Lack of a strategic intent in the ‘Reinvention’ template means Narasimhan will get a free hand in fleshing out details.
Starbucks unveiled broad-brush details of its future plans on its much-awaited investor day, with scant insights into what incoming CEO Laxman Narasimhan will have to offer the coffee chain. Given the paucity of details, Mint SnapView has two critical suggestions for him.
But, before that, here are some details of what Starbucks announced over the past 24 hours. Interim chief executive and Starbucks founder Howard Schultz and chief financial officer Rachel Ruggeri unveiled the barista’s biennial investor day plans—titled ‘Reinvention’—to an in-person audience of 150 investors in Seattle, the chain’s headquarters. The plans, broadly, involve a capital expenditure of $2.5-3 billion on new stores, technology to speed up delivery of orders to both in-store and at-home customers, and renovation of existing shops and supply chains.
The company plans to have a footprint comprising 45,000 stores by end of fiscal 2025 which, at current reckoning, works out to almost eight new stores every day. Apart from 2,000 new stores stateside (including some delivery-only locations), the plans entail doubling the chain’s physical presence in China to 9,000 stores, which works out to a new store every 9-10 hours.
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Based on these projections and investment plans, Starbucks expects earnings per share to grow by 15-20% over the next three years. The coffee chain also expects to return $20 billion to shareholders through buybacks and dividends over the next three years. But there is also a source of future concern for shareholders.
Starbucks has also announced a slew of benefits for its employees to stave off the wave of unionisation sweeping through stores in the USA. There is a small crimp in these plans: the benefits will be available only to non-unionised stores, the divide-and-rule policy thus sowing seeds of future conflict and hanging a pall of scepticism over earnings forecasts.
Narasimhan will inherit this lot when he moves into the corner office in April 2023. Given the lack of a strategic intent in the ‘Reinvention’ template, it is quite likely that Narasimhan will be given a free hand in fleshing out some of the finer, granular details when he finally takes charge. The lessons learnt from time spent at McKinsey, Pepsi and Reckitts are likely to come in exceptionally handy while reviving the flagging coffee chain—probably the most important ones being those gained from former Pepsi CEO Indra Nooyi’s tutelage.
Reinvention, going by the details made public so far, broadly focuses on crunching time while delivering a customer’s orders. But, crucially, it fails to examine the impact of the intervening pandemic and dislocation on customer preferences, especially the choice of beverages, and whether the existing Starbucks spectrum—both hot and cold beverages—aligns with the newer, emerging hierarchy of preferences. Add food items to the list and it becomes evident that the Starbucks management faces a unique strategy challenge, one that left unresolved could provide an entry point to new contenders.
This is where Narasimhan’s Pepsi experience—where he was chief commercial officer and CEO for South America, Europe and sub-Saharan Africa—could work for Starbuck’s moribund growth plans. Indra Nooyi famously revived Pepsi’s margins and reignited investor interest by pivoting away from the staid and under-performing cola drinks to health beverages. This is not to suggest that Narasimhan cut-and-paste that exact strategy, but there are obvious, underlying lessons in that strategic swing—where the product portfolio was overhauled to reflect changing tastes of an emerging customer cohort—which could help Narasimhan provide some momentum to the stalled Starbucks experience.
The second leg of Narasimhan’s strategic game plan should focus on the China question, specifically the risks arising from Starbucks investing so much in one specific geography. China might have been a promising market for Starbucks thus far and yielding higher margins but, as the disclaimers famously announce, the past is never a good indication for what the future holds. The sharpening geo-political tensions, as well as the growing chill between the USA and China, hold out a major risk to the Starbucks balance sheet. Narasimhan perhaps knows better than anyone how past mistakes can come back to haunt a new CEO: at Reckitts he had to correct past mis-steps, which included apologising for consumer deaths in South Korea from faulty dehumidifiers and disposing of expensive acquisitions made by predecessors.
Beyond this, Narasimhan will have to forge a new company-employee compact, one that is less confrontational and combative. Employees that have unionised are not the company’s enemies but members of its diverse set of partners. This will require him to provide a healing touch, a humane approach to employee relations.
It is also true that till April 2023 Laxman Narasimhan will have to shadow the current CEO Howard Schultz, much like his namesake, the mythological younger brother. Thereafter, he doesn’t necessarily have to accept the hand dealt to him. Beginning April 2023, Narasimhan must focus on creating an independent outreach to all stakeholders, which include jaded investors, to sell his vision of a vibrant, compassionate, future-ready and climate-friendly retail outlet.
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