Brian Niccol’s plan to get Starbucks back on track is coming into view. He’s wisely leaning on strategies he used to turn around Chipotle . The stakes are significant. Starbucks added $21 billion in market cap the day Niccol’s hiring as CEO was announced in August, signaling high hopes for his leadership after his success at Chipotle . The stock has held onto all of those gains in the two months that followed. It’s a sign that shareholders like us are willing to be patient as Niccol settles in. But eventually, the clock will start ticking, and promises will need to turn into progress. Investors will soon get a chance to hear directly from Niccol when Starbucks reports earnings Oct. 30. “We got bailed out by the board’s pick of Brian Niccol,” Jim Cramer said during the October Monthly Meeting, in reference to Starbucks’ poor stock performance under old CEO Laxman Narasimhan. “We don’t know his [Niccol’s] strategy yet. We know that he’s wedded to execution, though.” Niccol made that clear in his old job as he skillfully lifted Chipotle out of a hole. In March 2018, he stepped into a company battling a food-safety crisis that hurt its business and reputation and then ushered in a multiyear stretch of strong sales, profit and stock-price growth. The burrito chain is on track for earnings per share of $1.10 this year, up from EPS of just 13 cents in 2017, the year before Niccol took over. With Niccol at the helm for more than six years, Chipotle shares gained nearly 800% versus a nearly 100% gain for the S & P 500 . At Starbucks, Niccol inherits a company that under previous leadership consistently disappointed investors with weakening sales, including back-to-back periods of negative same-store sales growth this year. Starbucks’ two most important markets — the U.S. and China — are dealing with a variety of challenges; they include fulfilling mobile orders in a timely fashion in the U.S. and lower-priced competition in China. Starbucks shares lost about 22% during Narasimhan’s roughly year-and-a-half tenure, while the S & P 500 gain about 36% over the same timeframe. The stock had outperformed the index during the yearlong period between March 2022 and March 2023 that Howard Schultz served as interim CEO , his third time leading the company he turned into an iconic global brand. Narasimhan spent a few months learning the ropes from Schultz before taking the baton. SBUX 5Y mountain Starbucks’ five-year stock performance. Jefferies analyst Andy Barish is among the contingent on Wall Street trying to temper the euphoria around the CEO change. “There is a lot of foundational work that needs to happen before we can think about what he’s going to do to grow the business,” Barish said in a CNBC interview, adding the upcoming fiscal fourth quarter and the 2025 forecast do not look promising . “This turnaround is clearly not going to happen overnight so investors are going to need to brace for that,” said Barish, who downgraded Starbucks to a hold rating from buy-equivalent in late September. To be sure, Niccol is already making moves to right the ship. In an open letter published during his first week on the job, he said he was committed to fixing operational issues and restoring Starbucks as a welcoming community coffeehouse that serves high-quality drinks. To that end, Niccol is scaling back discounts that have been offered over the past year in an attempt to boost sluggish sales, The Wall Street Journal reported Monday . The goal is to shift the focus to Starbucks’ premium coffee experience instead of luring customers in with cheaper prices. Additionally, in a bid to streamline leadership, Niccol eliminated top executive roles like the position of global chief merchant and product officer and the role of North America CEO. What else might he do? To help answer that question ahead of earnings, we looked back on Niccol’s time at Chipotle and identified solutions he implemented to fix that company’s problems, some of which were similar to what Starbucks is grappling with now. Operations Upon taking over Chipotle, Niccol’s focus was on improving operations after the rise of digital orders complicated execution and increased wait times. When Chipotle’s digital channel became the fastest growing part of the business, it resulted in what Niccol called “friction” between the digital ordering pickup process and the in-store customer experience. To help alleviate that issue, Niccol tested digital pick-up shelves in restaurants, making it more clear for customers where to pick up their mobile orders. Before their implementation, guests were coming into stores and not sure where to pick up orders, forcing them to ask employees that were already assisting walk-in customers. Within the first few weeks, that change resulted in a double-digit increase in digital sales at a downtown Denver Chipotle location that proved sustainable, Niccol recounted during a business update in June 2018. The addition of shelves alone accelerated the use of Chipotle’s second “make line,” where digital orders are prepared in the back of the store. These were installed so in-person customers in the front of the restaurant weren’t disrupted by to-go orders. Niccol also started testing a mobile order pickup window called Chipotlane, which enabled customers to pick up orders without getting out of their cars. This was another way to get more efficiency out of the second make line and help increase speed of service and convenience for guests. It became a key driver of digital sales. Within a short period after it began testing out this new format in May 2018, Chipotle noticed a higher mix of digital sales and total restaurant sales, according to the company’s fourth-quarter earnings call of that year. By separating the in-person ordering area from the digital one and crafting specific strategies for each, Chipotle “reduced friction for both the in-store and digital customer and added efficiency,” said Lauren Silberman, analyst at Deutsche Bank. One of the challenges at Starbucks is the company “has not optimized the in-store digital experience,” Silberman noted. “Now that 25% of transactions go through mobile orders, there’s friction between in store and digital experience,” she added. Starbucks already has a designed area to pick up mobile orders, but you might have noticed on your own Starbucks run that sometimes digital customers are still trying to flag down the baristas while they attend to others. In its disastrous second-quarter earnings report earlier this year, Starbucks also had a mid-teens percentage incompletion rate on mobile orders, with long wait times cited as one factor. That’s where Niccol’s experience at Chipotle comes into play. “There’s clear unmet existing demand that’s not being captured because Starbucks has not optimized the in-store digital experience,” Silberman said. Another massive opportunity for Niccol to address at Starbucks is the backup in the morning – where almost 50% of sales volume comes from by 10:00 am, CFO Rachel Ruggeri said at an industry conference this summer. The influx of customers during that hour has negatively impacted throughput. Jefferies’ Barish believes that if Niccol can improve this area, in particular, there’s an opportunity stabilize the business. Menu innovation Chipotle has always had a simple menu from the beginning of its history. When Niccol came in, he experimented with new items and created a “menu innovation pipeline” to test food products and gauge customer preferences. He kept it streamlined, introducing just one or two new products a year to ensure stores could easily execute them without adding complexity. Niccol introduced a project management technique known as the “stage gate process” to boost the odds of success before a new product hit stores. The key was simplicity. Employees had to be able to prepare the new item quickly without hurting throughput, a critical metric that measures how fast customers are served. “The customers got to love it. It’s got to work financially. But it also has to work for our operating process,” Niccol explained on a 2019 earnings call. Notable wins from this process include Carne Asada, a limited-time steak offering that has twice returned to the menu since its 2019 debut, and Queso Blanco, an improved version of Chipotle’s once-maligned cheese dip . Both boosted sales. In other instances during his tenure, Niccol often limited-time offers to drive customer interest and orders. Starbucks, on the other hand, offers an extensive menu. Starbucks isn’t likely to scale back too much because customization is key to its brand, Deutsche Bank’s Silberman said. However, the analyst believes Niccol could implement a similar product-development process at Starbucks, ensuring new items are actually desirable to customers and marketed well. She pointed out that Starbucks recently rolled out many new products, including iced energy drinks and berry refreshers , that added complexity. “This is an area of simplification that Niccol will address,” Silberman predicted. “He might do a powerful innovation launch at a specified cadence versus all of these new menu items that are not really driving incremental volume,” she added. Branding Niccol’s marketing background runs deep, having served as Taco Bell’s marketing chief before he came CEO of that Yum Brands -owned chain. When he arrived at Chipotle, its reputation as a beloved brand was tarnished by a series of foodborne illness outbreaks that ultimately sickened more than 1,100 people between 2015 and 2018. The company later paid a $25 million fine to resolve criminal charges tied to the incidents. It was no doubt a crisis with serious financial ramifications . But for Niccol, it also created “the perfect opportunity to revisit that [Chipotle] is a lifestyle brand built on high quality food and customization,” Jefferies’ Barish said. To rebuild consumer trust at Chipotle, Chipotle launched the “Behind the Foil” campaign to showcase transparency in food preparation. Niccol also expanded awareness of the Chipotle brand through traditional media marketing, as well as social channels by partnering with micro-influencers rather than big celebrities, which often led to higher engagement. His marketing approach “brought new news in a positive way toward Chipotle,” Silberman said. In contrast, Starbucks has struggled to broaden its reach from a marketing perspective, according to Silberman. While she said its digital rewards program is strong, the company hasn’t figured out how to “re-invigorate brand messaging” in a way that engages occasional consumers outside of that system. “That will be powerful,” Silberman said. Silberman said Niccol’s experience marketing Chipotle’s brand to younger consumers will translate well to Starbucks as the coffee chain tries reaching that same audience. Niccol will have a familiar face alongside him in that effort. On Friday, Starbucks announced it hired Tressie Lieberman as its chief brand officer. Lieberman, who most recently led marketing at Yahoo, previously worked at Chipotle for five years and Yum Brands for about a decade, according to her LinkedIn. Focus on employees Chipotle has sought to position itself as a worker-friendly place through actions that include wage boosts in 2021 to bring the average for restaurant employees to $15 an hour. “This is something that Niccol championed” said Silberman, adding that his focus on internal promotions and culture has been a key factor in Chipotle’s success. Chipotle also invested in various education benefits for workers. To be sure, employees at a Chipotle location in Michigan unionized in 2022 while Niccol was at the helm, and the U.S. labor board in August found merit to workers’ claims that the company illegally withheld raises for them. Chipotle also settled a previous labor case over allegations it closed a Maine location after workers there started a unionization campaign. The company denied wrongdoing. Improving relationships with Starbucks’ employees is on Niccol’s menu of tasks. He made that clear in his open letter in September, writing that he aims to make Starbucks “the best place to work, with career opportunities and a clear path to growth.” He also committed to engaging constructively with the union representing workers at roughly 500 Starbucks stores , pledging to bargain in good faith if employees opt for representation. “I deeply respect the right of partners to choose, through a fair and democratic process, to be represented by a union,” Niccol wrote in response to a letter from the Starbucks Workers United. While acknowledging union rights, Niccol also emphasized that Starbucks values direct relationships with employees, which management calls partners. In his September open letter, Niccol also pledged to ensure employees “have the tools and time to craft great drinks every time, delivered personally to each customer.” Investors should get more details soon, but right now his vision seems to be simple: By making employees’ jobs better, Starbucks can offer a premium coffee experience that translates to happier customers – and stronger sales. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Brian Niccol, CEO of Chipotle Mexican Grill.
Adam Jeffery | CNBC
