Starbucks CEO Laxman Narasimhan
How closely will Howard Schultz work with the new CEO? And for how long? Image Credit: Bloomberg

Seattle: Starbucks Corp. tapped Laxman Narasimhan, CEO of Reckitt Benckiser Group Plc, as its next CEO, choosing a consumer-industry veteran to build on the new path charted in the interim tenure of Howard Schultz.

Narasimhan, 55, will join the coffee giant October 1 while long-time leader Schultz, 69, stays at the helm. The new chief will take over fully April 1 and will join the board, on which Schultz also intends to serve. Before his stint at Reckitt, Narasimhan was an executive at global beverage titan PepsiCo Inc., which is a Starbucks partner for ready-to-drink products, and worked at consulting firm McKinsey & Co.

The incoming CEO faces a growing union push, along with struggling sales in China, one of the chain’s key areas for growth. Meanwhile, Narasimhan will be working closely with founder Schultz, who’s known as a hands-on leader.

Starbucks US
Starbucks will unveil a new roadmap for growth later this month, much of it was crafted by Howard Schultz.

How that dynamic will play out in practice, with Schultz serving indefinitely as an adviser to Narasimhan, is an open question. New corporate leaders at times have struggled when their larger-than-life predecessors have stayed on the scene, as with the fitful period that Walt Disney Co. CEO Bob Chapek faced when Bob Iger stayed on as executive chairman.

“It seems like Howard’s going to continue to be very, very much involved, based on the language in the release,” said BTIG LLC analyst Peter Saleh. “My guess is that bigger-picture operating decisions, menu stuff - I don’t know - it feels like this is still Howard’s show, at least for a while.”

No restaurant experience

Saleh said he found it strange that Starbucks had moved to eliminate the role of chief operating officer, to be held by John Culver until Oct. 3, “but they brought in a CEO with no restaurant experience”.

Cowen Inc. analyst Andrew Charles said he believes Schultz understands that the new CEO will “want to put some spin and do things differently. Starbucks is his baby, and he wants to make sure there’s someone there who is capable and strong.”

The stock had lost 27 per cent this year, more than the 17 per cent decline of the S&P 500 Index.

A Schultz shakeup

Since coming back to the helm in April, Schultz has upended Starbucks, restructuring management and introducing a plan to redesign the company’s thousands of cafes for both customers and employees. The details of the plan are yet to be announced, with specifics expected during the company’s investor meeting September 13.

Is latest earnings show that diners are willing to keep spending in the key growth market of the US. Comparable sales in the US jumped 9 per cent in the third quarter, and the company is trying to serve diners their lattes and cappuccinos faster with improved technology.

Less uptake in China

That strong performance - along with higher menu prices - has helped to offset the sluggishness in China, where the chain has about 5,700 locations. The company says its recovery there will be nonlinear, despite the recent reopening of some of its locations in Shanghai.

Starbucks China
China operations have proved underwhelming for the US coffee chain in recent times. And there are no easy fixes.

No unions, please

The chain has hired a record number of employees in the US so far this fiscal year, and is trying to convince them that they will be better off without a union. Starbucks also is investing in worker training, new equipment and other operational changes to make jobs easier on its baristas. The moves, along with pay increases, total $1 billion, the company has said.

The chain has raised pay to an average of $17 an hour across the US as of the beginning of August while also bumping compensation further for managers and more tenured staff. But it hasn’t been enough to stop the union push so far, which has built across the US with more than 230 stores voting to unionize with Workers United.

Aim for a win-win?

“We are hopeful that Mr. Narasimhan will end Starbucks’s scorched-earth union-busting campaign and work with all Starbucks partners to make Starbucks a better company and better place to work,” said Michelle Eisen, a barista in Buffalo, New York, on behalf of Starbucks Workers United.

‘A lot of work’

“He’s got a lot of work to do,” Bloomberg Intelligence analyst Mike Halen said of Narasimhan. “The rapid unionization of the Starbucks chain is happening way faster than anybody thought.”

There’s also “tons of margin pressure with the commodity inflation, with the decision to increase wages for its employees, and there could be more pressure coming down the pike with the unionization efforts,” Halen said.

Narasimhan appears poised to travel around the world to get familiar with the business, He’ll use the lengthy transition period to become “fully immersed in the company, spending time with Schultz and the management team, partners and customers” and getting up-to-date on its strategy, the company said Thursday. He’ll visit manufacturing plants and coffee farms, and connect with workers and business partners.

What’s the new CEO’s take-home?
Narasimhan will be paid $1.3 million in annual base salary, according to a regulatory filing. He’ll also receive a $1.6 million cash signing bonus and a replacement equity grant with a target value of $9.25 million to make up for incentives that he’s forfeiting by leaving Reckitt. Starting in fiscal 2023, he’ll be eligible for annual equity awards worth as much as $13.6 million.

Reckitt shares fell 5.2 per cent in London after the company announced earlier Thursday that Narasimhan would depart at the end of the month, saying he was pursuing an opportunity in the US. The move was seen as a surprise for an executive who only joined in 2019 and was making headway in restructuring the company. He was unwinding the missteps of former chief Rakesh Kapoor, most notably the high-priced takeover of Enfamil infant formula maker Mead Johnson.

Neil Saunders, managing director of GlobalData, said in an emailed note that Narasimhan “has a solid track record at Reckitt Benckiser, where he has helped revitalize the company and successfully navigated it through the challenges of the pandemic.” His experience may help the company to improve profitability as it faces higher costs of business in the US.

Schultz’s presence, of course, will continue to weigh on the company’s actions and strategy, Saunders said. However, “given that Mr. Schultz has been involved in the recruitment process, we believe the transition will be relatively seamless as Starbucks moves to its next chapter.