Starbucks changes its leadership in the face of weak consumer demand, and its stock price soars! Chipotle CEO, who once turned the tide, takes over

Starbucks announced on Tuesday that Chipotle's CEO, Brian Niccol, will replace the current CEO, Laxman Narasimhan, to address the issue of declining sales. This news caused Starbucks' stock price to soar by over 20%. However, due to Niccol's departure from Chipotle, Chipotle's stock price briefly dropped by 10%.

Media reports indicate that Narasimhan's resignation took immediate effect. Starbucks' CFO, Rachel Ruggeri, will serve as interim CEO until Niccol officially takes over on September 9.

Sales Slump and Failed Activist Investor Efforts

Narasimhan took over as CEO of Starbucks in March 2023. However, the company's performance has been disappointing this year, mainly due to weak sales in its two largest markets, the US and China. In the latest quarter, Starbucks reported a 3% decline in same-store sales. Same-store sales in the US dropped by 2%, marking two consecutive quarters of decline, while same-store sales in China plummeted by 14%.

Regarding this personnel change at Starbucks, the company's China division stated: "The personnel adjustments at Starbucks headquarters do not involve the Chinese market. We remain confident in and committed to the Chinese market, and will continue to focus on the long-term development of our business in China."

As the company struggles to attract customers to its stores, the pressure has been mounting. Former Starbucks CEO Howard Schultz penned an open letter in May addressing the company's issues and offering suggestions, but never directly mentioned Narasimhan by name.

Furthermore, activist investor Elliott Management, which recently acquired a stake in Starbucks, has changed its stance and now supports this personnel change. Earlier reports indicated that when news of Elliott's acquisition of Starbucks shares first surfaced in July, the fund proposed a settlement to the Starbucks board to protect Narasimhan's position. Starbucks did not communicate with Elliott prior to announcing this news.

In a joint statement, Elliott's Managing Partner Jesse Cohn and Partner Marc Steinberg said: "Over the past two months, we have engaged with the Starbucks board on key company issues, and we believe today's announcement marks a transformative step forward for the company. We welcome Brian Niccol's appointment and look forward to continuing to work with the board to realize Starbucks' full potential."

Starbucks' current Honorary Chairman Schultz also supports Niccol as the new CEO. In a statement, he said: "I believe he is the leader Starbucks needs at this critical moment. He has my respect and full support."

During Narasimhan's tenure, Starbucks' stock price fell by 21% (excluding Tuesday's increase).

Prior to joining Starbucks, Narasimhan was the CEO of Reckitt, a company that owns brands like Lysol and Mucinex. After being selected as Starbucks' CEO-elect, he spent several months learning about Starbucks' business, including undergoing barista training

Hoping to Replicate Chipotle's Experience

In contrast, Niccol's career at Chipotle has been quite successful, which has also made his departure highly anticipated. Niccol has been the CEO of Chipotle since 2018, previously leading Taco Bell under Yum Brands. During his tenure as Chipotle CEO, the company's stock price soared by 773%.

As the CEO of Chipotle, he helped the chain recover from a food safety crisis and led its restaurants through the pandemic. In recent quarters, despite sharp declines in consumer spending reported by other restaurants, Chipotle's foot traffic and sales have been on the rise against the trend.

Starbucks board member Mellody Hobson said in a media interview on Tuesday that the board had been considering replacing Narasimhan for several months. She said, "Our board started discussing leadership issues within the company months ago, and I reached out to Brian through someone and he took the call."

Hobson acknowledged that Narasimhan faced some challenges entering Starbucks without restaurant experience, but she added that he helped reduce employee turnover and solve supply chain issues. However, the board apparently has more confidence in Niccol's ability to quickly turn around the business.

She said, "What we see in Niccol is someone with rich experience in various market environments and cycles. When I spoke with him, I remember him saying to me, 'I know what to do.'"

Under Niccol's leadership, one of Chipotle's major strengths is its application, which has contributed to Chipotle's performance in recent quarters. In contrast, Starbucks' application has become a "scapegoat" for its weak performance, with Schultz and other critics pointing out that excessive mobile orders have slowed down service speed, affecting the customer experience.

In contrast, Chipotle has added a dedicated assembly line for mobile orders to meet the growing demand for mobile orders, and has also set up "Chipotlanes" specifically for mobile order pickup in new stores.

Boosted by the news of the CEO change, Starbucks' stock price surged 20.69% to $92.97 on Tuesday. TD Cowen analyst Andrew Charles upgraded Starbucks to a buy rating (previously hold), with a target price of $105 - implying an 11% upside potential.

Chipotle's stock price, on the other hand, plummeted by 9.33% to $50.66.