Can Brian Niccol Save Starbucks?

It’s not often that a personnel change can move a stock by double-digit percentages, but that’s exactly what happened on Tuesday when Chipotle (CMG -2.78%) CEO Brian Niccol said he would jump for the top job at Starbucks (SBUX 0.53%). Shares of Chipotle are down 11% as of Tuesday morning, while Starbucks is up 21%. In total, Niccol’s move represented a nearly $30 billion change in market capitalization.

Niccol is rightly regarded as a star in the restaurant industry, having taken the helm of Chipotle in 2018 when the company was still reeling from the aftermath E. coli crisis. Before that, he also had an impressive stint as CEO of Huh! trademarksTaco Bell.

Now Niccol faces a similar challenge as it takes on Starbucks, which has also remained under CEO Laxman Narasimhan as comparable sales decline and the company struggles to fend off new competition from China – a key growing market.

Can Niccol get Starbucks back on track? Let’s look at the challenges facing the coffee giant.

Image source: Starbucks.

A bitter steak

Starbucks has dominated the coffee industry for more than a generation, but business is arguably as weak as ever.

Comparable sales fell 3% in its most recent quarter, even in a generally strong environment for restaurants, and comparable transactions fell 5%. Companies fell in both North America and international markets, with particular weakness in China, where they fell 14%.

As the company’s mobile payment and ordering program expanded, Starbucks struggled to meet customer demand by delivering drinks on time and accurately. Founder Howard Schultz has said the company lacks adequate capacity, but the Starbucks brand appears to be deteriorating with the decline in service.

Rewards members abandon their order after seeing long wait times. In other words, Starbucks is struggling with production, which has long been a key point at Chipotle and something the burrito chain focused on long before Niccol came along.

There have also been complaints that the quality of its coffee has declined, and the company has switched from grinding and brewing in large batches to individual Keurig-style cups, which has turned off some customers.

Finally, Starbucks faces a different set of problems in China, where cheaper options have proliferated, undercutting the company’s product prices. Starbucks has long seen its premium experience as a way to differentiate itself, but with the weakness of the Chinese consumer economy, it may have to respond to the changing environment with a different strategy.

Can Niccol fix Starbucks?

Turning around Starbucks will be a more daunting task than what Niccol faced at Chipotle, which had far fewer locations and essentially only operated in the United States.

Starbucks has nearly 40,000 stores worldwide, with nearly half of them licensed, meaning Starbucks does not directly control them. This is an approach that Chipotle did not take. Fixing the business in China may require a different set of solutions than in North America, as price competition appears to be a significant problem there.

However, most of Starbucks’ challenges seem to be operational, and Niccol has plenty of experience in that area. Starbucks must deliver on its promise to serve a quality cup of coffee and deliver it to customers in a timely manner. That’s 90% of the business.

This will take time given the current circumstances, and the 20% pop in the stock today is expecting what Niccol can actually do. With activist investors involved at Starbucks, we could see other changes, but bringing Niccol on board should pay off. Investors will just have to be patient as it will likely take a few quarters for the change to play out. Niccol starts the job on September 9.