Behind the story of Starbucks’ change of general

At a July 31 meeting at Starbucks headquarters in Washington, D.C., CEO Laxman Narasimhan stepped onto the stage, wearing a jacket emblazoned with the chain’s logo. He told the employees below about his excitement, as well as the signs of change.

“We are facing significant challenges. That’s for sure. But they are not insurmountable,” he said. A day earlier, he called for patience from investors as both profit and revenue fell from a year earlier. The company earned $9.1 billion in the second quarter.

However, Narasimhan’s time there was running out. The board was looking for a replacement. Less than two weeks later, Narasimhan was gone.

On August 13, the world’s largest coffee chain unexpectedly announced the appointment of Chipotle CEO Brian Niccol to replace Narasimhan, causing the company’s stock to rise 24% in just one session. The move also extended the period of turmoil at Starbucks. This year, Starbucks has been repeatedly criticized by two major shareholders and former CEO Howard Schultz. Their revenue has also slowed recently. This is the company’s third CEO appointment in less than 2.5 years.

By selecting Niccol, a veteran of the restaurant industry, Starbucks’ board of directors wanted to restore stability to the company. Niccol, 50, helped turn the Chipotle chain into an industry giant after the company was rocked by a food safety scandal. Niccol is now confident about Starbucks’ chances of turning things around.

Niccol’s appointment is widely seen as a natural result of months of internal debate within Starbucks over direction and leadership. Investors had grown increasingly skeptical about the company’s ability to meet the ambitious financial targets it had set before Narasimhan joined. Some employees said they had read articles about the shareholder demands. The board had supported Narasimhan, but had privately discussed finding a replacement while he was still in the job.

In an interview, Starbucks President Mellody Hobson said they had been thinking about the company’s direction for a long time. The board had no special relationship with Niccol. However, they considered him the best candidate to replace Narasimhan. They even convinced him directly to join Starbucks, rather than using a recruiting agency.

Hobson asked an acquaintance to call Niccol to keep the information confidential and was delighted when he answered the call. She then flew 25 hours from Europe to California (USA) to meet Niccol and convince him to take the job.

Starbucks’ board of directors controlled the entire hiring process, using only a few outside advisers, Hobson said. They also invited Schultz to participate. He was fully supportive of the plan.

To convince Niccol to leave Chipotle, where he had helped turn things around and was being paid handsomely, Starbucks offered him both the CEO and board roles. Niccol held both roles at Chipotle.

“We have an opportunity to bring in Brian Niccol. He is probably the most successful CEO in the industry right now,” Hobson said.

Narasimhan was informed of Starbucks’ decision last Sunday. When he was tapped to be Starbucks CEO in the summer of 2022, Narasimhan had little experience running a global restaurant chain. He was CEO of British baby formula maker Reckitt Benckiser, helping steer the company through Covid-19. He also served as global chief commercial officer of PepsiCo.

Starbucks’ board of directors had a plan to introduce Narasimhan to the chain’s traditions under the supervision of then-CEO Schultz. Just weeks after signing the contract in September 2022, Narasimhan was put on barista training. He learned how to make lattes and worked at the drive-thru counter. The training lasted six months. Narasimhan listened to suggestions from employees and once burned his hand while removing cheese from a sandwich.

Schultz handed over the reins to Narasimhan in March 2023, about 10 days earlier than planned. “As I hand over Starbucks, please know that I have the utmost confidence in you,” Schultz wrote to Narasimhan in a letter. Schultz said it was his last time running the company he built.

Narasimhan must adhere to an ambitious roadmap set by Schultz and other executives, with higher revenue and profit targets that are expected to run through 2025.

He quickly made his mark. Working in Starbucks cafes and talking to employees led Narasimhan to set a goal of streamlining supply chains and operations. He also saw a direct correlation between inefficient beverage preparation and long customer lines.

At headquarters, he reduced leadership positions and reassigned responsibilities by region. He also brought in a leader from retailer Target to improve Starbucks’ supply chain. Narasimhan also hosts a regular “Snacks With Laks” forum for employees to share their ideas. He also continues to work as a barista at Starbucks stores.

Investors were initially optimistic. Six months after Narasimhan joined the company, Starbucks shares rose 8%, while the S&P 500 index fell 15%.

But then bigger challenges began to emerge. Like other chains, inflation forced Starbucks to repeatedly raise prices. Customers complained about slow service times, in part because Starbucks’ ordering app increasingly allowed customers to customize their drinks.

In China, a huge market that Schultz has worked hard to develop for decades, Starbucks has also gradually lost its number one position. In mid-2023, Luckin Coffee surpassed Starbucks to become the largest coffee chain in the country in terms of revenue and number of stores. Fast delivery and new flavors have helped Luckin recover strongly from the accounting fraud scandal a few years ago.

At a November 2023 conference call, Narasimhan said the company was still on track to hit its growth targets and would continue to operate its China business, rather than spin it off as some investors have suggested.

However, Narasimhan also worries about the brand’s reputation. Starbucks has been boycotted by many consumers because of the US’s support for Israel in the Middle East conflict. Although Narasimhan has issued a message to dispel misconceptions about Starbucks’ stance, consumer surveys show that it has still suffered.

Starbucks ended the first quarter with its first same-store sales decline since the pandemic began. Visits to its U.S. stores also fell by the most since 2010. The company’s loyalty program lost 1.5 million members. Starbucks lowered its revenue forecast for the year. The company’s stock is down 20% since the start of the year.

“To be fair, Laxman had a lot of objective problems. But Starbucks didn’t operate in the way I thought it should,” Schultz said.

Schultz, who is now chairman emeritus of the company, said the chain needed to “revamp” its strategy and reassert its “premium position.” Earlier this year, he also wrote a letter to Starbucks’ board of directors, urging them to return to their core values.

Niccol will start his new job on September 9. Thomas Hayes, chairman of Great Hill Capital, described him as “a fixer.” On the day Starbucks announced its CEO replacement, Schultz said, “I believe he is the leader Starbucks needs at this historic turning point.”