Inside Starbucks’s surprising CEO firing and hiring

“We have big challenges, no question, but they’re not impossible," he told employees gathered at the July 31 company forum in Seattle, according to a replay viewed by The Wall Street Journal. On the company’s quarterly earnings call the day before, he asked investors for patience.

His days leading the coffee giant were already numbered, as the company’s board eyed his replacement. Less than two weeks later, Narasimhan was out.

Narasimhan’s exit from Starbucks, announced Tuesday, continues a turbulent period at the world’s largest coffee chain. This year Starbucks has faced two high-profile activist investors, public criticism from longtime former CEO Howard Schultz, and slowing sales. This week, it named its third CEO in less than 2½ years.

By hiring restaurant industry veteran Brian Niccol as Starbucks’s new leader, the board said Tuesday it was bringing in a steady hand. Niccol, 50 years old, who helped turn Chipotle into an industry powerhouse after it was laid low by food-safety problems, said he was energized at the opportunity to spur growth at Starbucks and improve things for customers and employees.

Behind the scenes, Niccol’s appointment was the culmination of months of internal angst over Starbucks’s direction and leadership.

Investors grew increasingly skeptical about the company’s ability to pull off lofty financial targets set before Narasimhan joined the company. Some employees said they read news stories about activist investors’ demands, with questions and concerns. And the company’s board, once firmly in Narasimhan’s camp, quietly discussed finding a possible replacement while he remained in charge.

Starbucks board chairwoman Mellody Hobson said in an interview that the board had been thinking about the company’s trajectory for some time. The board didn’t have a special connection to Niccol, but focused on him as the best candidate to potentially replace Narasimhan. The board set its sights on trying to directly woo him to Starbucks, rather than using a recruiter.

Hobson said she had a trusted associate make a call to Niccol, keeping knowledge of the deliberations among a tight circle of people. She said she was thrilled when he took the call, and she later flew 25 hours from Europe to California to personally meet with Niccol and sell him on the job.

Starbucks’s board managed the entire recruitment process itself, tapping just a few outside advisers to get it done, Hobson said. Late in the process, the board looped in Schultz. He wholeheartedly supported the plan.

To lure Niccol away from Chipotle, where he had turned around the company’s sales and was paid handsomely for it, Starbucks offered him both the CEO and board chair positions. Niccol has held both roles at Chipotle.

“We had the opportunity to get Brian Niccol," Hobson said. “In the industry, he’s probably the most successful CEO right now."

Narasimhan, 57, had been in touch with one of the activist shareholders, Elliott Investment Management, in recent days, according to people familiar with the discussions. He was informed of Starbucks’s decision on Sunday.

Narasimhan didn’t respond to requests for comment.

Training days

When Starbucks’s board of directors zeroed in on Narasimhan in the summer of 2022, he brought little experience running a global restaurant operation. Then CEO of Reckitt Benckiser, he had steered the British maker of Lysol and infant formula through the Covid-19 pandemic. And though Narasimhan had run food businesses as global chief commercial officer at PepsiCo, Starbucks’s board had a plan to steep him in the chain’s traditions—under Schultz’s watch.

Within weeks of signing on as Starbucks’s “CEO-elect" in September 2022, Narasimhan was training to be a barista, learning to make lattes and work the drive-through window, part of a six-month training period. Schultz, who feared Starbucks’s management had become too far removed from the chain’s day-to-day operations and brand, remained CEO while Narasimhan fielded suggestions from workers and once burned his hand scraping cheese from a sandwich.

Schultz at the time was on his third stint as Starbucks CEO. He had rejoined its C-suite in early 2022 to quell unrest among baristas seeking to unionize and to prepare a successor. Schultz said it was the last time he would run the company he built and that he didn’t plan to keep an office at headquarters.

Schultz handed the reins to Narasimhan in March 2023, about 10 days ahead of schedule. “As I turn Starbucks over to you now, know that you have my utmost confidence, trust and love," Schultz wrote Narasimhan in a letter.

Narasimhan also inherited an ambitious road map largely set by Schultz and other Starbucks executives, which set targets for annual earnings, same-store sales and unit growth above previous estimates. It was slated to last until 2025.

Losing ground

Narasimhan moved quickly to make his mark. Building on ideas gathered working in Starbucks cafes and talking to workers, he set out to simplify a sprawling supply chain and operations, seeing a direct link between inefficient drink-making and the long lines that frustrated patrons.

At headquarters, he streamlined some corporate functions, eliminating roles like global marketing chief and reassigning responsibilities to geographic divisions. He recruited a Target executive to improve Starbucks’s supply chain and elevated leaders to oversee North American and international businesses.

Cracking self-deprecating jokes about his athleticism and fashion sense, Narasimhan held a recurring “Snacks With Laks" forum, where employees could share their thoughts. He continued to regularly work in stores as a barista.

Starbucks investors initially were optimistic: Over the six months after Narasimhan joined the company, its shares gained about 8%, versus a 15% decline in the S&P 500 stock index.

Bigger challenges were emerging for Starbucks, though. The chain steadily raised its prices in response to inflation, executives said, as did many other restaurants. Customer complaints about slow service times continued to mount, with often highly customized orders being placed through the chain’s increasingly popular mobile app.

In China, a massive market that Schultz had worked for decades to cultivate, Starbucks was losing ground. Luckin Coffee by mid-2023 surpassed Starbucks as the country’s biggest coffee chain by sales and units, harnessing rapid delivery services and new flavors to bounce back from an accounting scandal that had sidelined the Chinese chain.

At an investor conference in November 2023, Narasimhan said the company was largely on track to hit its growth targets. He said he remained committed to running the company’s China business, versus the potential spinoff that some investors had said they wanted.

But internally, Narasimhan worried about the brand’s reputation. The company had been caught up in fallout from the Israel-Gaza conflict, attacked by critics on both sides. He put out a company message in December pushing back on mischaracterizations of Starbucks’s position, but consumer surveys showed that damage had been done.

In late 2023, Starbucks recruited the firm housing Robert Gibbs, a strategic communications executive who previously served as an Obama White House press secretary, for help. Gibbs ended his work for Starbucks when he was recruited to Warner Bros. Discovery in June.

Starbucks’s business kept deteriorating, and Narasimhan tried to brace the company’s board for a tough quarterly update in late April. The company reported that same-store sales fell in the first three months of 2024, the first quarterly drop since the chain grappled with the pandemic in 2020, and its U.S. traffic suffered the biggest quarterly decline since at least 2010. Its active loyalty-rewards program lost 1.5 million users between Dec. 31 and March 31.

Starbucks cut its sales outlook for the year, and the company’s shares got crushed.

The company’s struggles also drew the attention of Schultz, who wrote on LinkedIn days after the earnings report that Starbucks needed to refocus on its customers’ experience and cafe operations—which he called “the primary reason for the company’s fall from grace."

His post got thousands of likes and supportive emojis, with many Starbucks alumni chiming in to agree. Others said they thought Schultz should have kept his views private. In June he addressed Starbucks again during a roughly four-hour appearance on the Acquired podcast, saying the chain wasn’t having a great year.

“In fairness to Laxman, there’s a lot of external issues that have contributed to the pressure, like on every company," Schultz said. “But the company has not executed the way that I think it should have."

Activist summer

Starbucks’s struggles were also on the radar of Elliott Investment Management, one of Wall Street’s most prominent activist investment firms. In mid-July, The Wall Street Journal reported that Elliott had built a large stake in Starbucks’s stock and for several weeks had been pressing the company to make changes.

Starbucks and Elliott in recent weeks had been discussing a settlement agreement that would give Elliott representation on Starbucks’s board of directors. Elliott had also been pushing for a review of Starbucks’s China business, according to people familiar with those discussions. The firm hadn’t been seeking Narasimhan’s ouster.

By then Starbucks’s board had begun discussions about the company’s direction, including possibly replacing Narasimhan, unbeknown to the activists.

On July 30, Narasimhan convened Starbucks’s quarterly investor call to deliver more bad news—same-store sales fell 2% in the latest quarter, the number of orders placed declined 6%, profit dropped more than 7%. He asked for time: “We’re making real progress," he said on the call.

The chain, Narasimhan said, was making moves to speed service on digital orders, and it had introduced tapioca pearl-laden drinks to court curious consumers. In China, Narasimhan said Starbucks was exploring strategic partnerships for its business.

Starbucks’s shares traded higher after the quarterly report but remained under pressure. Through Monday’s close, the stock had lost nearly one-fifth of its value since the beginning of the year, versus a 12% gain for the S&P 500 stock index.

Last week, another activist surfaced in Starbucks’s stock. Starboard Value had taken a stake, the Journal reported, aiming for the company to take steps to improve its stock price.

During the internal Starbucks forum after the latest earnings report, Narasimhan struck an upbeat tone, saying the company was navigating a complicated environment, from cautious consumers to the CrowdStrike outage that for several days hampered the company’s operations.

But operational improvements were starting to pay off, he said, and discussions with Elliott had been productive. Narasimhan thanked Starbucks employees for their work helping to turn the company around and welcomed their questions.

They should do so in a “no eggshells way," he said.

Jacob Bunge, Emily Glazer and Chip Cutter contributed to this article.

Write to Heather Haddon at heather.haddon@wsj.com and Lauren Thomas at lauren.thomas@wsj.com