After months of searching, Starbucks (SBUX -1.61%) finally announced that it is hiring a new CEO to replace Kevin Johnson, who left last year. That's great news for a company that's been dealing with continued store closures, supply chain issues, inflation, increased wages, changing consumer habits, employee unionization efforts, and a falling stock price. That's a list that could scare any potential CEO away, but a fearless leader should bring the coffee giant into the next phase of growth.
Who's the new CEO?
Starbucks announced that it has hired Laxman Narasimhan, who will join the company in October with the title of incoming CEO. He is meant to work alongside Howard Schultz, who will stay on as interim CEO, before becoming CEO in April.
Based on his work history and Starbucks' direction, it certainly looks like a dream fit. When Johnson took the reins in 2017, he came from a tech background, and that experience was important as he helped steer the company into the digital age. Narasimhan, who was born in India, comes from a robust consumer goods background, leading several companies' operations as they embraced digital. He is leaving his role as CEO of Reckitt Benckiser Group, a London-based health and nutrition conglomerate. Previously, he was a partner at McKinsey & Company and held high-level positions at PepsiCo.
Why the pressure is on
Starbucks has seen enormous growth over the past several years, but it's facing several challenges right now. With a new CEO, at least that's off the desk, but how it will play out is a new uncertainty.
The challenges Starbucks faces fall into three categories: global economic pressure, employee unionization efforts, and changing consumer trends. Out of these, it can't change global economic pressure, but it's making broad changes to address the other two.
The company released a "reinvention plan" at its investors day last week, and it said that partners, its term for employees, "are at the core of the Reinvention plan." This is a clear attempt to tackle the unionization efforts. It's committing to increase wages, improve benefits and create a better atmosphere for workers, as well as invest in upward mobility.
It will work with changing consumer trends by expanding store formats and integrating digital in a deeper way. This includes its loyalty program and mobile order and pay, which are interconnected through a digital system. It's also developing an improved coffee customization system for quicker and simpler service.
All of these changes are meant to better utilize Starbucks' resources and result in increased efficiency, higher comparable sales, and improved profitability.
It will be interesting to see how Narasimhan leads the company forward considering he is not being hired to create a new plan, but rather follow one. He will be co-leading the company for the next six months, being trained in a strategy he did not develop. Clearly, Schultz has confidence in his ability to implement the strategy effectively, but will Starbucks give him leeway to shift as necessary? That will be important for him to be effective as a leader. He can't lead from behind Schultz.
How is Starbucks doing?
Despite its issues, Starbucks is demonstrating solid performance. Fiscal third-quarter (ended July 3) revenue increased 9% over last year to $8.2 billion despite store closures in China, to the tune of a 44% comparable sales decrease in that region. Comps increased just 3%, driven by a 3% decrease in transactions, but a 6% increase in average ticket (sales per order). That's a strong sign of loyalty -- people who were back buying were buying more. Starbucks has made robust investments in its loyalty program over the past few years, and that's generating sales.
Earnings came in lower year over year, and earnings per share decreased to $0.79 from $0.97 last year. That can be attributed to the global economic supply chain pressures. The company is still on track to open many new stores, with 318 new stores in the third quarter.
Confidence in Starbucks stock
The investing community has been cheering these new developments. Starbucks stock was up slightly on the news, and it's now down 21% this year.
There's still a lot of work to do here, but there's cautious optimism. The market didn't like the company's limbo status, but it's appreciating the stability of an experienced CEO coming in to lead. In the short term, investors may want to keep this stock on hold. There's tremendous future potential, and investors should keep a watch on where Narasimhan leads Starbucks.