Starbucks’ turnaround plan is here. Is coffee stock a buy?

New Starbucks (SBUX -0.71%) CEO Brian Niccol received the warmest reception in stock market history when he was named the coffee giant’s new boss in August.

Starbucks shares surged 24 percent when Niccol’s hiring was announced a month ago, adding about $20 billion to the company’s market capitalization. It’s rare to see such added value just by appointing a CEO. But with Niccol’s track record with Chipotle and Starbucks’ challenges under former CEO Laxman Narasimhan, it’s clear why investors liked the move.

Niccol stepped into the hot seat this week, and his first move was to post an open letter to Starbucks stakeholders. It was a smart choice as it was the easiest way for him to communicate his diagnosis and initial intentions to employees, customers and investors.

The new Starbucks leader seems to believe that the company has strayed from its core brand values ​​by doing the things that made the company great. Customer wait times are too long and the product is inconsistent, he said, especially in the US. Niccol outlined four initiatives for the company to improve its poor performance in the US; let’s take a look.

Image source: Getty Images.

The return plan

First, Niccol wants to empower baristas to take care of customers. This makes a lot of sense; bureaucracy can destroy the flow in any restaurant. Frontline workers must be able to make decisions to serve customers and handle special requests and must be fully supported to be successful. Niccol said he plans to make Starbucks the best place to work, building on its traditional leadership as a retail employer.

The second initiative is to meet customer expectations by offering high-quality drinks and food “on time, every time”.

Third, Niccol wants to rebuild the Starbucks brand around the in-store experience. Founder Howard Schultz created the coffee chain as a “third place” away from home and work, but in the digital age, Starbucks has lost sight of that core value. Niccol proposes “inviting places to linger, with comfortable seating, thoughtful design and a clear distinction between ‘to-go’ and ‘to-go’ service”.

Ultimately, he wants the brand to do a better job of telling its story. That could mean leaning into advertising and other ways to promote yourself more than it traditionally has.

What does this mean for Starbucks?

Niccol’s plan appears to be a good first step toward improving customer satisfaction and jump-starting Starbucks’ growth. Addressing customer complaints about slow service and inconsistent quality is the top priority, although Niccol understands that taking care of customers requires taking care of employees first.

Investors should expect more traditional advertising from Starbucks — a lever that Niccol has achieved with Chipotle, another brand that once shunned advertising. The Starbucks brand also needs a refresh. For example, Niccol noted that the company owns its own coffee farm in Costa Rica, which serves as a base for its coffee research and innovation, but usually hasn’t talked about it. Sharing more of the farm-to-cup stories that go into each cup of Starbucks coffee would help the brand regain some of its authenticity and refute the idea that it has become a commodity chain.

Similarly, remaking Starbucks as a “third place,” where customers might want to meet a friend or simply relax for a while, is a priority. Compared to both independent coffee shops and other chains, Starbucks has long stood out for its emphasis on comfortable and welcoming stores, though the company has gotten away from that in the era of mobile ordering and payment. It has the resources to invest in store design and is likely to do a revamp, as it did when Howard Schultz returned as CEO in 2008.

Is Starbucks a buy?

It’s hard to judge a new CEO after just the first few days on the job. But Niccol’s letter was a smart move, and investors greeted it warmly: the stock rose 1.2% on Tuesday, followed by a 5% gain on Wednesday, on a lower-than-expected inflation report .

Of course, Starbucks needs to execute that plan. And high expectations are already built in, with the stock now trading at a price-to-earnings (P/E) ratio of 27.5.

Starbucks is a huge business, and a turnaround could take years. This is especially true if sales fall in China, which will likely be the next area of ​​interest after the US

However, Starbucks has a number of competitive advantages. These include its brand, a strengthened rewards program, a wide range of in-store experiences and a strong business selling bagged coffee and ready-to-drink beverages in stores.

I would like to see some evidence that the business is improving, but Niccol seems to be on the right track. Right now, I’d call Starbucks a buy, but a cautious one. The stock should pay off for patient investors as the recovery plan unfolds.