Daily Management Review

Starbucks Shares Fall as CEO Steps Down to Focus on High-end Coffee


Starbucks Shares Fall as CEO Steps Down to Focus on High-end Coffee
Handing the top job to Chief Operating Officer Kevin Johnson, a long-time technology executive, Starbucks Corp co-founder Howard Schultz will step down as chief executive to focus on new high-end coffee shops.
In addition to setting the brand's "social impact agenda" that includes sending employees to college and recruiting veterans, he would focus on building ultra-premium Reserve stores and showcase Roastery and Tasting Rooms around the world, said Schultz, who will become executive chairman in April 2017.
But as investors recalled the company's decline after Schultz handed over the reins in 2000, its shares fell 3.6 percent to $56.41 in extended trading even though Starbucks had signaled the change in July. Schultz returned in 2008.
"Having him step down as CEO raised the anxiety level," said Stephens analyst Will Slabaugh, who said that Schultz is the heart and soul of the brand, its entrepreneurial leader and its savior.
"We're in a much better position on every level," said Schultz. In the depths of the "Great Recession," when Starbucks' stock was trading below $10, he had returned for his second stint as CEO. An all-time high above $60 was hit by it last year. Asking customers not to bring guns into stores and urging conversations on race relations, Schultz has put Starbucks in the national spotlight.
Many of the campaigns have raised the profile of the coffee company and cemented Schultz's status as a national figure even though many of the efforts have generated controversy, but analysts have not seen a hit to financial results.
"The idea that he's replaceable, I think that's erroneous," said Bill Smead, CEO of Smead Capital Management in Seattle, which owns Starbucks shares. The retirement of long-time McDonald's Corp CEO Ray Kroc, who turned a handful of hamburger stands into the world's biggest restaurant company, was compared to the change by him.
As investors worry about the restaurant industry's stubborn traffic declines, the announcement of the change was made. Starbucks has held up better than most, but it has not been immune.
Johnson is a former technology executive who became president and chief operating officer at Starbucks in March 201. For most of his career Johnson was in the technology industry and has been on the Starbucks board since 2009. He held several senior positions at Microsoft Corp and was the chief executive of Juniper Networks Inc from September 2008 to January 2014.
Questions on whether, with Schultz stepping aside, senior management still had the "merchant gene" and on timing of the change were pressed upon by analysts to the company an a conference call after the announcement was made.
"Not having retail experience could be a problem over time," said Howard Penney, an analyst at Hedgeye Risk Management.
"I'm not leaving the company and I'm here every day," said Schultz, whose office is connected to Johnson's.
Starbucks forecast a mid-single-digit rise in 2017 same-store sales even as a change in the company's loyalty program has been attributed by Johnson to be the reasons of the falling traffic at established Starbucks cafes in the last quarter.
Speculation that Schultz could be preparing for a new career in politics were dismissed by the company.
"He has no plans to run for political office, as he has said many times, and will remain with the company as Starbucks executive chairman, focusing on premium coffee," a spokeswoman said.

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