So this is what you get from a $113m chief executive: a ditching of profits guidance served with a dollop of platitudes about going back to the company’s roots. Amazingly, the stock market still thinks Starbucks is worth 25% more than before Brian Niccol was appointed.
To be fair to the new boss, he’s been in post for a month, so it’s too soon to expect a fully formed strategy. He was merely offering an initial helicopter view of operations (or perhaps the perspective from his private jet on the commute from Newport Beach, California, to the Seattle head office). That inevitably involved syrupy praise for “our green-apron partners” and a homage to the unconvincing corporate claim that a chain with 36,000 outlets in 84 countries can still style itself as “the community coffeehouse”.
Nor can investors grumble about the yanking of profits guidance. Nobody believed in predecessor Laxman Narasimhan’s promises of near-term growth anyway, so it is only sensible not to try to forecast next year’s outcome when you’ve just reported a 7% quarterly slump in like-for-like store sales and a plunge in earnings.
All the same, Niccol’s brew was thin and tepid. “We will simplify our overly complex menu, fix our pricing architecture, and ensure that every customer feels Starbucks is worth it every single time they visit,” he said.
The second item of that list hints at what the outside world thinks is Starbucks’s core problem: its prices. When a cup of coffee, even a fancy one, can cost $6 or $7 in the core US market, is it really a mystery why punters are buying less frequently? Transactions were down 10% in the US as prices increased 4%.
Niccol may succeed in injecting a renewed focus on service standards, as he did at the burrito chain Chipotle, but one still comes back to the prices. In the world after a post-inflation shock, consumers are increasingly looking at upwardly revised versions of what they’re expected to pay for non-essential “premium” offerings and deciding to go without or try alternative suppliers. It’s not as if the US, or the rest of the developed world, is undersupplied with independent and branded coffee shops with lower price “architecture”. Niccol’s answer to what a “fix” means for Starbucks is one enormous unknown.
Another is his plan in China, where Starbucks got in early in 1999 and has expanded to thousands of outlets, but has now run into fierce price-cutting competition from the likes of the local operator Luckin, now back in expansionary mode after an accounting scandal. Analysts’ wisdom is that Starbucks should either get out of China altogether or convert to a franchise model. Neither option would be quick or straightforward.
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None of which is to say that Niccol won’t be able to move the dial eventually. But the ra-ra reception for his arrival – complete with $10m signing-on bonus and $75m worth of share options to replace the ones he forfeited at Chipotle – still feels bizarre. Back to basics may indeed be the correct general direction, but Starbucks is no longer the buzzy newcomer of yesteryear. It is an enormous global corporation that is showing its age. A turnaround looks like a very long-term job.