Starbucks (SBUX -0.26%) stock got a nice boost with the recent appointment of CEO Brian Niccol. It's now down about 24% from its all-time highs. Clearly, the market expects a lot from Niccol, and for good reason. He's done this kind of thing successfully before.
Let's see where Niccol is going and where Starbucks might be a year from now.
Scenario 1: The situation begins to improve
Although he's only been in the hot seat for a bit more than a week, Niccol has already crafted the beginnings of a turnaround plan. After spending three weeks touring stores and speaking to workers in preparation for his new role, he identified four areas that need improvement.
The overarching theme is that Starbucks has strayed from its core mission of being a community gathering spot offering a premium product and experience. He plans to fix that by focusing on empowering baristas, getting rid of long wait times, setting up stores the right way, and redefining the brand with a new marketing campaign.
How might he change things in practice? First, Niccol is going to focus on the U.S. business. Taking small steps is a good plan. He plans to approach this by investing in technology, improving the supply chain, and focusing on the digital platform.
Starbucks is a huge company. It operates more than 39,000 stores globally with just under half in North America. That's a lot of stores in which to create change, and a lot of workers to empower, even just starting in the U.S. However, Niccol works his magic by changing processes from the ground up. Supply chain improvements could be small changes with wide-ranging impact, and investments in equipment would be similar across stores. Marketing, as well, is for the the entire brand, trickling down to individual stores.
The key for Niccol is going to be identifying the right message to get across to lift the branding. He gave some hints about his intentions in his update, where he talked about the company's owned farms and local roasters. He said Starbucks' next slogan could be "Coffee is our heart." That's the kind of premium image that made Chipotle Mexican Grill the standout that it is today.
Those kinds of actions could take some time to get going, but the results could be felt pretty quickly. The only part of the plan that might take longer to implement is store redesign.
If things go right, by this time next year, Starbucks should have new, clear, and compelling branding along with improved processes and shorter wait times. Since filling demand has been challenging for Starbucks, that should lead to fewer abandoned carts, higher sales, and overall better performance. If this happens, the stock will reflect the improvements.
Scenario 2: The situation doesn't change
Investors love to imagine the positive scenario; that's why the stock jumped on the announcement. But it's important to consider the flip side, even if it's less likely, which I believe it is.
There are all sorts of ways this could not work out. Management could misidentify the branding, or not get the message out the right way. It could have a hard time training its huge worker base in new technology and equipment.
Even if everything goes right, it may not fix the problem. Sales could be stagnating as there's increased competition, and customers might be disillusioned by Starbucks' higher prices.
What should investors do?
As I said, I find Niccol's experience and message thus far compelling, and I'm confident in his abilities, like most Starbucks-watchers. He seems to have an excellent handle on what Starbucks is all about and how to paint the company the way its target customers want to see it, and he has a proven track record of developing effective processes for restaurant chains.
Still, success is not a given. But if you can handle a bit of risk, you might want to take a small position in this turnaround stock.
