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3 Challenges Facing Starbucks' New CEO

By Jeremy Bowman – Apr 5, 2017 at 4:25PM

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Starbucks' new CEO Kevin Johnson has a big job ahead of him. These three factors will go a long way to determining his success.

Howard Schultz, the man who took Starbucks Corporation (SBUX 0.24%) from a few small stores in the 1980s to the global empire it is today, stepped down from the CEO chair this week.

He leaves some big shoes to fill. Kevin Johnson, Starbucks' new CEO, called them "venti-sized" in a press release marking the transition.

CEO Kevin Johnson, with Howard Schultz

CEO Kevin Johnson (right) pictured with Howard Schultz. Image source: Starbucks.

Johnson has served as COO for two years and been on Starbucks' board of directors since 2009. He brings a tech background to the leadership role, having spent 16 years at Microsoft and five years as CEO of Juniper Networks.

But Johnson takes the reins at a tough time. The restaurant industry has seen slowing growth over the past year as comparable sales have fallen industrywide. Starbucks itself posted its slowest comparable-sales growth in the U.S. since the recession, with a 3% increase last quarter. Though that is still better than many of its competitors, it has spurred concerns that growth could continue to decelerate.

Starbucks investors also remember the last time Schultz left the leadership post in 2000, which led to overexpansion, brand dilution, and the stock's cratering by 2006. In other words, guiding Starbucks' growth and success may not be so easy.

Here are three challenges Johnson must address in order to be successful.

1. Mobile Order & Pay

In Starbucks’ latest report, management made an odd complaint. Its new Mobile Order & Pay service, which allows customers to order remotely and then come in, pick up their orders, and go, has been so successful that it's causing bottlenecks in service; these lead to long lines and discouraged customers, who sometimes leave without ordering.

Schultz got ahead of the curve by implementing the program nationally in 2015, and it now accounts for 7% of U.S. transactions. Starbucks has been experimenting with counter stations that display mobile orders so customers can easily grab them, but the problem may require a number of different solutions. For now, it seems to be the coffee chain's most urgent challenge, especially when e-commerce is only likely to become more important.

With his tech background, Johnson should be well-suited to such a challenge, and Starbucks' increasing focus on tech may explain why Schultz tapped him as his successor. As Mobile Order & Pay becomes more popular and retail traffic slows, Starbucks and Johnson could focus on delivery next.

2. Food

Food has long been a challenge for Starbucks. Over the years, the company has overhauled its food menu several times, and at one point even pulled breakfast sandwiches from the lineup as Schultz believed the smell interfered with the aroma from the coffee.

Food sales at Starbucks make up a much smaller percentage of overall revenue than they do at competitors such as Panera Bread or Dunkin' Brands Group's Dunkin' Donuts, and food has long been viewed by management as an opportunity. Since Starbucks acquired the La Boulange chain in 2012, food sales have improved, increasing by 50% since 2013; the company expects them to double by 2021.

At the recent shareholders' meeting, Johnson unveiled a new lunchtime menu called Mercato, which will feature grab-and-go salads and sandwiches, and the company said it "sees a significant opportunity to drive attach[ment] at lunch through the new Mercato menu as well as existing products." The success of Mercato will likely determine whether Starbucks is able to achieve its goal of doubling food sales over the next four years.

3. Keeping the customer first

Part of Howard Schultz's genius has been his ability to recognize what the customer wants. Schultz innovated first by bringing the Italian-style espresso bar to the U.S. He always sought to deliver the customer not just a beverage, but an experience -- striving to make Starbucks the "third place between work and home." Schultz often talked about the "theater" and "romance" of the coffee-drinking experience and how customers should feel when they walk into a Starbucks. That quality and passion have separated Starbucks from many other coffeehouse chains.

Schultz has shown that customer-first intuition several times. He got the company back in track in 2008, shuttering hundreds of stores and refocusing the brand by eliminating automatic espresso machines and redesigning stores to make them less "cookie-cutter." Schultz also pioneered the Starbucks card and Rewards program, which led to the app, and today's Mobile Order & Pay service. Those initiatives have helped grow Starbucks' ecosystem and retain customers.

Johnson has said that he cannot be Howard Schultz. And Schultz is not leaving the company -- just going to work on the Reserve brand and the Roasteries. But as Johnson innovates and the company evolves, he must maintain that focus on the customer, and the theater and romance that have distinguished the Starbucks brand and made it so powerful.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors; LinkedIn is owned by Microsoft. Jeremy Bowman owns shares of Starbucks. The Motley Fool owns shares of and recommends Panera Bread and Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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