On August 13, coffee giant Starbucks (NASDAQ: SBUX) shocked the investment world when it named Brian Niccol as its new CEO. Niccol was previously CEO of Chipotle Mexican Grill. And to lure him away, Starbucks was willing to completely empty the bank. His total pay package is reportedly worth more than $110 million.
With one of the biggest pay packages on Wall Street, Niccol is now a superstar CEO. But Starbucks didn’t bring him in to maintain the status quo. On the contrary, the company is desperate to turn things around.
On September 10, Niccol unveiled a 100-day plan to fix things at Starbucks. And it all starts with his company in the US
What’s the problem with Starbucks?
Niccol just penned an open letter to all of Starbucks’ stakeholders, and he didn’t beat around the bush. He said that in the chain’s U.S. coffee shops, “it can feel transactional, menus can feel overwhelming, product can be inconsistent, wait times can be too long, or handoffs can be too hectic.”
These observations, especially the last one, aren’t necessarily new. In the second quarter of 2024, then-CEO Laxman Narasimhan said that some of Starbucks’ most loyal customers “were sometimes choosing not to complete their orders, citing long product wait times and availability.”
Former Starbucks CEO Howard Schultz echoed Niccol’s sentiments in a social media post earlier this year. Schultz specifically used the term “transactional” to describe a sentiment that should be avoided, as did Niccol in his open letter. But Schultz also reportedly approved of Niccol’s plan to start with the U.S. side of the business, saying that “U.S. operations are the primary reason the company is down.”
Starbucks’ North American segment (the majority of which is the U.S.) has seen a decline in transactions over the past two quarters. This happens occasionally in a restaurant business. But in this case, the company believes the decline could have been avoided by addressing issues within its control. And that’s why it’s imperative to turn things around.
What’s the plan now?
If this sounds like a small problem for Starbucks, I think it’s fair to say that it is. The company wrapped up its fiscal third quarter in June. Through the first three quarters of its fiscal 2024 year, it generated more than $20 billion in North American revenue, up 3% from the same three quarters of its fiscal 2023 year.
North America also reported operating income of more than $4.1 billion in the first three quarters of fiscal 2024, an increase of 5%.
In short, North America is still a huge and growing business for Starbucks, and it is profitable. The company is not experiencing an outright disaster. But the problems it does have are self-inflicted, and that is why it needs to fix things.
For Niccol, part of the plan for Starbucks is to perfect the morning experience, which is crucial. After all, management says that about half of its revenue comes in the morning hours. And starting someone’s day with a bad coffee experience is an easy way to lose customer loyalty.
Niccol also wants to invest in the company’s baristas. He wants to get customers interested in eating in the cafes again, rather than just taking them out. And he wants customers to have a better connection with the brand. But this all sounds like suggestions Schultz made earlier this year.
That’s why I think Starbucks shareholders should be hopeful about the future. While Starbucks stock has been one of the best investments of the past 30 years, the company has struggled every time Schultz has stepped back. He seems to have a good grasp of what makes Starbucks great that others don’t. Niccol’s plan sounds a lot like something Schultz would come up with. And so I think Starbucks’ prospects are finally improving without Schultz as boss.
To be clear, Niccol’s plan focuses only on the next three months in the U.S.; there are issues elsewhere in the business that will eventually need to be resolved, particularly in China. In short, there is still plenty of work to be done. But I believe Starbucks has gotten back on track quickly under Niccol’s leadership, and we are excited about that.
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Jon Quast has positions in Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Starbucks’ new superstar CEO just released his plan to fix things. Here’s what investors need to know. was originally published by The Motley Fool
