Howard Schultz is backseat driving Starbucks. That’s a problem for his successor

Laxman Narasimhan took over as CEO of Starbucks from its founder Howard Schultz last year.
Laxman Narasimhan took over as CEO of Starbucks from its founder Howard Schultz last year.

Summary

The tale behind his recent public outburst. Meanwhile, the CEO rallies staff, ‘Are you in it to win it?’

Howard Schultz, the legendary entrepreneur who turned a local coffee chain into a global icon, was meeting with the man who would succeed him as Starbucks chief executive in a month’s time. He’d recently had the opportunity to watch a New York Giants practice and had come away inspired by how football teams manage their time and structure their work by unit—offense, defense and special teams.

The same principle, he told his handpicked successor Laxman Narasimhan, could be applied to Starbucks’s systems, which Schultz had spent nearly a year analyzing in search of ways to improve service.

Narasimhan, set to take over as CEO in March 2023, wasn’t buying it. “That’s a football team. We are a company," he said.

“You don’t like it, fine, it’s your company," Schultz said, laughing, as Narasimhan chuckled.

For the prior five months, Narasimhan had trained under Schultz and other Starbucks veterans, learning everything from corporate structure to how to make iced mochas and serve cafe drive-throughs. The time he spent shadowing Schultz was a gift, he said. Starbucks had invited a reporter to talk about their handover over coffee at the cafe in headquarters.

Schultz, nearing the end of his third run as Starbucks’s CEO, said he had no plans to keep an office at headquarters nor be in the building come April. He would let his successor run the business with a clear mandate and a singular voice.

There would be only one boss, and “that’s me," Narasimhan said. “I will listen to him but there will be times I won’t agree with him. We will resolve those things privately."

That lasted barely a year.

It all exploded into public view Sunday night when Schultz wrote a LinkedIn post that read like an open letter to shareholders criticizing how Narasimhan and his senior leaders were running the business. On the heels of the company’s weak earnings report, the 70-year-old declared that Starbucks had to improve service to its U.S. customers. He challenged executives to tie on one of the chain’s signature green aprons and better root themselves in the coffee giant’s history and culture.

“Don’t try to do everything at once," he wrote. “Leaders must model both humility and confidence as they work to restore trust and increase performance across the organization."

Schultz got more than 9,600 likes, hearts and clapping-hand emojis and 1,200 comments on his post, many of them from Starbucks’s powerful alumni who agreed with their former leader. Other alumni thought Schultz should keep his views private.

Narasimhan was left to wade through the fallout and brace for questions on who’s the boss. A Starbucks spokeswoman said: “We always appreciate Howard’s perspective."

The leadership questions over Starbucks comes as the chain is struggling. On April 30, it cut its financial outlook for the second time this year, a move that contributed to shares plummeting 16% the next day. It was the worst single day for Starbucks shares since it became a public company in 1992. Some analysts and pundits described the results as “stunning."

The quarterly results prompted Schultz to write Sunday’s LinkedIn post, said people familiar with his thinking. He notified Starbucks before publishing it.

Even in the annals of meddling ex-CEOs, Schultz’s public airing of grievances on a social-media platform is surprising. Disney’s CEO Bob Iger was known to critique his successor, Bob Chapek, privately to friends and former colleagues across Hollywood after he left his post in 2020, before returning to lead the company in November 2022. Goldman Sachs’ former CEO Lloyd Blankfein grumbled about his successor, David Solomon, last year at the bar during a partners’ meeting. A public post on LinkedIn is another level.

Narasimhan came out swinging during an internal company forum last week after earnings, but before Schultz’s post. Narasimhan said he owned the quarterly results, and added that the company has grown stronger when facing adversities in the past and would ascend again. He asked the crowd if they agreed, urging them to say so in a call and response.

“I don’t care what the people outside say. Do you agree with me?" said Narasimhan during the nearly two-hour forum, a replay of which was viewed by The Wall Street Journal.

“Yes," replied the people in the crowd amid some applause.

“I’m grateful to each of you for getting in this ring and fighting forward. So let me ask you this, ‘Are you in it? Let me ask you this again. Are you in it to win it?’" asked Narasimhan.

He then yielded the floor to his chief financial officer, who took the stage to the David Bowie and Queen song “Under Pressure."

Starbucks, the world’s largest coffee company by locations and sales, is at a crossroads. Its vision under Schultz was to serve as a “third place" between home and work where customers could slowly sip coffee from couches or meet with friends. But now, the to-go business is the engine of its growth and the company is having trouble keeping up.

Customers are fed up with mobile sales that take too long to complete. They abandon their orders before paying. Stores are frequently out of breakfast sandwiches and items like chive cheddar bakes. Some people are ditching Starbucks coffee for cheaper alternatives, leading to slowing sales growth.

Narasimhan prepped Starbucks’s board and leaders ahead of its April quarterly earnings report, warning them that it would disappoint investors and analysts. And when the company reported the results April 30, Narasimhan spoke for half an hour, reassuring investors that there was a plan to turn around the business. The rebuke still came, with the steep stock selloff and challenging takedowns from commentators.

When Schultz officially left Starbucks as CEO in March 2023, the shares were at $100, and the company was worth $115 billion. Now, the stock is $76 a share and Starbucks’s market capitalization is $86 billion.

Schultz is the company’s fifth-largest shareholder, holding 2% of shares outstanding worth around $1.6 billion, according to FactSet.

The first outside CEO

Starbucks recruited Narasimhan two years ago as its first outside CEO to help the chain turn around its operations. The India-born executive had been living in London running consumer-products company Reckitt Benckiser Group after years as an executive at PepsiCo. He hadn’t led a restaurant chain.

Narasimhan hesitated to take the CEO role when the company first reached out to him. He had just navigated Reckitt through the pandemic and he was helping to care for his mother.

He inherited an ambitious road map largely set by Schultz and other Starbucks executives. The plan, outlined at a 2022 investor day, boosted annual earnings, same-store sales and unit growth targets past previous estimates. It was slated to last until 2025.

Starbucks alumni have advised him on how to pick better cafe licensees and the urgent need to improve the chain’s food, according to people familiar with the conversations. Cafe workers have demanded that the company negotiate contracts with unions representing baristas.

In February, Schultz began posting on LinkedIn to dole out advice for Starbucks managers on how to run the business better. He has shown up at Starbucks’s headquarters to speak with staff. He spends time in the Reserve cafe on the ground floor. He attends celebrations for longtime executives. He’s welcome in the building, Starbucks said.

Narasimhan has begun to reshape Starbucks with his own vision. He has appointed four of the company’s 11 directors, and serves on the board.

He moved to streamline corporate operations, eliminating roles like global marketing chief and spreading those functions to geographic divisions.

Turnover at U.S. cafes has dropped as Starbucks has invested in its worker benefits, provided more hours to employees and improved cafe equipment. Drive-through order times are falling, the company said. The company is on track to meet a goal of running 55,000 stores globally by 2030.

“We are confident in our outstanding partners, our plan, and the long-term success of Starbucks," a spokeswoman said.

Cutting the chord

For four decades, Schultz has rarely strayed far from Starbucks.

A Brooklyn, N.Y., native, Schultz got his start in sales for a company that sold kitchen equipment, including to a Seattle retailer called Starbucks. He grew curious why it was buying so much of a particular coffee maker, and traveled to Seattle to introduce himself to management. Schultz came to work for Starbucks with its previous owners, and grew to love Italian-style coffee.

He bought the Seattle-based coffee company in 1987 when it operated only a handful of local shops. His vision of creating Italian-style cafes where people could linger over premium coffee helped turn Starbucks into a global company with tens of thousands of locations. The company reshaped Americans’ relationship with coffee in the process.

He served as its CEO from 1987 until 2000. He came back in 2008, when the chain was aiming to improve its performance. He led the company until 2017.

Schultz left Starbucks’s board the following year and flirted with an independent run for U.S. president in 2019, before returning for a third stint as Starbucks’s CEO in 2022, as the chain faced a broadening unionization campaign among its baristas.

Since leaving (again), Schultz had worked at his family foundation, recruiting a trusted Starbucks aide to lead its efforts to invest in entrepreneurship and youth development. He also invested in food and beverage startups, including a machine to make cold brew coffee at home.

Schultz is also a brand ambassador, which means he does promotion for the Oleato line of olive-oil beverages he launched at Starbucks in 2023. He also holds a stake in the Italian olive oil company used for Starbucks Oleato drinks.

Company founders and former long-tenured executives often have a hard time keeping away from the brands they’ve built. Disney, Apple, Twitter, Procter & Gamble and Dell are among the companies with a history of so-called boomerang CEOs, where chiefs have returned to the corporate helm to fix problems.

When former CEOs begin speaking out, or remain in close touch with current employees, there’s another danger, corporate advisers say: They’ll often keep doing so.

“Like moss growing on something, it doesn’t quite go away," said Peter Crist, chairman of the executive-search firm Crist Kolder Associates.

When a leader like Schultz continues to weigh in, Crist said he advises board members to step in, reasoning with the former CEO to remain quiet.

Starbucks named Narasimhan as the coffee giant’s next CEO in September 2022, though he didn’t assume that title for nearly seven months.

While he was “interim CEO" Starbucks assigned Narasimhan a trainer, veteran Sandy Roberts who, as director of cultural experiences, was to help him learn the company’s ways and heritage. He traveled with senior executives to a company coffee farm in Costa Rica to discuss Starbucks’s future. Schultz told those gathered there that out-of-touch leadership was part of the problem, and that executives needed to spend more time making lattes in stores and less on lofty discussions.

Last September, Schultz stepped down from the company’s board. He said he would support the next generation of company leaders as a customer, supporter and advocate in his role as chairman emeritus. Schultz would hold no operational or fiduciary roles, Starbucks said.

The numbers guy

Narasimhan is a data guy who spent nearly two decades at consulting firm McKinsey. He sought to build bridges internally by dropping in on meetings and continued to work monthly in stores as a barista. He readily delivered a quick joke, often downplaying his sense of style or fitness acumen.

Early in his tenure Narasimhan, 57 years old, got to work in overhauling the chain’s sprawling supply chain. He had found a startling number of cup and lid pairings that needed trimming, and stores where inventory lacked management. He cut down the number of emails leaders sent to stores.

Cracks in the business were starting to show. In December, Narasimhan said that competition had grown in its key China market.

A coalition of labor unions with a small Starbucks stake mounted a proxy battle late last year, nominating three alternative candidates to Starbucks’s board and criticizing the company’s labor practices.

In February, with the shareholder vote on the board looming, Schultz sent a letter to Starbucks’s board and leadership team. He said that leaders needed to address business challenges, but also to nurture “the soul of the brand."

He later posted the letter on his LinkedIn page. It drew praise, including from current Starbucks executives and workers. Schultz thanked supporters in a subsequent LinkedIn message, and reflected on words he delivered during a previous shareholder meeting: “We must all stay optimistic and vigilant."

In April, Schultz posted on LinkedIn a video of himself discussing a recent trip to China and Japan on behalf of Starbucks as the company launched its Oleato line there. He had spent time with Starbucks employees and customers in China, and was optimistic about the two countries spanning their differences, he said.

At home, Starbucks’s leadership team managed to end a nearly yearlong impasse with the Workers United union organizing U.S. cafes, with both sides agreeing in February to hold talks to work toward new labor agreements. Attrition was dropping in U.S. cafes and Narasimhan was identifying billions of dollars in potential corporate cost savings.

In April, Starbucks held a “Promises Day," a new annual event to honor its employees and the expanded company mission Narasimhan put into place.

“I want to give a round of applause to all of you, but also to our alumni so they hear it," Narasimhan said to the room during the internal forum. “Thank you for the support on the journey forward."

Chip Cutter contributed to this article

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