Can Brian Niccol Save Starbucks?

It's not often that a personnel change can move a stock by double-digit percentages, but that's exactly what happened on Tuesday, when Chipotle (NYSE:CMG) CEO Brian Niccol said he was jumping ship for the top job at Starbucks (NASDAQ:SBUX). Chipotle stock was down 11% as of Tuesday morning, while Starbucks had jumped 21%. Altogether, Niccol's move represented close to a $30 billion swing in market cap.

Niccol is rightly regarded as something of a star in the restaurant industry, as he took the helm of Chipotle back in 2018, when the company was still reeling from the fallout from the E. coli crisis. Before that, he also had an impressive run as CEO of Yum! Brands' Taco Bell.

Now, Niccol faces a similar turnaround challenge as he takes over Starbucks, which has also languished under the leadership of outgoing CEO Laxman Narasimhan as comparable sales are falling and the company is struggling to fend off new competition in China -- a key growth market.

Can Niccol get Starbucks back on track? Let's look at the challenges facing the coffee giant.

Image source: Starbucks.

A bitter roast

Starbucks has dominated the coffee industry for more than a generation, but the business is arguably as weak as it's ever been.

Comparable sales fell 3% in its most recent quarter, even in a generally strong environment for restaurants, and comparable transactions dropped 5%. Comps declined in both North America and international markets, with particular weakness in China, where they plunged 14%.

As the company's mobile order and pay program has expanded, Starbucks has struggled to meet customer demand, delivering drinks on time and accurately. Founder Howard Schultz said the company doesn't have adequate capacity, but Starbucks' brand seems to be deteriorating with the decline in service.

Rewards members are giving up on ordering after seeing long wait times. In other words, Starbucks is struggling with throughput, which has long been a key strength at Chipotle, and something the burrito chain has focused on since long before Niccol showed up.

There have also been complaints that the quality of its coffee has gone downhill, and the company has switched from large-batch grinding and brewing to Keurig-style individual cups, which has turned off some customers.

Finally, Starbucks is facing a different set of problems in China, where cheaper options have proliferated, undercutting the company's product prices. Starbucks has long seen its premium experience as a way of differentiating itself, but with weakness in the Chinese consumer economy, it may have to respond to the changing environment with a different strategy.

Can Niccol fix Starbucks?

Turning around Starbucks will be a more daunting task than what Niccol faced at Chipotle, which had far fewer locations and essentially operated only in the United States.

Starbucks has nearly 40,000 outlets around the world, with nearly half of them licensed, meaning Starbucks doesn't directly control them. That's an approach Chipotle didn't take. Fixing the business in China might require a different set of solutions than in North America also, as price competition seems like a significant problem there.

However, most of Starbucks' challenges seem to be operational ones, and Niccol has plenty of experience of there. Starbucks needs to fulfill its promise to serve a quality cup of coffee and to get it to customers in a timely manner. That's 90% of the business.

Doing that will take time given the current circumstances, and the 20% pop in the stock today bakes in high expectations for what Niccol can actually do. With activist investors involved at Starbucks, we could see further changes as well, but bringing Niccol on board should pay off. Investors will just have to be patient as it will likely take several quarters for the turnaround to play out. Niccol starts the job on Sept. 9.

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Jeremy Bowman has positions in Chipotle Mexican Grill and 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.