- Brian Niccol is thrilled for Starbucks investors and appalled for Chipotle investors.
The stock price had charted its course, and thus no one was surprised when Starbucks ousted its CEO Laxman Narasimhan on Tuesday. For many investors, even the removal of an old, unsuccessful CEO is a buy signal. However, the 25% increase in Starbucks' stock price on Tuesday was primarily due to Narasimhan's successor: investor favorite Brian Niccol, previously CEO of the restaurant chain Chipotle.
To understand why the markets reacted so positively, one need not travel far. A visit to the Skyline Plaza shopping center in Frankfurt is sufficient. There, one of the two Chipotle branches in Germany is located, and ordering there often means waiting in line for more than 20 minutes. Just a few meters away, the next Starbucks is relatively quiet these days. Apparently, customers prefer to pay 14.80 euros for a hearty, healthy burrito than seven euros for a coffee with a cool logo. Starbucks' coffee was never the best, and the company knew that. What Starbucks did have was its brand strength.
Until consumers experienced three years of real wage losses due to inflation in many parts of the world. Now, customers are more price-sensitive and look for the best value for their money. And the best often means: much, high-quality, and long-lasting. In other words: Chipotle, which has excited many US citizens with its healthy Mexican cuisine, where the chain has recently seen particularly strong growth.
While Chipotle's market value has grown by 24% since the beginning of the year, Starbucks' has fallen by 18%. Lately, Chipotle has been trading almost like a luxury stock, with a price-to-earnings ratio of 50. Even hot tech stocks like Nvidia and Microsoft seem moderately valued compared to Chipotle.
Narasimhan was unable to pull Starbucks out of the crisis. The man behind Chipotle's success, Brian Niccol, will now take over at Starbucks on September 9. Until then, interim CFO Rachel Ruggeri will step in, while Narasimhan must leave the company immediately. Niccol has a lot of work ahead of him, left by his predecessor. Under Narasimhan, Starbucks missed almost every Wall Street expectation. The revenue forecast for this year has already been lowered twice, leading to a gradual loss of confidence in Narasimhan. Even Starbucks patriarch Howard Schultz publicly criticized the state of the company, writing on the career network LinkedIn that the company had "fallen from grace" and that "The answer lies not in the data, but in the stores". He appealed for a stronger focus on the customer experience in the stores.
What Schultz meant was Narasimhan's strategy of making Starbucks more efficient. The focus was on shorter wait times, faster payment, cheaper purchase prices, smooth logistics, and more. Narasimhan acted like a turnaround manager and restructuring expert, rather than a product manager. This type of manager is sometimes in demand because they deliver short-term profits. However, many concepts do not hold up in the long run. The latest example is sportswear manufacturer Adidas, which initially performed well under finance chief Kasper Rorsted, but then the product pipeline dried up under the efficiency maxim. Only since the new CEO Bjørn Gulden came on board, a confessed product manager, has it been running again. The motto is: you have to put something in at the top to get something out at the bottom.
Starbucks patriarch Howard Schultz is now hoping for the same effect with Brian Niccol. The 49-year-old brings extensive experience in the restaurant industry. After stints at Pizza Hut and Taco Bell, he became CEO of Chipotle in 2018. A Starbucks statement says his "focus on people and culture, brand, menu innovation, operational excellence, and digital transformation" has set new standards in the industry and driven significant growth and value creation. In other words: Niccol aims to improve the product. And if the product is good, revenue and efficiency will follow naturally.
Indeed, under Niccol, Chipotle's revenue nearly doubled and profits increased nearly sevenfold. The company's stock price also rose by nearly 800 percent during his tenure. Investors' confidence in Niccol's leadership was evident on Tuesday, as Chipotle's stock price fell by nearly 12 percent at its peak.
Meanwhile, Schultz is optimistic. He welcomes Niccol with the words: "I believe he is the leader Starbucks needs at this critical juncture in its history. He has my respect and full support."
The 25% increase in Starbucks' share price on Tuesday was primarily attributed to the excitement surrounding Brian Niccol, Starbucks' new CEO, known for his success with Chipotle. Furthermore, the strong performance of Chipotle's stock, with a 24% growth since the beginning of the year, could potentially indicate positive expectations from investors for Niccol's leadership at Starbucks as well.
