Starbucks CEO Swap: Burritos Meet Venti Frappes
Is the Starbucks HQ moving to Newport Beach?
Programming Note: Logically Answered is now Parallel Processing
Last week Starbucks announced a groundbreaking change to their current leadership, ending the short tenure of CEO Laxman Narasimhan.
This week, the company made headlines again with the compensation package of Brian Niccol, the incoming CEO. Here’s what the SEC fillings indicate:
During Mr. Niccol’s employment with the Company, he will receive an initial base salary of $1,600,000 per year and…be eligible to receive annual equity awards with a target value of $23,000,000…Mr. Niccol will receive a cash signing bonus of $10,000,000, in consideration for cash incentive opportunities that are being forfeited from his current employer [and]...will also receive a replacement equity grant with a targeted grant date fair value of $75,000,000.
Bonkers…that adds up to more than $100 million in possible compensation in the first year alone. This is the type of Blind post that needs to show up on my feed. In addition to the $100 million in first-year comp incentives, Niccol can work remotely and take a PJ to the headquarters (~1,600 miles away) 3 times a week to comply with their RTO policy.
What went so wrong with Laxman that Starbucks had to cough up $100 million to fix their problems? Is the fix simply to swap out the CEO? Let's break it down.
Venti Woes
Even though his tenure was short, there were some memorable moments from both the former and incoming CEOs. You guys remember Niccol’s viral “head nod” interview. And obviously, there’s the famous CNBC squawk box when Laxman gets grilled by Jim Cramer (of all people).
I’ll save you the time of watching it. Narasimhan uses the words “action plan” more than 5 times in the 8 minutes Cramer grills him but only once drops the specifics - weekly drops and bundle deals on the app. Nothing original. Instead, Narasimhan blames the company’s troubles on a shrinking wallet and a drop in occasional customer visits.
I beg to disagree. If anything, customer demand is currently booming. Coffee consumers are mostly split into two categories: those who make quick drive-thru visits and those who grab a drink and sit down.
Check out any local coffee in Austin. Go after 9 am, and you struggle to find a spot. In a city with over 2 million people, Austin has over 14 coffee shops for every 100,000 in population. 16% more than the average city. I bet you could find the same for those in the Bay Area, New York, Seattle, and the other major hubs of the nation.
And customers prefer local coffee shops. In a survey by Premise, customers indicated that they are more likely to spend an hour sitting at a local coffee shop than at Starbucks due to ambiance and preferences for quirky, colorful, and different.
Such a preference alone is daunting for Starbucks. Rewinding 40 years back to their roots, Schultz initially envisioned Starbucks as the American version of Italian coffee houses. A symphony of people and interactions.
“In each shop I visited I began to see the same people and interactions, and it dawned on me that what these coffee bars had created, aside from the romance and theater of coffee, was a morning ritual and a sense of community,”
That is all out of the door. Over Narasimhan's term, prices increased by more than 30%. While wallets may have tightened up over the pandemic, price increases outpaced any stringent budgets. Just think about the prices 10 years ago!
And then you have the drive-thru crowd. Let’s put the anecdotes and fluffy stories aside and look at the facts.
According to Placer.ai, among four of the major coffee chains — Starbucks, Dunkin’, Dutch Bros and Biggby Coffee — only Starbucks saw negative traffic measured in visits per location.
Isn’t the drive-thru industry booming? The growth of drive-thru-only chains like Dutch Bros over the past few years further cemented the rise of the new coffee generation. With double the sales growth of Starbucks - 24.2% versus 12.5% for Starbucks - and a leaner business model that focuses on output and value than a large store footprint, Dutch Bros is driving the future of the drive-thru-only category.
Dutch Bros isn’t alone. Scooter’s, 7 Brew, and The Human Bean are among other pure drive-thru restaurants with massive growth recently.
Swap Solved?
Does Brian Niccol's swooping in change Starbuck’s trajectory? Maybe. The ex-Chipotle CEO took a large role in the company’s success. Just 2 months ago, the company announced a 50-to-1 stock split, splitting the stock price at record highs at $3,000 after Niccol’s 6 years of 550% growth.
Niccol comes in with a specialty in understanding digital channels and strengths in optimizing in-store operations. Last year, Chipotle saw an 11% increase in comparable sales while competitors faced declines. It’s safe to say that Niccol understands the restaurant space, but where’s he spending time optimizing Starbucks?
Feel free to drop your thoughts - but I think Starbucks’ mobile app (while acting as a huge cash infusion for them) killed their product. Focusing on the mobile app added to issues. By hammering down promotions and incentivizing mobile app use, people shifted to Starbucks as a touch-and-go option, diverting from the company’s original vision. All Niccol has to do is focus on driving prices down through operational improvements or whatever else he can think of. Once prices are back down, Starbucks’ 16,000 store locations and ubiquity will do the rest.
Fortunately, there’s a lot to be excited about. Even though it’s hitting 100-degree weather here in Texas, Starbucks dropped its fall menu this past Thursday. Pumpkin spice is back, along with my personal favorite - the Iced Pumpkin Cream Chai!
Oh and about the subtext for today’s newsletter - Chipotle’s HQ was originally Denver, CO till Brian Niccol swooped in and moved it to his town of Newport Beach. Will he do the same with Starbucks? Time can only tell.
That’s all for this one folks! If you enjoyed this piece breaking down the downfall of Starbucks and if they can get back in the game, hit the like button or drop a comment with your take. Reach out to us by replying to this email if you have any insider takes or leave a comment on our Substack page!