Starbucks Names Outsider Laxman Narasimhan as New CEO

The waiting game has ended for followers of wide-moat Starbucks (SBUX), with the chain announcing that Laxman Narasimhan will serve as its CEO, effective April 2023. At first glance, the move strikes us as curious, particularly when juxtaposed against Howard Schultz’s commentary on earnings calls that his permanent successor would have domain expertise, sensitivity to the values and culture of Starbucks, global experience, and a commitment to leading for the long term. We appreciate that wide-moat Reckitt Benckiser Group, where Narasimhan serves as CEO, maintains a strong environmental, social, and governance ethos, and a 2019 turnaround under his guidance seems to loosely align with Starbucks’ needs. Nevertheless, his experience as CEO of a health, hygiene, and nutrition company, and, formerly, as the global chief commercial officer with wide-moat PepsiCo and as a senior partner at McKinsey, don’t cleanly check the domain experience box. While Reckitt and PepsiCo’s consumer-facing portfolios overlap with Starbucks’ own packaged-goods businesses, the lack of own-brand store operating experience or with a licensed store model espouses qualified concerns. Despite our initial trepidation, we plan to maintain our $100 intrinsic valuation and Exemplary capital allocation rating, with the latter partially contingent on the investment priorities laid out at the firm’s upcoming investor day.

Laxman will step down from Reckitt effective Sept. 30, 2022, a move that clearly caught the market by surprise (its shares were down 5%-6% in aftermarket trading). Over the following six months, he’ll take a crash course in Starbucks’ brand, culture, and reinvention plan, serving under the aegis of Schultz. We expect the firm’s reinvention plan to bear fruit, in the form of lower partner attrition, stymied union momentum, and better store-level peak transaction volume capacity, but time will prove the ultimate judge of the firm’s current investment push.