Massive Executive Shakeup: Where SBUX and CMG Go from Here

New Leadership Gives Starbucks a Much-Needed Jolt

Starbucks (SBUX) surprised the market yesterday with a massive executive shakeup, appointing Brian Niccol, the former CEO of Chipotle (CMG), as its new CEO.

The pivotal decision comes amid growing pressure from activist investor Elliott Management, which recently purchased a significant stake in Starbucks.

Elliott is the same firm that helped to re-invigorate Pinterest (PINS) shares by guiding the company into opening up its platform to third-party advertising. PINS traded from $20 to $40 in the two years following its investment.

Starbucks needed this lifeline – and you can see why on the chart below why.

Rising labor costs, unionization, boycotts, and increasing competition in key markets like the U.S. and China are just a few of the missteps that landed SBUX in hot water this year.   

The stock lost nearly 25% of its value during the tenure of the previous CEO, Laxman Narasimhan.

Now, Niccol will be tasked with spearheading a much-needed turnaround for the struggling coffee giant. The former Taco Bell hero is credited with successfully revitalizing Chipotle after a series of food safety scandals. (He saved Chipotle’s queso, among other wins.)

The leadership change sent Starbucks shares soaring by over 20% yesterday, while Chipotle’s stock dropped sharply by 9%, reflecting investor concerns about the future without Niccol at the helm.

Where Does This Leave SBUX and CMG?

CMG’s Challenges

One thing is for certain: While Niccol has spent years building up Chipotle’s brand value, the current upward trajectory isn’t guaranteed.

LikeFolio has been detecting signs of consumer resistance to Chipotle’s ever-increasing prices and seemingly shrinking portion sizes.

In short, what used to be a $5 burrito complete with a free drink now costs over $9, and that drink is no longer included. This sharp increase (more than 80%) in the cost of its flagship item has driven consumer discussions about Chipotle’s pricing power – with many expressing their discontent.

According to the latest LikeFolio data, Chipotle’s Consumer Happiness levels are down 4% year over year:

With Niccol’s departure, it’s uncertain where Chipotle goes from here.

SBUX’s Opportunities

In contrast, SBUX faces mounting competition – but it also has an opportunity.

Americans drink more coffee than they have in 20 years. Two-thirds of U.S. adults drink coffee daily, according to the National Coffee Association. 

And Starbucks is still THE name to beat in this arena. To get its groove back, the company needs to make headway in a few key areas.

The first order of business to tackle? Speed.

Starbucks is on track to reach higher efficiency goals, thanks to technology like the Siren Craft System, a streamlined beverage sequencing system, and The Clover Vertica, a paper-filter-less coffee grinder/brewer.

Next: Waning traffic.

Starbucks’ global same-store sales declined 3% in the most recent quarter, driven by a 6% drop in transactions. But the company has a highly loyal app user base that can be activated with personalized recommendations – and it wants to attract “occasional” users to its app to encourage more frequent visits.

A quick look at web views shows some improvement in April-June compared to February-March levels:

And lastly… Innovation will be key.

Starbucks has struggled to bring new and exciting drinks to the table. Its Oleato drink – a controversial concoction of coffee and olive oil launched earlier this year – was deemed one of Starbucks’ top flops. Not only do they taste bad, but the olive oil added an extra 120 calories on top of an already sugar-packed drink. 

Starbucks needs a hit.

Bottom line: With Niccol’s track record, we’re excited to see where the coffee giant can go from here. New leadership at this juncture could be just the spark Starbucks needs to turn its ship in the right direction.

Until next time,