Niccol will face new challenges as he takes over the struggling coffee giant.
The news that Chipotle (CMG -2.78%) CEO Brian Niccol has jumped ship to move to Starbucks (SBUX 0.53%) sent shock waves across the restaurant industry. Niccol has had a successful tenure at Chipotle with rapid expansion, revenue growth in the double digits, and procedural changes that addressed the setbacks that hurt Chipotle in previous years.
However, Starbucks presents its own challenges. Howard Schultz has been Starbucks’ only truly successful CEO, and the company has brought him back more than once because it failed to find an adequate replacement. Hence, the question for investors is whether this will be a move that will boost the coffee stock over time.
Why Starbucks chose Brian Niccol
The choice of Niccol was undoubtedly determined by his performance as Chipotle CEO. Since he took over in March 2018, the stock has risen by over 700%, almost six times the return the S&P 500 delivered over the same timeframe.
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So successful were his efforts that Chipotle reported 7% revenue growth in 2020, a year when many restaurants experienced revenue declines of 100% amid the shutdowns. Moreover, after the pandemic lifted, double-digit revenue growth resumed.
This part of Niccol’s resume may have attracted Starbucks to him. In recent weeks, activist investor Elliott Management bought a substantial stake in Starbucks as a struggling economy led to declining same-store sales in the U.S. and China.
Additionally, Niccol has proven himself in getting a company past operational struggles. Chipotle faced periodic E. coli and salmonella outbreaks between 2015 and 2018 before Niccol took over. Under Niccol, such outbreaks ended as he launched a food safety program, improved the company’s food prep and handling, and incentivized sick workers to stay home.
Starbucks also faces a problem that Niccol got Chipotle past — moving on from the founder’s leadership. Starbucks has struggled to find a successor to Howard Schultz, who founded the modern iteration of Starbucks. In the same way, Chipotle founder Steve Ellis had to return to the CEO position after it struggled to find a successor. It was only after Niccol took over that Ellis could leave the company for good.
Niccol’s new challenges
Nonetheless, Starbucks will present Niccol with some unique challenges. For one, Chipotle and Starbucks are at different growth stages.
Chipotle is in a growth-focused mode in the U.S. and operates mainly in that country. It is approximately halfway to the goal of 7,000 stores that it considers “saturation” in North America. Much of its revenue growth came from increasing the restaurant count by 8%, making double-digit revenue growth an easier goal to achieve.
In contrast, Starbucks’ U.S. market is close to saturation. Hence, it has turned to foreign markets, primarily China, to drive continued growth. Thus, Niccol will have to focus more on same-store sales growth and international expansion than he did at Chipotle to succeed at this job.
Moreover, Starbucks sells more products in different venues. While transitioning from selling mostly food to primarily beverages may not be a problem, Niccol will have a more extensive product selection to manage between the drinks, desserts, and sandwiches Starbucks sells.
Channel development, which consists of consumer products, made up about 5% of Starbucks’ revenue in the third quarter of fiscal 2024 (ended June 30). While not a major revenue source, it is a different food-related business in which Niccol does not have extensive experience.
Can Brian Niccol succeed at Starbucks?
Although Niccol’s success is not guaranteed, the move is one that will likely boost Starbucks’ stock over time. Niccol has a proven track record of operational success under challenging circumstances. Also, given Starbucks’ lack of success at finding a worthy successor to Howard Schultz, Niccol’s ability to succeed Chipotle’s founder without complications makes him a natural choice for this role.
Admittedly, Niccol will have to rise to the challenge of deriving growth from a more mature business and will face some struggles that may be new to him. But if he can revive this more mature business, he stands a high probability of succeeding as Starbucks CEO.
Will Healy has no position in any of the stocks mentioned. 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.