Can CEO Laxman Narasimhan Boost Starbucks’ Profit

Laxman Narasimhan's challenges as Starbucks CEO include a saturated market, competitors and a unionization drive

(Photo: Laxman Narasimhan, CEO, Starbucks.)

May 31, 2024

In March 2023, Laxman Narasimhan took over as the Chief Executive of Starbucks from the coffee chain’s founder Howard Schultz. “The foundation Howard has laid – building from scratch an iconic global brand…is truly remarkable, and I am honored to have the opportunity to build on this deep heritage,” Narasimhan said in a statement at that time.

“There is a natural tendency to try to do too much too soon” Schultz stated, early this month, in a LinkedIn post on Starbucks. “Don’t try to do everything at once. Leaders must model both humility and confidence as they work to restore trust and increase performance across the organization.”

The post “read like an open letter to shareholders criticizing how Narasimhan and his senior leaders were running the business,” a Wall Street Journal report noted. Schultz, 70, while Chairman Emeritus of Starbucks, is no longer on the company’s board. His post got more than 11,000 responses among his nearly 100,000 followers on LinkedIn.

Schultz’s public comments came after shares of Starbucks fell 16% on May 1, the day after the company cut its profit forecast for the second time this year.  The drop was the biggest single-day price decline since the public listing of the stock in 1992.

Seattle, United States, based Starbucks mainly sells a variety of coffees, both hot and cold and in several combinations and price points, from more than 36,000 stores in 84 countries, including China and India. The stores include more than 17,000 which are licensed to other operators.

The company, which has more than 450,000 employees worldwide, was founded in 1971. In fiscal year ended October 2023, it earned $5.4 billion in pre-tax income on $36 billion in revenues. While Starbucks’ 15% pre-tax margin is healthy, it is less than that of both McDonalds and Restaurant Brands, owner of Burger King.

Since Narasimhan, 57, took over as CEO, Starbucks’ stock has fallen by about 25%. It now has a market capitalization of $86 billion, down from $115 billion. 

Narasimhan faces major challenges in trying to raise Starbucks’ revenue and profits, including market saturation, rising competition and employees joining unions.

In the U.S., its largest market, Starbucks already operates 16,600 stores and hence has few locations left to set up new stores.

Since 2021, employees at 438 stores in the U.S. have voted to join a union. Management is currently in negotiations with union leaders. Any agreement with the union will likely raise Starbucks’ operating costs.

Starbucks has kept raising prices, especially at its U.S. stores, alienating some customers. As a result, Starbucks prices are similar or even higher than those charged by many competitors. For instance, in New York City, a small cup of Starbucks brewed coffee - its most popular item - costs $3, while you pay $2.66 for a cup from Joe Coffee. Also, the coffee from some of the competitors tastes far superior to those from Starbucks.

Starbucks operates 9,100 stores in China, and management views it as its biggest  potential market. But it faces stiff competition from Chinese companies, especially Luckin Coffee which operates 16,500 stores in the country.    

Narasimhan uses the name “Laks” when ordering coffee from Starbucks to avoid misspellings, he told CNBC; his favorite drink is a doppio espresso macchiato with milk on the side.

Earlier, Narasimhan served as the CEO of Reckitt Benckiser, a British vendor of Lysol disinfectant, baby formula and other consumer products around the globe. The stock of Reckitt, which has a market value of $50 billion, was roughly flat during the three years when Narasimhan was the CEO.

From 2012 to 2019, he held various senior roles at PepsiCo, including, Global Chief Commercial Officer, and CEO of the company’s food and beverage businesses in Latin America, Europe and Sub-Saharan Africa. Earlier, from 1993 to 2012, he was at the consulting firm McKinsey & Company, including as a director focused on consumer, retail and technology practices in the U.S. and Asia, including India.

Narasimhan grew up in Pune, India, and in 1982 graduated from Loyola High School, a private Catholic school run by the Jesuits. He holds a degree in Mechanical Engineering from the College of Engineering, University of Pune. He has an MA in German and International Studies and an MBA from the University of Pennsylvania. He wakes up at 5 am to meditate and exercise, loves writing poetry and listens to Carnatic as well as rock music.

Discussing Starbucks’ latest quarterly earnings, Narasimhan said in a statement that, “In a highly challenged environment, this quarter's results do not reflect the power of our brand, our capabilities or the opportunities ahead… We have a clear plan to execute and the entire organization is mobilized around it.”

As Narasimhan tries to implement his plans, they may get diluted, even blocked, by some senior managers who have long served at the company. In addition, Narasimhan may face self-doubts about his plans, especially if they differ from those put forth by the founder Schultz, who reportedly owns around $1.6 billion of Starbucks stock.

In his LinkedIn post, Schultz states, “Senior leaders—including board members—need to spend more time with” store employees, improve the mobile ordering and payment platform and the “path forward should be what has guided the company over decades of financial success: Inspire your people, exceed the expectations of your customers, and let culture and servant leadership lead the way.”

If, as Schultz notes, Starbucks’ future financial success depends heavily on the company’s culture, it is odd that he did not groom a manager from within to take over as CEO - instead of hiring an outsider like Narasimhan.

Schultz, who says he knows how to improve Starbucks, was the CEO - for the third time - from 2022 to 2023. As CEO, why did Schultz not implement the measures which he suggests Narasimhan should be pursuing?

And Narasimhan apparently knew the major challenges faced by Starbucks. Assume he took on the CEO role expecting to succeed in tackling them.

Narasimhan’s siblings passed away when they were young and his father’s business of exporting mechanical parts to the U.S. ran into trouble. Speaking of his time in India, Narasimhan told The Sunday Times, London, “You learn resilience, you learn tolerance, you learn to find a way through.” These traits, combined with the career opportunities that the U.S. or Europe provides, he added, enables several Indians to succeed as CEOs of major global companies.