New Starbucks (SUB -0.71%) CEO Brian Niccol got about the warmest welcome in stock-market history when he was named the coffee giant’s new chief in August.
Shares of Starbucks jumped 24% when Niccol’s hiring was announced a month ago, adding roughly $20 billion to the company’s market cap. It’s rare to see that kind of value added by just a CEO appointment. But with Niccol’s track record with Chipotle and Starbucks’ own challenges under former CEO Laxman Narasimhan, it’s clear why investors loved the move.
Niccol stepped into the hot seat this week, and his first move was to post an open letter to Starbucks’ stakeholders. That was a smart choice, as the easiest way for him to communicate his initial diagnosis and intentions to employees, customers, and investors.
The new Starbucks leader seems to believe the company has gotten away from its core brand values, doing the things that have made the company great. Customer wait times are too long and the product is inconsistent, he said, especially in the U.S. Niccol outlined four initiatives for the company to improve its lackluster performance in the U.S.; let’s take a look.
Image source: Getty Images.
The turnaround plan
First, Niccol wants to empower baristas to take care of customers. This makes a lot of sense; bureaucracy can kill the flow in any restaurant. Front-line workers need to be able to make decisions to serve customers and handle special requests, and they need to be fully supported to be successful. Niccol said he intends 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, delivering high-quality drinks and food “on time, every time.”
Third, Niccol wants to reestablish 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 gotten away from that core value. Niccol proposes “inviting places to linger, with comfortable seating, thoughtful design, and a clear distinction between ‘to-go’ and ‘for-here’ service.”
Finally, he wants the brand to do a better job of telling its story. This could mean leaning into advertising and other ways of promoting itself more than it traditionally has.
What this means for Starbucks
Niccol’s plan seems like a good first step toward improving customer satisfaction and jump-starting Starbucks’ growth. Tackling customer complaints about slow service and inconsistent quality is the top priority, though Niccol understands that taking care of customers requires taking care of employees first.
Investors should expect more traditional advertising from Starbucks — a lever Niccol successfully pulled with Chipotle, another brand that had once avoided advertising. Starbucks’ brand is also in need of a refresh. For example, Niccol noted that the company owns its own coffee farm in Costa Rica, which serves as the base for its research and innovation in coffee, but it hasn’t typically talked about that. Sharing more of the farm-to-cup stories that go into every cup of Starbucks coffee would help the brand regain some of its authenticity, and push back on the notion that it’s become a commodified chain.
Similarly, remaking Starbucks as a “third place,” where customers might want to meet a friend or just 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, welcoming stores, though the company has gotten away from that in the mobile-order-and-pay era. It has the resources to invest in store design, and is likely to do a revamp much 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 went up 1.2% on Tuesday, followed by a 5% jump on Wednesday on a lower-than-expected inflation report.
Of course, Starbucks needs to execute that plan. And high expectations are already baked 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 with sales tumbling in China, which will likely be the next area of focus after the U.S.
Still, Starbucks has a number of competitive advantages. These include its brand, an entrenched rewards program, a wide range of in-store experiences, and a strong business selling bagged coffee and ready-to-drink beverages in stores.
I’d like to see some evidence that the business is improving, but Niccol seems to be on the right track. At this point, I’d call Starbucks a buy, but a cautious one. The stock should pay off for patient investors as the turnaround plan plays out.
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