SBUX: Howard Schultz is BACK
(Former Founder and 2-time CEO is back as interim CEO)
A quick memo this morning, as I perused the headlines and found that Howard Schultz, founder and two-time CEO of Starbucks, will be coming back to the company, serving as interim CEO until the fall, as Kevin Johnson announces his retirement. The transition will be effective on April 4th, and Howard is expected to assist with succession planning. I am a big fan of Schultz, having read both ‘Pour Your Heart into It’ and ‘Onward’ in my younger years.
Why is Kevin Retiring?
Given the timing of the announcement, as the unionisation effort heats up the US (discussed in “SBUX: Union, What Union?”), one wonders why he decided to retire now. The announcement highlighted that this was somewhat premeditated and not the direct outcome of union pressure. Although, I suspect it might have been a factor. After 13-years of service, Johnson “signalled to the Board that as the global pandemic neared an end, [he] would be considering retirement from Starbucks” as early as 2021. Succession planning had been underway from that point onward. His parting words are as follows:
“As I make this transition, we are very fortunate to have a founder who is able to step in on an interim basis, giving the Board time to further explore potential candidates and make the right long-term succession decision for the company. I have enjoyed every minute of the job and am proud of what we have achieved together. It has been an honour to serve the 400,000 Starbucks green apron partners around the world and I want to thank them for their service, resilience and optimism.” - Kevin Johnson, Starbucks CEO
Third Time’s a Charm
As sad as it is to see Kevin depart, as a shareholder and fan of Schultz, I am elated to have him back, even if just for a quarter or two. Howard famously manned the helm from 1985 to 2000 when founding the company, before pulling back and taking the title of Chief Global Strategist from 2000 to 2005. However, when trouble loomed at Starbucks, and the company lost their way, he came back as CEO in 2008, serving until 2017.
Now he is back for a third time but in more of a volunteering role. He will take a $1 salary for his troubles, and will even be paying Starbucks ~$7.5M in rent and fees for the use of an aircraft hangar lease and rent for his stay. The guy is reportedly worth ~$4B, so this is not an action incentivised by monetary gain. On returning to Starbucks for his third time, Schultz had the following to say:
“When you love something, you have a deep sense of responsibility to help when called. Although I did not plan to return to Starbucks, I know the company must transform once again to meet a new and exciting future where all of our stakeholders mutually flourish.
"Our success is not an entitlement. We must continue to earn the trust of our people and our customers every day by how we deliver the Starbucks Experience, how we treat each other and how we act as responsible community members and corporate citizens. With the backdrop of COVID recovery and global unrest, it’s critical we set the table for a courageous reimagining and reinvention of the future Starbucks experience for our partners and customers." - Howard Schultz, Founder of Starbucks
What’s the Tea?
What’s are the considerations here? Sure, Schultz coming back is great. Despite being inactive for some time, Howard is the one that outlined many of the plans that Starbucks is still undertaking today (China, Rewards), and understands the mission. The last time Starbucks lost sight of their mission, he came in and turned things around.
He also pioneered programs like comprehensive healthcare, stock ownership and free college tuition for full and part-time employees, when he was last at the company. But Starbucks is not currently in disarray, all things considered, and he’s only here for a temporary period of time.
Is that enough time to soothe the relations between the union effort and the corporation? The last time I wrote about Starbucks, on February 15th, 88 stores had filed for their right to hold a vote, and 2 had officially unionised.
Today, I got word from @SBWorkersUnited (who have been great in responding to my questions promptly) that the total now stands at 141 stores having submitted their filings, and 6 stores across the States have officially unionised. Things are moving fast, but the appointment of Schultz doesn’t appear to have settled those behind the union effort.
Granted, SBWU is biased (rightly so), but they feel Schultz is another of the Starbucks consortium that has set out to quash the cause. In a rather odd interview back in October, ahead of the then-pending Buffalo vote, Schultz would use an analogy of holocaust prisoners sharing blankets and link it to how Starbucks should combat unionisation, stating; “What we have tried to do at Starbucks is share our blanket”. I am not sure what he hoped to convey with that messaging, but to me, it would seem he thinks the resources should be shared nationally? Below is a snippet of that prose.
Anyway, it would appear that Schultz is mostly opposed to a union and, well, it figures. In a perfect world, there is no need for a union. Autumn Capital outlined some of the problems with unionising low-skilled service workers, as opposed to other industries, which I have re-assembled in the table below.
For point 7, AC states that “this is different than a factory, wherein increasing safety requires employers to make investments. Unionizing helps here. Likewise, if you are a teacher/cop, unionizing helps get you better resources/necessary breaks/and limits "after 9-5" commitments for no $”. I tend to agree with no-union rhetoric here, but I am not unsympathetic to apron partners’ cries.
Last month I talked about how management pushed out the 18%/19% LT EBIT margin target to 2024 (previously pushed to 2023). I remarked that “I find it interesting that management talked so frequently about how inflationary pressures and supply chain disruption is hampering EBIT margins but failed to mention the union effort in this line of discussion. Amongst other costs (both socially and monetarily) unions tend to increase the cost of labour for an organisation, which no doubt plays negatively on margins too.” It remains to be seen whether this will be a hot topic in the Q2 earnings call. I, for one, would be asking these questions.
Bigger Picture
A broader question that is in my mind is, who replaces Schultz/Johnson?
Schultz is a great shoo-in, and would probably be a great replacement if he was not bordering on the right side of 70. Johnson had been at the helm for 5 years, after joining some 13 years ago. He knew the company well, made excellent progress on the Rewards and China business, and handled Covid particularly well. But, if we want to be really pedantic, is it a sign of incompetence that Starbucks has failed to generate an attractive bench of suitors for the CEO role? The language used in the 8-K suggests they are still looking for a replacement. They do have a strong internal bench, but why is there not a clear successor by now?
Lynch once stated that investors should “Go for a business that any idiot can run because sooner or later, any idiot probably is going to run it”. Buffett has echoed something similar before too, once remarking that a “ham sandwich” could run Coca Cola in a complementary fashion. Is Starbucks a business that can be run by a sandwich? I’m not so sure.
The longer-term challenges for Starbucks include; continued execution of Chinese expansion and reinvestment, regaining the LT EBIT margin guide, optimising stores using Deep Brew AI to increase labour efficiency, and building the Starbucks Rewards program base. On top of that, I suspect pleasing dividend investors through continued appreciation of annual dividends, and returning capital back to shareholders via their sizeable repurchase program, are also priorities.
A ham sandwich could maybe handle that, given the strength of Starbucks’ executive suite. But I keep coming back to this unionisation issue. I like my toasted sandwiches a little crispy, but throwing one into the pit of fire that is this unionisation movement, could potentially lead to a mouthful of char. Will Schultz be the one to tackle this issue? Will he have enough time before a suitor is found? Does he even care about resolving it?
These are the questions on my lips, and I can attest that I don’t know the answer to any of them. I’ll likely go deeper into this topic once some time has passed, and we get the benefit of hearing what Schultz thinks on the Q2 earnings call.
If you want to read some of my more recent writings on Starbucks, check out the below memos.
• SBUX: Union, What Union? - February 2022
• SBUX: Musings on 2021 - November 2021
• The History of the Frappuccino: The Importance of Outside Perspective - September 2021
Conor,
Author of Investment Talk
Remember when Lebron James went back to Cleveland and won a championship?
Yep, its kinda like that.
I haven't followed SBUX closely in a couple of years now, but I remember being very impressed with Roz Brewer, who was the COO at the time. I wonder if the Board is kicking itself for not grooming her to next in line and letting her go be the CEO at Walgreens