other fast food giants are currently in a price war, offering more and more bargains to bring in diners.

That said, it’s worth noting that Chipotle hasn’t joined its peers in offering promotional pricing. And according to Schultz, Starbucks needs to strengthen its “premium position” with consumers. Given Chipotle’s ongoing premium pricing, perhaps Niccol will also be able to keep Starbucks menu prices higher than peers without alienating customers.

Fortunately, I think Starbucks has some low-hanging fruit that Niccol can quickly pick. About 60% of the company’s business comes from its base of nearly 34 million rewards customers. But in Q2, management saw a double-digit drop in orders, meaning customers ordered through the app but failed to pick up their order.

Starbucks management said these customers primarily cited long wait times and order accuracy as reasons they did not complete their order. To be fair, management noted an improvement in Q3. But this is an operational problem that frustrates the brands’ most loyal customers.

If Starbucks can quickly resolve this operational issue, it would go a long way in strengthening this premium brand position. In my view, this should be one of Niccol’s first orders of business and something investors can watch with high expectations in the coming quarters.