What went disastrously wrong in Laxman Narasimhan's 17 months as CEO of Starbucks

Laxman Narasimhan is out after less than a year and a half as Starbucks CEO.

Starbucks; Chelsea Jia Feng/BI

Starbucks CEO Laxman Narasimhan has stepped down after 17 months in the role.
His tenure at the company was tainted by falling sales, union clashes, and activist investors.
One analyst said that his exit from the top role was "not surprising."

Laxman Narasimhan is stepping down as CEO of Starbucks, just 17 months after he assumed the role in March 2023, the coffee giant announced on Tuesday.

Chipotle CEO Brian Niccol will take over in September, with current CFO Rachel Ruggeri serving as interim CEO until then.

Narasimhan's time at the head of the company had been tainted by falling sales, union clashes, and activist investors.

"While not surprising that Laxman Narasimhan is out as Starbucks's CEO given activist investors and the company's steep sales reversal over the past 9 months, his replacement will send ripples throughout the industry," William Blair analyst Sharon Zackfia wrote in a note.

Here's what went wrong for Starbucks under Narasimhan's leadership.

Falling sales

Same-store sales — a key metric in the restaurant industry — have been falling at Starbucks. In late July, it posted a 3% drop in global comparable store sales in the quarter versus the 10% increase it posted a year ago.

This includes a drop in sales in its home market. Comparable store sales in the US were down 2% in the quarter compared to a 7% increase in the same quarter the year before.

Comparable store sales in China, a key growth market, plunged 14% in the quarter year over year, compared to a huge 46% growth in the same period the prior year.

Starbucks has given numerous reasons for its poor performance. Boycotts related to the Middle East have seen some customers avoid the brand, which Narasimhan told investors last month was "driven by widely discussed misperceptions about our brand." He said that there was a challenging consumer environment in the US, while in China, sales had been hit by cautious consumer spending and increased competition.

Starbucks has looked at a number of ways to boost sales, including selling boba-inspired drinks and introducing bundling. Stifel restaurant analyst Chris O'Cull said in a recent note that Starbucks' 6% decline in the number of comparable US transactions, which was only partially offset by 3% increase in average ticket size, was "alarming" despite these efforts to increase sales.

Activist investors

Paul E. Singer, Founder and President, Elliott Management — Elliott Management, headed by founder Paul Singer, has taken aim at the coffee giant in recent months.
CNBC / Getty Contributor

Narasimhan confirmed in July that activist investor Elliott Management had taken a stake in Starbucks.

"Our conversations to date have been constructive," he said at the time.

Starboard Value has also taken a stake in the company, The Wall Street Journal reported on August 9.

People familiar with the matter told The Journal that Starboard Value wanted Starbucks to take action to boost its stock price after falling over the course of 2024.

Union clashes

Starbucks baristas have been organizing over the past few years. The Workers United union represents staff at more than 470 US stores, The Financial Times reported.

Starbucks has gotten into clashes with the union during Narasimhan's tenure as head of the company.

Last summer, the union accused the chain of "hypocritical treatment of LGBTQIA+ workers." It told Business Insider that Starbucks had refused to let workers at some stores decorate for Pride and had taken down Pride flags. Starbucks said that there had been "no change" to company policies regarding Pride Month celebrations.

Starbucks and the union then sued each other in October after the union used the company's name and logo in a social media post declaring "solidarity" with Palestine.

Its former CEO keeps attacking the company

Howard Schultz, a leader synonymous with Starbucks' rise, won't pipe down.

In a LinkedIn post in May, the longtime former CEO said that Starbucks needed to focus on customer experience and fix its stores and mobile app to reverse its "fall from grace."

Schultz, who remains the company's chairman emeritus, added that the chain needs to "overhaul" its strategy and reinforce its "premium position."

"Through it all, focus on being experiential, not transactional," Schultz wrote.

Earlier on in the year, he said in a letter to the chain's management that it needed to return to its core values and rediscover its "soul."

In Starbucks' press release addressing the leadership change, Schultz didn't acknowledge Narasimhan's time at the company. Instead, he said of Niccol: "I believe he is the leader Starbucks needs at a pivotal moment in its history."

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Contributer : Business Insider https://ift.tt/HqYJInx

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