Revitalizing Starbucks: Actions for New CEO Brian Niccol

Starbucks now has a new CEO. Just about a year since having taken over, Laxman Narasimhan was ousted and replaced by Brian Niccol (Chipotle). It’s unfortunate because a large organization like SBUX can’t be fixed overnight. It takes patience, experimentation, and deep engagement with customers – thus, it takes time to see results come through.

Why did this happen? Could it have been avoided?

Both as a regular patron of Starbucks and as an avid follower/reader/practitioner of strategy and product coaching, I have been noticing a marked decline across many areas:

1. Worsening relationships with employees
2. Being out of touch with societal and cultural changes and expectations
3. Disastrous move towards store redesign and other approaches in such a way that it actually excludes people – its very customers – from being part of the Starbucks experience
   1. Focus on app-based and drive-through sales at the cost of in-store transactions
   2. Removal of chairs from many locations along with rendering many locations sterile/cold, boring, and even unwelcoming due to improper lighting, seating, and comfort
   3. The rise of to-go-only locations
   4. Focus on turnaround time to such an extent it has demolished the relationship-making potential of baristas with customers (also see: Southwest for its hyperfocus on turnaround time, resulting in major issues in a completely different context)
   5. Over-automation and depersonalization of the customer experience as a result. Does anyone remember the meme-worthy, but adorable misspellings of people’s names scrawled on the cup?
4. Pricing that has started alienating even its best and most loyal customers and is completely unjustifiable
5. The loss of its brand luster and coolness due to dilution, excessive choice, gimmicky offerings, quality issues, and value prop decline
6. Strong competition in key countries like China as well as from independent coffeehouses. These entities that have sought to fill exactly the gaps that Starbucks had started out to fill originally at its inception. But SBUX then broke the contract that it had with its customers as I mention above – talk about irony!

In general, it’s quite easy to do hindsight analysis, but the leading indicators for the impending and imminent destruction of shareholder value were blindingly obvious: Sentiment drop, boycotts, protests, unionization efforts and such.

To fix these issues, they brought in Laxman, who actually has a CPG (Consumer Packaged Goods) background rather than a restaurant operations background. Focusing on the wrong metrics (app/drive-through) resulted in significant, sub-par and suboptimal experiences for its customers: both new and old.

Its complete obliviousness to the fact that inflation as well as the job market have made people cut back heavily on discretionary spending (such as $6 coffee) made it offer “value pairings,” which are not really taking off as they’re still not considered worthwhile. Note the furious reaction that people are having against McD’s price updates; as a consequence, prices are expected to drop and be more reasonable.

What could Laxman have done better?

Any good strategy has 3 essential components (Richard Rummelt dissects this masterfully in his outstanding book, Good Strategy Bad Strategy): the challenge statement/diagnosis, strong guiding policies, and clear, coherent actions.

Their challenge statement was a drop in same-store sales, but they did not have any good guiding policies – they were, in fact, all over the place (or nowhere). There wasn’t a clear policy around employee relations or price considerations or improving customer experience regardless of mode of consumption (store/app/drive-through). The policy was just to make more money rather than arrest the sales decline and reverse it. In short, they did not practice any kind of systems thinking but were focused on optimizing only one thing (which then suboptimized the entire organization.)

As a consequence of non-existent policies (or conflicting policies), their actions were muddled, which confused and even infuriated customers (not to mention investors/shareholders as well as stakeholders).

Continuing on the strategy aspect, AG Lafley and Roger Martin, in their phenomenal book Playin to Win, talk about 5 key focus areas which, when combined holistically, may result in a good, adaptive strategy:

1. What is the winning aspiration?
2. Where should we play?
3. How do we win?
4. What systems must we need in place to be successful?
5. What capabilities must be invest in?

SBUX has been enormously successful in the past because it had clear answers to the above 5 questions, but over the past several years, as the markets, the world, culture, expectations, and norms evolved and changed.

SBUX thought its original approach would be good enough and it could keep raising prices without changing anything else (other than poorer customer experience). But when a rapid set of events and trends impacted the organization, it couldn’t move fast enough as it had gotten too comfortable, staid, and complacent. Its strategy was either static, non-existent, or entirely out-of-date.

Its reputation and intent as the “3rd place” beyond work and home (as originally envisioned by Howard Schultz) was completely shattered due to customer- and employee-unfriendly practices.

So, coming back to the question, what should Laxman have done/better? He should have focused on

1. Revitalizing the in-store experience, making it truly enjoyable and return-worthy – a haven for reading, chatting, and just relaxing
2. Revitalizing relationships between the baristas and customers through enabling, encouraging, and enshrining more personable and genuine interactions
3. Implementing a Design Thinking approach to understand customer sentiment, pain points, high points, and overall journey
4. Taking a fundamental look at the economics of their offerings vs what customers are actually willing to pay and adjust pricing subsequently
5. Building trust with employees by practicing radical transparency and acting without delay on promises made
6. Practicing simplicity with its offerings – eliminate things like Oleato, which has been a major flop

In other words, state the challenge clearly, state the policies that will be followed, and state the actions that will be taken.

In my opinion, the new CEO is more of an optimizer not a visionary, which means he will try to extract value from the current ecosystem than make the ecosystem itself more valuable. His success at Chipotle came from solving a straightforward set of problems while SBUX’s problems are way more complex and driven at once by politics, economics, society, employee relations, and consumer psychology/behavior.

So, if he wants to be successful he needs strong systems thinkers, design thinkers, behavioral economists, and pragmatists by his side rather than PowerPoint jockeys.