China Competition Is Just One Challenge Brian Niccol Will Face as Starbucks CEO
:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2162482552-23799eff82d14e2f8c059c34bcd5f74f.jpg)
CFOTO / Future Publishing via Getty Images' title='Close-up of a Starbucks logo on a building's facade.'>
CFOTO / Future Publishing via Getty Images
Key TakeawaysStarbucks on Tuesday tapped Chipotle CEO Brian Niccol to lead the company as the world's largest coffeehouse chain seeks to regain its footing.During Niccol's tenure at Chipotle, the restaurant steadily expanded its footprint and grew sales at a rate well ahead of most competitors.At Starbucks, Niccols will have to address a slowdown in China as competition grows more intense in the company's second-largest global market, slumping U.S. sales and demands from activist investors that have grown louder recently.
Starbucks (SBUX) on Tuesday tapped Chipotle Mexican Grill's (CMG) chief executive, Brian Niccol, to lead the company as the world's largest coffeehouse chain seeks to regain its footing amid slumping global sales and fend off attacks from disgruntled investors.Niccol is no stranger to these circumstances. He took over Chipotle in March 2018 as the fast-casual chain sought to move past a 2016 E. coli outbreak that drew attention from regulators, as well as shook consumer and investor confidence in the restaurant that touted its commitment to freshness and health. Bill Ackman's Pershing Square, then Chipotle's largest shareholder, was pushing the company for change at the time of Niccol's appointment.During his tenure at Chipotle, the restaurant has steadily expanded its footprint and grown sales at a rate well ahead of most competitors.Starbucks, meanwhile, has seen sales growth stall as it grapples with macroeconomic headwinds and shifting consumer preferences. Below, we look at some of the unique challenges facing Niccol as he takes the helm of one of the world's most iconic brands.Competition in ChinaStarbucks has faced pressure in China, its second-largest market, in recent years. Same-store sales there declined 14% in its fiscal 2024 third quarter after falling 11% in the preceding period.The problem underlying contracting sales is twofold. Both comparable transactions, a proxy for foot traffic, and average ticket, a measure of how much the average customer spends on each visit, declined by 7% in the quarter. Starbucks is, first of all, having trouble attracting and retaining customers. The company has said repeatedly over the last year that China's sluggish post-Covid economic recovery has weighed on its business.On top of that, it is struggling to keep up with fierce competition from local competitors, like Luckin Coffee (LKNCY), which has expanded rapidly in recent years and now has well over twice as many Chinese locations as Starbucks. The competition has sparked what outgoing CEO Laxman Narasimhan described in July as “a mass segment price war.”Narasimhan, speaking on Starbucks's most recent earnings call, added that the company was “in the early stages of exploring strategic partnerships” to shore up its Chinese business. Slumping U.S. SalesAt the same time, Starbucks faces pressure at home in what is by far its largest, most lucrative market. U.S. same-store sales declined 2% last quarter when a 4% increase in average ticket partially offset a 6% drop in traffic. Management has outlined a three-part action plan that emphasizes improving the customer experience, developing new products, and reaching new customers. More immediately, though, Starbucks has leaned into discounts to lure back customers lost amid a steady uptick in fast food prices. The company in June launched a $5 value meal, following in the footsteps of other fast food giants like McDonald’s (MCD) and Wendy’s (WEN).The company has reined in spending to offset the cost of recent promotions, as evidenced by a nearly 5% decline in general and administrative expenses in the third quarter.Activist Investors Are CirclingThe company’s struggles have recently made it a target for activist investors, who may or may not let up after Niccol takes over.The Wall Street Journal in mid-July reported that Elliott Investment Management had taken a sizable stake in the coffee chain and was in talks with management about ways to boost its stock price. And in early August CNBC reported that the firm had proposed expanding Starbucks’s board and other governance improvements as part of a settlement that would have allowed Narasimhan to keep his job.And last week the Journal reported that Starboard Value, another activist investor, had also amassed a stake and begun pushing for changes. Tuesday’s executive shake-up could relieve some of this pressure. Activist investors are often seeking changes they believe will benefit a company’s share price. With Starbucks stock gaining 25% on Tuesday’s announcement, they may have already got what they wanted. The stock is now in positive territory for 2024, though its still 24% below its July 2021 all-time high.And Niccol’s track record should appeal to long-term shareholders. During his nearly six-and-a-half years leading Chipotle, the chain’s share price rose by 777%. It has been the 54th best-performing stock in the S&P 500 over the last 5 years. Read the original article on Investopedia.
Welcome to Billionaire Club Co LLC, your gateway to a brand-new social media experience! Sign up today and dive into over 10,000 fresh daily articles and videos curated just for your enjoyment. Enjoy the ad free experience, unlimited content interactions, and get that coveted blue check verification—all for just $1 a month!
Account Frozen
Your account is frozen. You can still view content but cannot interact with it.
Please go to your settings to update your account status.
Open Profile Settings