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Posted: 02 Dec 2016 07:41 AM PST
It’s the end of an era for the global corner coffeeshop: Howard Schultz is stepping down as Starbucks’ CEO. And investors are uneasy about it.
Shultz announced the move Thursday in a statement released right after the stock market’s official trading session ended. He will take on the title of executive chairman, while Starbucks President and COO Kevin Johnson will assume the CEO role. Both men held a conference call to reassure investors that, far from disrupting Starbucks’ long history of success, the moves will pave the way for future growth.
Shultz will remain at Starbucks, but will focus on building out new categories of stores, such as the high-end, 15,000 square-foot Roastery it opened in Seattle. Johnson will focus on running the 25,000 stores Starbucks has in 75 countries, drawing on his experience at Microsoft and Juniper Networks to employ technology aimed at keeping customers coming to its coffeeshops.
So iconic is Shultz as a retail CEO, however, that Starbucks shares dropped 4% on the announcement. Nor did the stock recover much after repeated assurances from both executives that this was “an evolutionary process” that has been in the works for several months as Starbucks charted out a five-year strategic plan. Evolutionary or not, it came as a surprise to investors.
“I’m here every single day,” Shultz said. “And I’m going contribute to what I think is a significant growth opportunity of a new franchise within Starbucks.” For his part, Johnson underscored he won’t be running Starbucks alone. “Over the last two years, we’ve worked much more closely together,” he said. “Our offices are connected. We talk several times a day. We brainstorm.”
Shultz joined Starbucks in 1982 after working for a Swedish housewares company and noticing the a small Seattle store was buying more cone filters than anyone. He bought Starbucks in 1987, expanded into other cities and took the company public in 1992. In 2000, having brought the company to $2.2 billion in annual revenue, Schultz stepped down.
Eight years later, Schultz returned as CEO after the stock entered a prolonged slump that saw its value decline 80% over a two-and-a-half year period. Once Schultz returned, Starbucks’ stock went on a tear that pushed it to new heights, rising more than 500%.
Over the past year, however, that rally has stalled, with the stock down 9% from its record high of $64 a share. Schultz says retailers in general are undergoing a “seismic shift away from bricks and mortar toward online retailing.” Starbucks isn’t immune to the loss of foot traffic, which is why he’s embarking on a new kind of coffeeshop designed to become what he calls “relevant consumer destinations.”
Starbucks plans to open as many as 30 Roastery stores in coming years, including one in New York and another in Shanghai, which feature on-site roasting and $12 cups of coffee. Schultz said the Roastery stores will feature baked goods from the Italian restaurant Princi as well as “a broader category” that Starbucks will unveil at its investor day on Dec. 7.
The company will also build as many as 1,000 smaller stores under the Starbucks Reserve brand, which will offer high-end coffee without the on-site roasting, while remodeling many older stores to include Reserve espresso bars. Johnson, meanwhile, will work to improve customer engagement with initiatives like loyalty programs, app-driven orders and digital payments.
Given Schultz’ lifelong entrepreneurial bent, the plan the company has outlined for growth into high-end stores makes sense. The chief concerns are that the new stores could cannibalize business from its traditional stores and that pulling Schultz away from a $21 billion enterprise could lead the stock lower.
One analyst on today’s call called Schultz a “master merchant” and asked whether “that merchant gene and level of entrepreneurial spirit” would remain in the managerial team. Another asked why this changing of the guard would be different from the last time Schultz stepped down 16 years ago.
“The differences between then and now couldn’t be greater,” Schultz said. “I don’t think there’s ever been a time in the company’s history with a pipeline of product innovation.” For now, investors don’t seem so sure. The new roles for Johnson and Schultz may prove to be just what Starbucks needs for its next chapter. But don’t change the fact that there is a difference between a capable CEO and an iconic one.
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