Starbucks: Reinvention Roadmap
“Our partners are co-creating the future with Starbucks. This is not a project in some ivory tower, it's a bottoms-up approach. It's a democratization of innovation at a company that has unique scale, engaging the people who have a unique window into America and who are most proximate to the challenges and the opportunities that the marketplace provides us…”
In the June 2022 Starbucks deep dive, I wrote the following: “With the benefit of hindsight, Starbucks had significant operational issues arise over the past two to three years due to changes in customer behavior, which were exacerbated by the pandemic. The fact that Schultz needed to return, yet again, is indicative of the challenges Starbucks faces (and potentially speaks to the severity of the situation)… It also speaks to the need for best-in-class management that can provide stores with the proper support / incentives while also balancing the need to deliver long-term results for owners.”
At the beginning of September, we received our first indication of what the plan looks like for life beyond Schultz (hopefully for the last time): Laxman Narasimhan, Reckitt Benckiser’s leader for the past three years, was named the coffee chain’s next CEO. The specifics of the C-suite transition are a bit unique: for a six-month period beginning in October, Narasimhan will shadow Schultz, before taking the official CEO title in April 2023. As noted in the press release, this is an opportunity for Narasimhan to “be fully immersed in the company” and to gain “in-depth exposure to the brand, company culture, and Reinvention plan”. Given the cultural issues discussed in the deep dive, I think that this is a reasonable compromise; as opposed to coming in as an outsider and putting his feet to the fire, Narasimhan now has an opportunity to learn firsthand alongside Schultz. (That said, the fact that Starbucks / Schultz felt that an outside hire was a necessity is worth thinking about.)
In addition to the changes in the C-suite, Starbucks hosted an Investor Day event on September 13th to outline its vision for the future. Today’s update will focus on a few key announcements from the Investor Day event, along with some updated thoughts on the investment thesis and the valuation.
Reinvention: “Convenience and Connection”
Before we talk about the future, let’s start with a short history of the recent past: COVID pressured Starbucks’ business in interesting ways, most notably by accelerating the importance of drive-thru, mobile order & pay (MOP), and delivery options, which collectively accounted for roughly 70% of the business in YTD FY22 (with drive-thru’s alone at 47% of its U.S. company-owned mix, up from one-third in 2018). Over the past 18 months, the company’s primary issue in the U.S. hasn’t been revenue generation; it has been effectively serving customer needs while maintaining reasonable expectations of its employees (baristas). In short, ensuring effortless convenience for customers led to significant strain for baristas. As one Starbucks executive put it, “We haven’t lived up to our end of the bargain with our partners.”