The Journal. - The Inside Story of Starbucks’s CEO Drama

Episode Date: August 21, 2024

Last week, Starbucks ousted its CEO Laxman Narasimhan and replaced him with Brian Niccol, the current leader of Chipotle. Lauren Thomas reports on the dramatic leadership change, as Starbucks struggles to turn around its business and contend with activist investors.   Further Listening: - Can Chinese Customers Rescue Starbucks?   - The Underdog Coffee Bean That’s Making a Comeback  Further Reading: - Inside Starbucks’s Surprising CEO Firing and Hiring  Learn more about your ad choices. Visit megaphone.fm/adchoices

Our colleague Lauren Thomas covers shareholder activism, and recently that's meant reporting on Starbucks. But long before that, Lauren tried to make it in the Frappuccino business. My first job, funny enough, was actually working at a Starbucks in North Carolina. Bring us to what that was like. Great experience. I mean I feel like everyone should at some point have you know a job like working in either retail or restaurants. It teaches you many life skills. And Lauren learned she wasn't fast enough. Especially when it came to you know the Frappuccinos, anything that required extra steps.

Yeah, I was taking my time and the worst thing was to look over your shoulder and you saw the line of cups there waiting to be filled. That's like the pressure's on. That's the worst thing from both sides of the counter though. Well, 100%. And recently, Starbucks the company has been about as successful as Lauren the Barista. What three adjectives would you use to describe Starbucks performance this year? Ooh, um, choppy, underwhelming, and, um, d-d-d-do. Flat, weak, un-uncaffeinated, decaffeinated.

Decaf. A lot of unrest was brewing. Customers were complaining, earnings were falling. Then the old CEO called out new management strategy and shareholders started agitating. It all led to a major shakeup last week. So last week, in a pretty abrupt twist to everyone that had been following along the Starbucks saga, the CEO was fired.

They brought in a new CEO somewhat behind his back. At least there was this kind of hush hush operation going on over the summer to find the new guy, which they did successfully. I think you can sum last week up as very shocking. Everyone was shocked. Welcome to The Journal, our show about money, business and power. I'm Kate Leimbach.

It's Wednesday, August 21st. Coming up on the show, the inside story of Starbucks' CEO drama. So what's it like to buy your first cryptocurrency on Kraken? Well, let's say I'm at a food truck I've never tried before. Am I going to go all in on the loaded taco? No, sir. I'm keeping it simple. Starting small. That's trading on Kraken. Pick from over 190 assets and start with the 10 bucks in your pocket. Easy. Go to kraken.com and see what crypto can be.

Not investment advice. Crypto trading involves risk of loss. See kraken.com slash legal slash ca dash pru dash disclaimer for info on Kraken was a small chain in Seattle. And the person credited with expanding it around the world is former CEO Howard Schultz. Schultz, now a billionaire and once presidential hopeful, has had a hard time saying goodbye to Starbucks. He's been CEO three times. And in March of 2023, Schultz finally said he was leaving for good and handed the CEO desk

over to a man named Laxman Narasimhan. So Laxman takes over as CEO. This is a guy that didn't really have much, if any, experience running a restaurant, being in the food industry. He was at McKinsey for a number of years. Then he was at Pepsi. So he did work in the consumer product space. And then he was leading Wreck-It,

which is, you know, they make products including Lysol. So big consumer package goods company. Lysol? Lysol, yes. Not coffee, Lysol. Right, like what does Lysol have to do with running a coffee chain? Yeah, I think what Howard saw in Laxman was that he was capable of kind of leading a company

through a moment of change and a broader turnaround at companies that had global scale. And so I think that certainly played a role in picking Laxman. As CEO, Nara Simon came up with an ambitious plan for how to drive the business forward. It involved reducing wait times, regaining market share in China, and of course, drink innovation. Here he is talking with Jim Cramer on CNBC last year. And do you know the flavor for the season for us? Boy, I just finished pumpkin, so give it to me. Pumpkin may still be available for you,

but the flavor this season, Jim, is gingerbread. Gingerbread chai, a big recommendation. I know you're a tripper. It was a lot of momentum because it's like, Howard's gone. He's passed the baton on to Laxman. I know you're a trip. There was a lot of momentum because it's like Howard's gone. He's passed the baton on to Laxman. He's called Laxman his number one draft pick. I think investors were excited.

Everyone was excited. This is a new face, you know, taking over the business at kind of a pivotal moment. He had a lot on his plate, sure, but I think everyone was a believer that he could be the guy to do it. But Schultz didn't go away completely. He had a lifetime appointment as Chairman Emeritus, a permanent parking spot at Starbucks headquarters, and the ability to listen in on board meetings. He's kind of the boardroom whisperer. It's understood that Howard has a close relationship with a number of, well, I'm sure many of the board members, but a number in particular, including Melody Hobson, who has been the chair of the board. When did things start going awry?

About a year after Laxman takes over, Starbucks just had a really, really poor earnings report, a really dismal report. When we look at the biggest loser today, it's going to be Starbucks. It's among the worst performers in the S&P 500. It's down double digits. So they report that sales dropped. That was the first quarterly drop since coming out of the pandemic. And then traffic at U.S. stores also dropped the most since at least 2010.

You also saw just within their like membership program, their loyalty rewards program, the active membership was falling off. So there are a number of things, but really poor earnings report. The stock plummets and Laxman goes on CNBC. I want to know why you did not feel the need to come out and say, our quarter is going to be substantially worse than expected at least four weeks ago. I think Jim, we've been working on action plans to address these headwinds.

He was really put on the spot and asked some tough questions. And I think there was some feedback afterwards that he really stumbled through that. And that was a really tough moment, I think, for Lax. And that's when I think everyone realized, all right, things are not going great at Starbucks. Like, you know, something's got to give, something's got to change. Then criticism starts coming from inside the house.

From former three-time CEO Howard Schultz. Howard Schultz goes on LinkedIn and really walks through what he thinks are some of the missteps at Starbucks and really calls out management. He doesn't call out Laxman by name, but calls out management for just not doing a good enough job. And that's when you really see this tension between Howard and Laxman on full public display. I'm just pulling up the post here. He says, at any company that misses badly, there must be contrition and renewed focus

and discipline on the core. Own the shortcoming without the slightest semblance of an excuse." So it definitely feels like he's suggesting that they didn't respond well. Right. There were a lot of subtle, maybe not so subtle, digs. From then on, it really just builds. In July, it came out that a well-known activist investor, Elliott Investment Management, had built up a $2 billion stake. And that's after a report from the Wall Street Journal that Elliott Management has taken a big stake in the coffee chain.

The Journal reporting the activist is privately seeking ways to boost the share price. They smell blood in the water. They smell blood in the water. This is a firm that will show up, build positions in companies, and whether it's behind the scenes or whether it's playing out in the public, will just push for change. a CEO to getting a seat on the board to maybe pursuing a sale of the company. But Elliott is really there to push for changes that it thinks management is not doing quickly

enough and they're not doing right. How does that go down at Starbucks? Well, of course, so they're definitely nervous. You're always nervous when you have an activist show up in your stock. The big risk with activist investors is a proxy fight. A proxy fight is basically an election. Activist investors like Elliott try to get their own people on the board and thereby gain more power over the company.

You always want to avoid that. I mean, if possible, because it costs a ton of money. It's distracting for management, I think above all else. Shareholders don't like it because there's just then a lot of uncertainty of where things were going to go. So if you're Starbucks and you know, Elliot is in your stock and they want to see it on the board, I think of course you're going to try to work

to some sort of resolution, get to some sort of resolution with Elliot before it gets to the point where Elliot is launching a proxy fight. get to some sort of resolution with Elliott before it gets to the point where Elliott is launching a proxy fight. And behind the scenes, the board was looking to make a big change. That's next.

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And so he had kind of his circle of advisors and confidants. Then you have the Howard camp. Howard Schultz, even though he's no longer CEO, still has this lifelong title of chairman emeritus and he has this lifelong title of chairman emeritus, and he has his own view of things. Then you have Elliott, one of the biggest and most kind of feared activists on Wall Street, show up over the summer and starts building

this massive stake and is talking to management behind the scenes. So it's a tricky situation to navigate for sure. And the person navigating it was Melody Hobson, the board chair. And Hobson had an idea. So unbeknownst to many people at the time, you have Melody Hobson and a small circle of people

started to formulate a plan where they were going to try to recruit a CEO. And not just any CEO, they really had their sights set on Brian Nichol, who had led Chipotle through a pretty incredible turnaround. It's not that they are out there casting about for someone. They're saying, we want this one guy. Very specific, very keyed in on him. It was my understanding, at least some people had the mentality of like, either we get Brian or we keep Laxman.

Brian Nickell, the CEO of Chipotle, who's credited with the chain success. Everything from improving the mobile app to speeding up service times, to helping the company through a food safety scandal. Many consider Nicol to be one of the best CEOs in the restaurant industry. So on the down low, this like small faction is out there trying to get...

Trying to recruit Brian Nicol to come over to Starbucks. And then also important to mention, you had two other activists come to find out that had been building positions in the stock. So the barbarians are at the gate at this point. Barbarians are literally, yeah, in the stock. managed to keep this under wraps. I think the thinking was like, if we can get Brian, this could really be the solution that would placate everyone. Elliot and Howard, by the way, who's aware of everything,

Brian was kind of seen as like the ultimate solution. He would have been the ultimate get if they could seal this deal. He's the goat. The total goat. So this little group of people goes around offering Brian Nicol a coffee instead of a burrito. Exactly.

How did they get him on board? What do they do? Brian was already one of the highest paid CEOs. And he's certainly getting a pretty handsome pay package now over at Starbucks. To get Nickel to make the change, Starbucks board offered a multi-year pay package worth more than $110 million. And he doesn't have to relocate to Seattle. He'll stay in Southern California and use the company Jet to commute when he needs to.

And he also, by the way, is now chairman and CEO. It was not, you know, a title that Laxman previously held. Got it. So they're offering him money and perks and titles. Money, perks, title, the whole package, the whole package. You know, they knew they had to pull him away from a great gig and a great success story at Chipotle. And I don't think anyone was expecting that he was quite ready to hang up his hat over there. And this surprise CEO switch was good for Starbucks' stock.

Can one man create $21 billion in value on the first day on the job as CEO? That's what happened in Starbucks today when they dismissed Luxman, Narasimham and hired Chipotle's Brian Nicol as the new CEO. Look, this is an amazing development. The day that the news of Brian's hiring came out, Starbucks had like one of its best days ever. The stock was up big. And so they're all making money. That's the thing. You know, it's hard to argue with this. How could you be upset with this news that Starbucks has just brought over the biggest

get in the restaurant industry to be their CEO? Activist investor Elliot called Nichols appointment a quote transformational step forward. But Elliot also said it would continue discussions with the Starbucks board. Does this story say anything about the effect that activist investors can have on people who run major companies? Sure, Starbucks was already facing these pressures. It may have already been thinking, all right, we need to do something, we need to figure this out, possibly we need to find a new CEO. But when you have these activists show up, it's just going to add to the pressure. And I think in the case of

Starbucks, it's certainly accelerated whatever was happening and it happened on a much quicker timeline. Nara Simmon, the now former CEO, didn't know he was being fired until two days before the news was announced. It's unfortunate because in a way it's like Laxman was from the start, he was dealt a really tough set of cards. It's just like wrong place, wrong time. And, you know, he tried and he made progress on certain things, whether it was, you know, supply chain in particular, I think was always a strong suit of his, but ultimately it just wasn't enough. And the activists showed up and

the pressure mounted and they decided to go with another guy. But Nickel is going to inherit the same problems that Starbucks has been struggling with. What's his plan? It's a great question. There's a new CEO in charge. Like there's a new guy in town and I think he's going to make his own imprint on the company and probably bring some of his learnings

from Chipotle over to Starbucks. And there are things that the company has said it wants to get better at, whether that's like, you know, shorter wait times, better mobile experience, better loyalty program, like more experimentation with products and like new innovation, like cooler drinks, fancy drinks. And so Starbucks customers can expect that there probably will be some changes over time that eventually will be visible to the end user. And Howard Schultz is happy that he doesn't have to come back in again.

Happy, although he's always there, you know, I guess he still is there as that whisperer, so to speak. That's all for today, Wednesday, August 21st. The Journal is a co-production of Spotify and the Wall Street Journal. Additional reporting in this episode by Heather Haddon. Thanks for listening. See you tomorrow.