Starbucks’ Turnaround Plan Is Here. Is the Coffee Stock a Buy?

New Starbucks (SBUX -0.71%) CEO Brian Niccol received the warmest welcome in stock market history when he was named the coffee giant’s new chief executive in August.

Shares of Starbucks soared 24% when Niccol’s appointment was announced a month ago, adding about $20 billion to the company’s market cap. It’s rare to see that kind of added value from a CEO appointment alone. But with Niccol’s track record of Chipotle and the challenges Starbucks itself faced under former CEO Laxman Narasimhan, it’s clear why investors were so happy with the move.

Niccol stepped into the hot seat this week and his first move was to post an open letter to Starbucks stakeholders. It was a smart move, as it was the easiest way for him to communicate his initial diagnosis and intentions to employees, customers and investors.

Starbucks’ new leader seems to believe the company has strayed from its core values ​​and is doing the things that made it great. Wait times for customers are too long and the product is inconsistent, he said, especially in the U.S. Niccol outlined four initiatives for the company to improve its lackluster performance in the U.S.; let’s take a look.

Image source: Getty Images.

The turnaround plan

First, Niccol wants to empower baristas to take care of customers. That makes sense; bureaucracy can kill the flow in any restaurant. Frontline workers need to make decisions to serve customers and handle special requests, and they need to be fully supported to be successful. Niccol said he wants to make Starbucks the best place to work, building on its traditional leadership as a retail employer.

The second initiative is to meet customer expectations by delivering high-quality beverages and food “on time, every time.”

Third, Niccol wants to re-establish the Starbucks brand around the in-store experience. Founder Howard Schultz created the coffee chain as a “third place” away from home and work, but in the digital age, Starbucks has moved away from that core value. Niccol suggests creating “inviting places to linger, with comfortable seating, thoughtful design and a clear distinction between ‘to-go’ and ‘for-here’ service.”

Finally, he wants the brand to tell its story better. This could mean relying more than it traditionally has on advertising and other ways to promote itself.

What This Means for Starbucks

Niccol’s plan seems like a good first step toward improving customer satisfaction and boosting Starbucks’ growth. Addressing customer complaints about slow service and inconsistent quality is a top priority, though Niccol understands that to take care of customers, you have to take care of employees first.

Investors should expect more traditional advertising from Starbucks — a lever Niccol successfully used at Chipotle, another brand that once eschewed advertising. Starbucks’ brand also needs a refresh. Niccol noted, for example, that the company owns its own coffee farm in Costa Rica that serves as a base for its coffee research and innovation, but it has typically been silent about it. Sharing more of the farm-to-cup stories that go into every cup of Starbucks coffee could help the brand regain some of its authenticity and challenge the perception that it has become a commodified chain.

Likewise, a priority is to transform Starbucks into a “third place,” where customers might meet a friend or simply relax. Compared to both independent coffee shops and other chains, Starbucks has long stood out for its emphasis on comfortable, welcoming stores, though the company has shifted away from that in the age of mobile ordering and payment. It has the resources to invest in store design and will likely undertake a facelift, just as it did when Howard Schultz returned as CEO in 2008.

Is Starbucks a bargain?

It’s hard to judge a new CEO after just a few days on the job. But Niccol’s letter was a smart move, and investors welcomed it warmly: The stock rose 1.2% on Tuesday, followed by a 5% jump on Wednesday on a lower-than-expected inflation report.

Of course, Starbucks needs to execute on that plan. And high expectations are already built in, with the stock now trading at a price-to-earnings (P/E) ratio of 27.5.

Starbucks is a big company and a turnaround could take years. This is especially true with declining sales in China, which is likely to be the next area of ​​focus after the US.

Still, Starbucks has a number of competitive advantages. These include its brand, a well-established rewards program, a wide range of in-store experiences, and a strong business selling bagged coffee and ready-to-drink beverages in stores.

I’d like to see some evidence that things are improving, but Niccol seems to be on the right track. At this point, I’d call Starbucks a buy, but a cautious one. The stock should pay off for patient investors as the turnaround plan unfolds.