By Svea Herbst-Bayliss, Granth Vanaik and Waylon Cunningham
(Reuters) -Starbucks on Tuesday named Chipotle Mexican Grill (NYSE:CMG) head Brian Niccol as its new CEO, poaching a successful fast-food executive known for reviving the burrito chain to lead a turnaround, in a shock move that sent the coffee chain's shares up 24%.
Niccol replaces Laxman Narasimhan, whose tenure only lasted a year-and-a-half after he was originally brought in as CEO in March 2023 to engineer a "reinvention" of the world's biggest coffee chain. Since then, the stock has continued to falter, losing nearly one-quarter of its value.
He inherits several challenges at the coffee giant, which has been under pressure from activist investor Elliott Investment Management to improve its business, and has suffered from increased competition and weakening demand in the United States and China.
Niccol's appointment is a coup for Starbucks (NASDAQ:SBUX), as Chipotle's annual sales have surged since he joined in 2018, and the stock has more than tripled over the last five years.
"This is a significant victory for Starbucks. Niccol has earned the respect and confidence of the investment community and will be given the much-needed leeway to make investments and time to turn around Starbucks," BTIG analyst Peter Saleh said.
Starbucks had been under pressure from Elliott, which had built a $2 billion stake. The hedge fund had suggested Starbucks expand its board and make Elliott executive Jesse Cohn a director, though it was not demanding a CEO change.
Sources familiar with Starbucks said former CEO Howard Schultz had been pressing board members to try and solve the company's issues without offering a board seat to the activist investor.
Elliott on Tuesday said that Niccol's appointment was "a transformational step forward" for the company. "We look forward to continuing our engagement with the Board as it works toward the realization of Starbucks' full potential," Elliott said in statement.
Starbucks recently tweaked its model to focus on mobile pickup and delivery orders rather than cafes set up for long visits.
When asked on CNBC if activist Elliott was consulted about the shakeup, Starbucks Board Chair Mellody Hobson said it had not been.
Trian Fund Management, another activist investment firm which tangled with Walt Disney (NYSE:DIS) this year, also owned Starbucks shares and had conversations with Hobson, according to sources. Happy with the appointment, the fund has now sold its position. Trian did not immediately respond to a request for comment.
THE SIXTH CEO
Starbucks shares had a record one-day percentage jump, hitting a more than five-month high. Chipotle stock closed down 7.5% on Tuesday.
Craig Garthwaite, a professor at Northwestern (NASDAQ:NWE)'s Kellogg (NYSE:K) School of Management, said Niccol "has taken an upscale fast food restaurant chain and improved it before, and that is what Starbucks is today, a fast-food restaurant. For Niccol this could be the ultimate challenge in fixing the perception that's weighing on the company and the business problems."
In May, days after Starbucks cut its annual sales forecast, Schultz wrote on his LinkedIn account that its U.S. operations were the "primary reason for its fall from grace," and that senior leaders need to spend more time with workers.
Starbucks in late July reported a 6% decline in U.S. comparable transactions for its most recent quarter.
Under Narasimhan, Starbucks moved away from Schultz's tough stance on Workers United, the union seeking to organize its U.S. workforce. In February, the chain announced talks that began a national contract negotiating process for the more than 400 unionized stores.
Niccol, who will start on Sept. 9, will become only the sixth CEO at Starbucks over its 50-plus-year history, with founder Schultz leading the company for 23 years in three separate stints.
CFO Rachel Ruggeri will serve as Starbucks' interim CEO until Niccol starts.
Chipotle said its board had appointed Scott Boatwright, chief operating officer, as interim CEO.
Niccol, who has an engineering major from Miami University, joined Chipotle in 2018 from Taco Bell and helped the company overcome salmonella and E.coli outbreaks at several outlets.
"(Niccol) is a fixer and a doer and an executor," said Thomas Hayes, chairman at Great Hill Capital.