Can a CEO change help transform Starbucks’ business?

A change in leadership can have a drastic impact on a company’s strategy, its vision, and ultimately its financial performance. This month, the coffee chain giant Starbucks (SBUX 1.72%) made a big move by ousting the CEO and bringing in an established leader from Chipotle Mexican GrillBrian Niccol.

Investors reacted positively, with Starbucks shares rising on the move. Can this move fix Starbucks’ woes, and is the stock a good buy on this news?

Investors are hoping for a return to growth

Chipotle is known for being one of the fastest growing fast food chains in the world. Many stocks struggle to mimic their level of growth, and investors are often on the lookout for the “next Chipotle,” knowing that a business with similar growth opportunities could generate impressive returns.

Niccol took over as CEO of Chipotle in 2018. Since then, the company has doubled its sales from $4.9 billion to $9.9 billion last year. More impressively, its bottom line rose from $177 million to $1.2 billion.

In Starbucks, Niccol takes on a much larger company. Revenues for the past 12 months totaled $36.5 billion. But in the last two quarters, the company posted negative comparable sales numbers.

A big struggle for Starbucks these days is the challenge of balancing mobile ordering and the in-person experience. Former CEO Howard Schultz says the company’s problem is in-store and in the “mosh pit” that exists when there’s an influx of customers, leading to frustration and long wait times.

Fixing Starbucks may not be easy

There will be opportunities to address things like the ordering process and improving wait times, but this alone may not be enough to turn the business around.

A particularly worrisome issue for Starbucks, for example, is its international business. Addressing the problems in its stores could help boost sales in North America, but it may not be so simple in other parts of the world, where there are different economic concerns and competitors to worry about there.

In Starbucks’ most recent quarter, which ended June 30, North American comparable-store sales fell 2 percent, but international same-store sales fell 7 percent. In China, which is a key market for Starbucks, same-store sales fell 14 percent.

While Niccol has experience growing sales and profits for a chain as large as Chipotle, whether he can replicate that success at a much larger giant in Starbucks and solve growth problems in multiple international markets is a big question mark. Chipotle, for example, has more than 3,500 locations in total, the vast majority of which are in North America. Starbucks has more than 39,000 stores, of which 6,500 are in mainland China alone.

Starbucks may not be the unusual shopping spree it seems to be

A change in CEO can affect the trajectory of a company. But judging by the rise in Starbucks shares, investors may be overestimating the effect Niccol can have. While it can improve efficiency and change the ordering process in stores, it may not be able to turn Starbucks into a fast-growing business like Chipotle or fix all of the company’s problems.

Its China market, for example, is struggling with slowing growth, and that will make it harder for the business to find leverage to boost sales and ensure profits are also growing. There is a lot of low-cost competition out there. How Starbucks performs in China will be key to its overall performance, and investors shouldn’t expect a quick or easy fix.

At the very least, this process could take some time. It would be prudent for investors to take a wait-and-see approach and see if the CEO’s plans show some early results.

Buying the coffee stock on the assumption that the move will solve Starbucks’ problems and put it back on a growth path could prove costly. The company can change things over the long term, but a lot will depend on economic conditions, which could override any changes a CEO makes.

Starbucks may be a good buy and there is hope that the business will return to growing its operations. However, investors should be careful to temper their expectations and not bet on a quick turnaround.