Can Starbucks CEO Niccol Turn Customer Growth Into Higher Profit Margins?
By Waylon Cunningham
Starbucks’ Turnaround Under Brian Niccol: Can Growth Lead to Profitability?
Niccol’s Early Impact and Strategic Shifts
NEW YORK, Sept 9 (Reuters) - Brian Niccol's first two years at the helm of Starbucks have been a qualified success as his focus on store improvements and marketing has brought customers back to the world's largest coffeehouse chain.
The "Back to Starbucks" restructuring strategy, however, has raised costs and squeezed margins. For Niccol, who marks two years as CEO on Wednesday, it will be the next two years that could determine if he can translate that recovery into the sustainable profits investors are demanding.
Addressing Customer Dissatisfaction
Starbucks had posted three consecutive quarters of falling comparable sales when Niccol took the reins in September 2024, underscoring customer dissatisfaction with long wait times, promotions that missed the mark and a complicated menu.
The declines would continue for another three quarters before sales started to recover, rising to 7.9% in the fiscal third quarter ended June 28 and marking the fourth straight quarter of improvement.
Focus on Customer Satisfaction Over Margins
Rather than prioritizing near-term margins, Niccol has emphasised customer satisfaction, a philosophy that has underpinned Starbucks' decision to spend hundreds of millions of dollars on additional staffing to reduce wait times, and store improvements aimed at restoring the coffeehouse atmosphere that had helped make Starbucks a global brand.
The strategy harks back to Niccol's playbook from his previous job as Chipotle Mexican Grill's CEO. There, he acknowledged the chain's shortcomings and revived sales after its food-safety crisis, burnishing his reputation as a brand-centered executive.
Under him, Starbucks has also emphasized marketing efforts, such as the company's product placement recently in the movie "The Devil Wears Prada 2".
Financial Performance and Market Response
Shares popped 24% on the day Niccol's hiring was announced. They have risen 30% since, lagging the broader S&P 500 index's roughly 40% gain, but performing better than declines at peers like McDonald's and Chipotle over the same period.
"You can look at all sorts of stock metrics, but if the customer's not happy, it's not relevant," said Jake Dollarhide, CEO of Longbow Asset Management, an investor in Starbucks. Dollarhide said he was skeptical of the turnaround as recently as six months ago, but has been won over by improvements in service time.
Rising Costs and Margin Pressures
Those gains, however, have come at a cost. Starbucks has spent at least $500 million on labor investments as part of the reorganization, contributing to a decline in operating margin after Niccol took over.
As of the fiscal third quarter, operating margin was 12.9%, down from 15.8% in the same quarter two years earlier, according to LSEG data. The decline was steeper in North America — its largest market — where margin dropped to 13.6% from 21% in those periods.
"We will have to see if those investments pay off," said Brian Jacobsen, chief economic strategist of Annex Wealth Management.
A Starbucks spokesperson said in a statement the turnaround's investments in employees are "supporting sustained business momentum."
Restructuring and Future Challenges
Cost-Cutting Initiatives and Store Closures
JOB CUTS, STORE CLOSURES
Niccol has already started laying the groundwork for the next phase, offering executives stock awards tied to cost-cutting targets through fiscal 2027.
Starbucks has closed hundreds of stores, including its once-celebrated Seattle roastery, and cut jobs at its corporate offices. In China, Starbucks sold control of its operations this year to revive growth in a market where low-cost rivals, including Luckin, have gained market share.
International Strategy: The China Example
The China deal is an example of Starbucks' corporate restructuring under Niccol that makes the brand "well positioned to convert stronger organic sales growth to profit growth," said Jim Sanderson, analyst at Northcoast Research.
Labor Relations and Technology Setbacks
But significant challenges remain. Starbucks has yet to reach a first labor contract with its U.S. barista union, which called for a consumer boycott in August.
The company has also faced scrutiny over its labor relations and abandoned an AI inventory-management system meant to help address persistent product challenges, though that has not dissuaded Wall Street.
"I'm impressed with how he takes full responsibility for his mistakes and is not afraid to pivot," Dollarhide said.
(Reporting by Waylon Cunningham in New York; Additional reporting by Neil Kannatt in Bengaluru; Editing by Sayantani Ghosh and Muralikumar Anantharaman)
