On Aug. 13, coffee giant Starbucks (NASDAQ: SBUX) shocked the investing world when it named Brian Niccol as its new CEO. Niccol was formerly CEO at Chipotle Mexican Grill. And to lure him away, Starbucks was willing to absolutely break the bank. His total pay package is reportedly worth over $110 million.
With one of the largest 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 Sept. 10, Niccol laid out a 100-day plan to start fixing things at Starbucks. And it all starts with its business in the U.S.
What’s the problem with Starbucks?
Niccol just wrote an open letter to all of Starbucks’ stakeholders, and he didn’t mince words. He said that in the chain’s U.S. coffee shops, “It can feel transactional, menus can feel overwhelming, product is inconsistent, the wait too long or the handoff too hectic.”
These observations — particularly the final one — aren’t necessarily new. In the second quarter of 2024, then-CEO Laxman Narasimhan said that some of Starbucks’ most loyal customers “sometimes chose not to complete their order, citing long wait times of product and availability.”
Former longtime Starbucks CEO Howard Schultz echoed Niccol’s thoughts in a social media post earlier this year. Schultz specifically used the term “transactional” to describe a feeling to be avoided, as did Niccol in his open letter. But Schultz would also approve of Niccol’s plan to start with the U.S. side of the business, since he said that “U.S. operations are the primary reason for the company’s fall from grace.”
In Starbucks’ North America segment (most of which is the U.S.), transactions have dropped during the last two quarters. This happens from time to time with a restaurant business. But in this case, the company believes the drop could have been avoided just by addressing things within its control. And that’s why it’s imperative to turn things around.
So what’s the plan now?
If this sounds like a small problem for Starbucks, I believe it’s fair to say that’s because it is. The company finished its fiscal third quarter in June. During the first three quarters of its fiscal 2024, it generated revenue of over $20 billion in North America, which was up 3% from the same three quarters of its fiscal 2023.
Also during the first three quarters of fiscal 2024, North America had over $4.1 billion in operating income, which was up 5%.
In short, North America is still a huge and growing business for Starbucks, and it’s profitable. The company isn’t experiencing an outright disaster. But the problems it does have are of its own making, which is why it’s imperative to fix things.
For Niccol, part of the plan for Starbucks is perfecting the morning experience, which is crucial. After all, management says roughly half of its sales come during the morning hours. And starting someone’s day off with a bad coffee experience is an easy way to lose a customer’s loyalty.
Niccol also wants to invest in the company’s baristas. He wants to get customers interested in dining in its cafes again rather than just carrying out. And he wants customers to better connect with the brand. But all of these sound like the suggestions that Schultz made earlier this year.
This is why I believe Starbucks’ shareholders should be hopeful about the future. While Starbucks stock has been one of the greatest investments over the last 30 years, the company has struggled each time Schultz has stepped away. It’s seemed like he has a firm grasp of what makes Starbucks great, whereas others haven’t. Niccol’s plan sounds a lot like something that Schultz would come up with. And so I think Starbucks’ prospects without Schultz in charge are finally improving.
To be clear, Niccol’s plan only addresses the next three months in the U.S.; there are problems elsewhere in the business that must eventually be resolved, especially in China. In short, there’s plenty more work to do. But I believe Starbucks has quickly returned to the right path under Niccol’s leadership, which is something to get excited about.
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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 the Business. Here’s What Investors Need to Know. was originally published by The Motley Fool
