Drama at Starbucks: The inside story

Laxman Narasimhan energetically took to the stage late last month at Starbucks headquarters, sporting a jacket with the chain’s logo emblazoned on the white sleeve and exclaiming to the crowd about the joy he felt and the signs of change.

“We certainly have big challenges, but they’re not impossible,” he told employees gathered at the company’s forum on July 31 in Seattle, according to a replay seen by The Wall Street Journal. On the company’s quarterly earnings call the day before, he urged investors to be patient.

His days at the helm of the coffee giant were already numbered as the company’s board of directors considered his replacement. Less than two weeks later, Narasimhan was out.

Narasimhan’s departure from Starbucks, announced Tuesday, follows a turbulent period at the world’s largest coffee chain. This year, Starbucks has faced two high-profile activist investors, public criticism from former chief executive Howard Schultz and a slowdown in sales. This week, it named its third CEO in less than two and a half years.

In hiring restaurant industry veteran Brian Niccol as Starbucks’ new leader, the board on Tuesday signaled it was bringing in a steady hand. Niccol, 50, who helped build Chipotle into an industry powerhouse after it was weakened by food safety issues, said he was excited about the opportunity to spur growth at Starbucks and make things better for customers and employees.

Behind the scenes, Niccol’s appointment was the culmination of months of internal anguish over Starbucks’ direction and leadership.

To lure Niccol away from Chipotle, where he had revived the company’s sales and was paid handsomely for it, Starbucks offered him the roles of CEO and chairman of the board. Niccol has served in both roles at Chipotle.

“We had the opportunity to hire Brian Niccol,” said Mellody Hobson, Starbucks’ board chairwoman. “He’s probably the most successful CEO in the industry right now.”

Narasimhan, 57, had been in contact with one of the activist shareholders, Elliott Investment Management, in recent days, people familiar with the discussions said. He was informed of Starbucks’ decision on Sunday.

Training days

Within weeks of signing on as Starbucks’ “CEO-elect” in September 2022, Narasimhan was in training as a barista, learning how to make lattes and man the drive-thru window as part of a six-month training period. Schultz, who feared that Starbucks management had become too removed from the chain’s day-to-day operations and brand, remained CEO while Narasimhan heeded employee input.

At the time, Schultz was in his third stint as Starbucks CEO. He had rejoined its top management in early 2022 to quell unrest among baristas seeking to unionize and to groom a successor. Schultz said it was his last time running the company he built and that he did not plan to keep an office at its headquarters.

When Starbucks’ board of directors set its sights on Narasimhan in the summer of 2022, he brought little experience running a global restaurant operation. Then chief executive of Reckitt Benckiser, he had steered the British maker of Lysol and infant formula through the Covid-19 pandemic. And while Narasimhan had run food businesses as PepsiCo’s global chief commercial officer, Starbucks’ board had a plan to steep him in the chain’s traditions — under Schultz’s tutelage.

Losing ground

Narasimhan quickly sought to make his mark. From insights gathered while working in Starbucks cafes and talking to employees, he set out to streamline a sprawling supply chain and operations, seeing a direct link between inefficient beverage making and long lines that frustrated customers.

At headquarters, he streamlined some corporate functions, eliminating roles such as global marketing director and reassigning responsibilities to geographic divisions. He recruited an executive from Target to improve Starbucks’ supply chain and named leaders to oversee North American and international businesses.

Starbucks investors were initially optimistic: In the six months after Narasimhan joined the company, its shares rose 8%, against a 15% drop in the S&P 500 index.

But bigger challenges were emerging for Starbucks. The chain steadily raised prices in response to inflation, executives said, as did many other restaurants. Customer complaints about slow service times continued to mount, with orders often highly customized and placed via the chain’s increasingly popular mobile app.

In China, a massive market that Schultz had worked for decades to cultivate, Starbucks was losing ground. By mid-2023, Luckin Coffee had surpassed Starbucks as the country’s largest coffee chain by sales and units, leveraging fast-delivery services and new flavors to recover from an accounting scandal that had derailed the Chinese chain.

Activist Summer

Starbucks’s troubles were also on the radar of Elliott Investment Management, one of Wall Street’s most prominent activist investment firms. In mid-July, The Wall Street Journal reported that Elliott had acquired a large stake in Starbucks stock and had been lobbying the company for changes for several weeks.

In recent weeks, Starbucks and Elliott had been exploring a severance deal that would give Elliott representation on Starbucks’ board of directors. Elliott had also been pushing for an overhaul of Starbucks’ business in China, according to people familiar with those discussions.

Last week, another activist appeared in Starbucks stock. Starboard Value had taken a stake, the Journal reported, with the goal of getting the company to take steps to boost its stock price.

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