Starbucks (NASDAQ:SBUX) was once among the hottest food and drink stocks in America. Recently, though, the company’s revenue growth has tapered off and turned negative for the first time since the early days of the 2020-21 era.
The stock has also significantly underperformed the market, falling 3.5% in the last 12 months as indices like the S&P 500 experienced a huge bull run.
The company and its investors are now pinning their hopes on former Chipotle CEO Brian Niccol, who was named as the new CEO and chairman of Starbucks on August 13th.
Niccol’s restaurant resume is impressive and includes executive positions at Pizza Hut and a 3-year stint as CEO of Taco Bell.
Niccol also presided over an explosive period of growth at Chipotle, during which shareholders saw returns of nearly 800%.
Can Brian Niccol turn Starbucks around, and will the initiatives he championed to make Chipotle so successful translate well to America’s largest coffee chain?
A Look at Brian Niccol’s Successes With Chipotle
To get a sense of why Starbucks was so anxious to hire Niccol, let’s examine his record at Chipotle. When he took over as CEO of Chipotle in March of 2018, the company was worth only about $9 billion. Today, that number is well over $70 billion.
Revenue in Q1 of 2018 was $4.56 billion, whereas in the most recent quarter, Chipotle reported revenue of $9.11 billion. Trailing 12-month EPS, meanwhile, has skyrocketed from just $0.13 to $1.02.
Much of Niccol’s success in driving Chipotle’s growth came from creating a seamless guest experience that focused heavily on online ordering. In Q2, slightly over 35% of Chipotle’s total sales came from online orders.
Another innovation that worked in tandem with this digital focus was the so-called Chipotlane, a special drive-thru lane where customers can pick up food ordered through the app without having to wait behind other guests.
In many cases, this combination of online ordering and a dedicated lane leads to pick-ups taking as little as 30 seconds.
Niccol’s time at Chipotle was also marked by an aggressive store expansion strategy. Coming out of the pandemic, the company increased its target store count from 6,000 locations to 7,000. At the time, Chipotle had around 3,000 stores.
This growth project is still ongoing, but Chipotle’s continued addition of new stores has been a major factor in its steady revenue growth.
Where Are the Opportunities At Starbucks?
Looking at Starbucks’ current business plans, Niccol seems like a natural fit. Late in 2023, the company announced plans to build 17,000 new locations by 2030. This would bring its total number of locations to about 55,000.
Much of this expansion is expected to occur outside of the US as Starbucks increasingly targets international markets. Given Niccol’s success in building out Chipotle’s footprint during his time there, he seems an extremely good choice to lead this large expansion at Starbucks.
Another opportunity that seems almost custom-made for Niccol is that of improving the Starbucks app. Whereas Chipotle has seen massive success from creating a better app and streamlining online orders, Starbucks has struggled in this area.
Until June, the Starbucks app was available only to loyalty club customers. This naturally reduced its potential as a sales driver and prevented Starbucks from having the kind of digital successes Chipotle has experienced.
Finally, Niccol’s expertise in increasing efficiency could be very valuable at Starbucks. In the last fiscal year, Starbucks reported a net margin of 11.2%. Though far from a poor performance, this was well below the 13-14% margins the chain was achieving as recently as 2021 and 2022.
Given that Starbucks’ EPS is currently expected to grow at a fairly modest rate of 9.8% annually over the coming five years, restoring a higher net margin while increasing revenue could help the company’s stock regain some of its past momentum.
The Differences Between Chipotle and Starbucks
Though Niccol has had enormous success at Chipotle, it’s important to acknowledge that Starbucks is a very different animal.
Starbucks is a much more mature company that is already valued at well over $100 billion. As such, Starbucks’ growth rate is likely to be slower than Chipotle’s, even with a talented CEO at the head of the company.
Starbucks’ expansion is also likely to be more complex than Chipotle’s. Whereas Chipotle was building out a network of stores to adequately meet US demand, Starbucks will be expanding in multiple international markets that could present unique challenges.
Domestically, the company’s opportunities for expansion may be limited, as its densely clustered stores have long raised concerns of internal competition.
A final challenge for Niccol at Starbucks will likely be handling the company’s ongoing labor difficulties. At Chipotle, Niccol saw raising employee wages as an important part of retaining team members and building a successful company.
Starbucks, however, has faced a growing unionization effort that saw the company criticized and sued for anti-union activities. As a newcomer, Niccol will have to carefully balance worker demands for higher wages with his own efforts to make the company more efficient and profitable.
Can Brian Niccol Turn Starbucks Around?
In spite of the unique challenges Starbucks poses, Brian Niccol appears to be a good fit for its current business needs.
The company is looking to expand widely while also improving its digital experience, both areas that Niccol is extremely experienced in.
Combined with his long resume across several large restaurant chains, these factors make it appear that Niccol may very well be the best choice to lead Starbucks through its current difficulties.
Shareholders also seem enthused about management’s decision to recruit Niccol. Though Starbucks shares are still down on a 12-month basis, they rose 24.6% on news of his taking the CEO spot.
In part, this upward momentum appears to be driven by shareholders’ positive regard for Niccol’s leadership. Only time will tell if Brian Niccol can turn Starbucks around, but he appears to be going into the role of CEO with the full support of both management and the company’s investors.
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