Starbucks Board Replaces CEO Laxman Narasimhan

In 2023, Starbucks's board named Laxman Narasimhan CEO though he had no prior retail experience

(Photo: Laxman Narasimhan, former Starbucks CEO.)

August 13, 2024

Investors were enthusiastic about Starbucks’s announcement today that, starting next month, Brian Niccol will take over as the Chief Executive replacing Laxman Narasimhan. Starbucks stock rose more than 20% at the open on the New York Stock Exchange.  

“I am energized by the tremendous potential to drive growth and further enhance the Starbucks experience for our customers” and employees, Niccol, 50-years-old, said in a statement. He is currently CEO of Chipotle Mexican Grill, a restaurant chain with about 3,500 outlets, all but about 60 of them in the United States, and with a market value of $69 billion.  

The statement issued by Starbucks implied why Niccol is replacing Narasimhan, 57-years-old. Since Niccol took over as Chipotle’s CEO in 2018, the statement notes, “Revenue has nearly doubled, profits have increased nearly sevenfold, and the stock price has increased by nearly 800%...all while increasing wages for retail team members, expanding benefits, and strengthening the culture.” Niccol achieved these gains, the statement adds, by focusing “on people and culture, brand, menu innovation, operational excellence, and digital transformation.”

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 39,000 stores in 84 countries, including China and India. The stores include more than 17,000 which are licensed to other operators.

The company, founded in 1971 and with a market value of $105 billion, has more than 450,000 employees worldwide. 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.

In March 2023, when he took over as the sole CEO, Narasimhan faced major challenges in trying to raise Starbucks’ revenue and profits, including market saturation, rising competition and some 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. 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.

In China, its biggest potential market, Starbucks already operates 9,100 stores. Also, it faces strong competition from Chinese companies, especially Luckin Coffee which operates 16,500 stores in the country.    

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.

As Narasimhan tried to implement his plans, they may have gotten diluted, even blocked, by some senior managers who have long served at Starbucks. In addition, he may have faced self-doubts, especially if they differed from those put forth by Howard Schultz, the founder who is Chairman Emeritus and reportedly owns around $1.6 billion of the company’s stock.

On May 1, Starbucks’s stock fell 16%, 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. After Narasimhan took over as CEO, Starbucks’ stock fell by about 25%.

“There is a natural tendency to try to do too much too soon” Schultz, 71-years-old, stated in a post about Starbucks on LinkedIn, following the stock drop. “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.”

Schultz’s 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. The post got more than 11,000 responses from Schultz’s more than 108,000 followers on LinkedIn.

In the post, Schultz added, “Senior leaders—including board members—need to spend more time with” store employees and improve the mobile ordering and payment platform. 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.”

Schultz was the CEO - for the third time - from 2022 to 2023 but apparently failed to implement his solutions. If, as he 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 hiring outsiders Niccol, and earlier Narasimhan.   

In fact, it is odd that Schultz and Starbucks’s board hired Narasimhan as CEO even though he had no prior experience operating a restaurant chain or even retail stores. Odd too that Narasimhan took on the challenges faced by Starbucks and that too in a business in which he had no direct operating experience.  

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.

There is a good chance Narasimhan will soon bounce back into another executive role. His 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 growing up 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.

In fiscal year 2023, as Starbucks CEO, Narasimhan earned a total $14.6 million, including salary, bonus and $9.8 million in stock awards. In fiscal 2022, he earned a total $8.8 million.

Speaking of Narasimhan’s replacement as CEO, Schultz said in a statement that Niccol’s “retail excellence and track record in delivering extraordinary shareholder value recognizes the critical human element it takes to lead a culture and values driven enterprise. I believe he is the leader Starbucks needs at a pivotal moment in its history. He has my respect and full support.”