Starbucks' Bitter Brew | Back in Black | 2

0:07It's November 16th, 2023, in Chicago. We are the union! We are the union! Somebody, somebody, you! On bustling North Broadway, baristas on strike walk a picket line in front of a Starbucks store. Workers at 150 other stores have walked off the job, too. This is the biggest strike in Starbucks history, and it's being held on a big day for the coffee chain. Today is Red Cup Day, an annual event where Starbucks gives customers a free, reusable red cup with the purchase of a holiday-themed drink. But here in Chicago and around the country, Starbucks workers are asking customers to forego their free red cups and instead join them in what they're calling the Red Cup Rebellion.

0:53A reporter with the Associated Press asks a Starbucks worker why they're striking on such a busy promotional day. So we just have basically an infinite amount of drinks, and we're understaffed, and we're underpaid, and we're sick of it. It's been almost two years to the day since workers formed the first-ever union at Starbucks back in 2021. Soon after that, Starbucks' legendary leader, Howard Schultz, came out of retirement to serve his third stint as Starbucks CEO and try to stop the union drive in its tracks. Schultz barnstormed the country with that effort. He even apologized to employees and said Starbucks had failed them.

1:33He promised the company would do better. But the unionization drive continued through Schultz's year-long tenure. Schultz left in the spring of 2023 for what he promised would be the final time and brought in Laxman Narasimhan as the new CEO. A few months into his tenure, Narasimhan had yet to make headway in fixing Starbucks' labor problems. And today, on Red Cup Day, striking Starbucks workers from Seattle to San Francisco to New York are feeling brokenhearted under the new leadership, as this Starbucks worker in Chicago explains. I've actually been a barista for 16 years. Since I turned 18, I started with this company.

2:14I actually love this company, and I love the ideals that this company has stood for my whole life. However, they have not stayed true to those ideals, and that is one of the biggest reasons why I personally unionized, is because they have promised the world to us and they have not delivered. Soon after, Starbucks and CEO Laxman Narasimhan will make another promise to start a collective bargaining process. Company leaders want to finally broker a peace between the chain's increasingly unionized workforce and Starbucks' leadership. But a big fight with Starbucks' leadership is coming anyway. That contest will pit Narasimhan against Starbucks' most iconic leader, Howard Schultz.

2:54which will beg this question. Is Schultz's lasting shadow over Starbucks clouding the company's future?

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5:13From Wondery, I'm David Brown, and this is Business Wars.

5:43You know that feeling you get when you haven't had quite enough coffee? You're not exactly falling asleep, but you're not awake enough either. Well, that's where Starbucks finds itself at the end of 2023. The company's not quite right, not sharp enough. Starbucks may sell millions of cups of coffee a day, but right now, it's the one needing a jolt. In the last episode, it looked like the man who built Starbucks from a little Seattle coffee roaster into the world's leading coffeehouse, might be the person to provide that jolt. Howard Schultz returned to his company to serve as CEO for the third time, and he promised that he could return Starbucks to what Schultz called a third place, a public gathering spot where all kinds of people politely mingle.

6:31And that's what Starbucks was in its early days. But as of Schultz's return, the company was not so much a third place as it was in a bad place. It had labor troubles, and its stores had lost their once-welcoming appeal. Before those problems were fixed, Schultz handed over the CEO job to Laxman Narasimun, who Schultz called his number one draft pick for the position. But Schultz has kept a close eye on Narasimun ever since. And now Schultz, Starbucks' all-time best player, might be getting too close for his number one draft pick's comfort. Starbucks has powerful competitors. and an activist investor breathing down its neck, too.

7:15And that will lead to yet another executive shake-up, one in which a new leader brews up a plan to take Starbucks back to its past. This is Episode 2, Back in Black.

7:34It's December 2023. In Helsinki, Finland, it's sleeting. A group of protesters stands out in the cold, refusing to come inside to a nearby Starbucks store where warm beverages are being poured by baristas. The protesters are boycotting Starbucks because of the war in Gaza.

7:58It's been almost two months since Hamas invaded Israel on October 7, 2023, and Israel responded with an aerial bombardment of Gaza. When that happened, the union representing Starbucks workers posted a pro-Palestine message on social media. Starbucks responded by suing the union for infringing on the Starbucks copyright. That's convinced some customers, or former customers like those boycotting in Finland, that Starbucks has taken Israel's side in the fight. But in fact, Starbucks hasn't taken any official stance on the war. Still, the boycotts are starting to hurt business. especially in the Middle East.

8:38And that comes at an especially bad time. Because right now, Starbucks also has trouble brewing in its second biggest market, China. During the pandemic, Starbucks' business cratered there, falling 17 % from 2019 to 2020. Sales have perked up since then. But in late 2023, a Chinese chain called Luckin Coffee overtook Starbucks as the biggest selling coffee there. And now, amid all that trouble overseas, back in the States, the biggest restaurant chain in the world is about to shake up the coffee scene even more.

9:21It's December 2023 in suburban Chicago. In the darkness before dawn, a line of cars wraps around the block of a brand new McDonald's concept store. There are no Big Macs here, no Quarter Pounders, no McChickens, not even a dining room. This store is drive-thru only. From four different drive-thru lanes, drivers can order lattes, energy drinks, slushies, and bubble tea, plus breakfast sandwiches and ice cream and a handful of snacks. McDonald's calls this concept Cosmix. It's been designed to deliver customers' orders with the speed of a rocket. Get it? But on the first weekend in business at the first Cosmix location, it'll take a while for customers to even place their orders.

10:04Because today, the demand is otherworldly. Outside of the store, news crews film the traffic. Police in yellow vests wave their arms to direct the snarled line of cars. After waiting in line for an hour and eight minutes, one excited vlogger films himself placing his first Cosmix order. Good morning, welcome to Cosmix. What can I get started for you today? Can I get the churro frappe? Pretzel bites? Twisty cone? I don't know what it's called. The one with donuts and stuff in the middle? Oh, the McPops. The McPops. Anything else? That is it. If you're wondering, no. At Cosmix, they don't ask, do you want fries with that?

10:43Because Cosmix doesn't serve fries. What they are serving, though, is a challenge to Starbucks. Cosmix has been designed to hit Starbucks right in its weak spots. Hey, remember back in episode one where we talked about how Starbucks, after Howard Schultz acquired the company, introduced Americans to Italian-style coffee drinks? Those were the days when we all learned the words venti and grande. Well, as Starbucks expanded, it created enough demand for other coffee chains to step in. Pete's and Tim Hortons grew alongside Starbucks, and a lot of smaller local roasters and shops opened too. But as time has gone on, well, Americans' taste for Americanos has changed.

11:27The kind of hot, dark, caffeine-packed drinks that Schultz pioneered are on the decline. Lighter and softer and definitely sweeter drinks are on the rise. Between 2016 and 2023, consumption of cold coffee concoctions more than doubled in the U.S. That trend was driven by younger consumers. If you're between 18 and 39, you probably think black coffee is gross. You're most likely a cold coffee consumer who prefers some kind of sweetener to mask coffee's bitter taste. Older than that, well, you'd probably drink it hot. That means the generations that best remember Howard Schultz's booming coffee chain in the 1990s with those comfy chairs and couches and that dark roast scent, that's stopped the generation that's buying most of what's sold at America's coffee shops.

12:19Think about it this way. If you take your coffee hot and unsweetened, well, you can make it at home in minutes using a pod machine or maybe one of those chunky Italian mocha pods. If you like it cold and caramelly, you're probably getting it at a coffee shop rather than going through a typical 20-hour-long cold brew process. Starbucks offers plenty of those kinds of chilled drinks, of course, but it sometimes struggles to do so. Ever since the pandemic, Starbucks customers have complained about increasingly long wait times for iced coffee concoctions and other drinks. Dunkin', on the other hand, put the pedal to the metal on its speed of service.

12:57Even though Dunkin' is smaller than Starbucks, it has around 64 % more drive-thru locations than Starbucks does. To fix that, Starbucks doesn't just want to add more drive-thrus. It wants to boost its speed overall. The company has just begun what it calls its triple-shot reinvention with two pumps. That plan will fund a revamp of Starbucks stores, which had been designed back in Howard Schultz's days to primarily make hot coffee drinks. With more than 70 % of Starbucks' drinks orders now consisting of cold beverages, well, Starbucks is remaking its equipment, retraining baristas in hopes of making those beverages faster.

13:37But McDonald's doesn't have to redesign anything with Cosmix. It built the concept from the ground up to offer both speedy service and cold drinks, like the Sour Cherry Energy Burst and the Melon Herb Chiller and the sea-salted caramelactic shaken espresso. For now, the suburban Chicago location of Cosmix is the only one that's open, but the mega-chain has plans to open 10 more Cosmix this year in suburbs and cities across Texas, and it hopes more will follow. Just as McDonald's hopes to put a chill on Starbucks' revenues, other big chains are also trying to do the same, albeit in different ways.

14:18Massachusetts-based Dunkin' and Minnesota-based Caribou Coffee tout lower prices, and Oregon-based Dutch Bros, which says it's on a mission to love everyone, has Broistas, who offer ultra-friendly, some even think of it as flirty, service that goes a step above Starbucks. As 2024 begins, those challengers at home and the troubles overseas are about to take a toll that'll be paid right after the opening bell rings on Wall Street.

14:55It's early May 2024 on Wall Street. Minutes before the stock market's open for the day, a distressed Jim Cramer predicts a freefall for Starbucks' stock, which has already sunk in pre-market trading. Jim, when we look at the biggest loser today, it's going to be Starbucks. It's among the worst performers in the S &P 500. Joining us now exclusively is Starbucks CEO Luxman Narasimhan. Mr. Narasimhan, it's good to have you on the show, and I appreciate that you're coming on, despite the fact that the quarter was extremely weak. Jim, it was a very tough quarter. Thank you for having me. That's an understatement.

15:29It was, in fact, Starbucks' worst quarter since the pandemic. And some on Wall Street think it was the company's worst quarter in its entire 53-year history. Starbucks reports that its revenues slumped nearly 2 % and net income fell 15%. In China, sales are down 11%. Worse, customer traffic to Starbucks' stores slumped by 6 % and same-store sales fell 4%. Now, maybe 4 % doesn't sound like all that much, But Starbucks rarely reports same-store declines. And with 6 % fewer customers coming through its doors, Wall Street gets apoplectic about the news. As the trading day begins, Starbucks' stock cascades.

16:16It continues sliding for the next couple of days, losing 17 % of its value to mark a two-year low. The company line from Narasimun is that inflation, which spiked during the pandemic and has not yet been tamed, may have led some occasional customers to forego visits. That makes some sense. As Starbucks releases its terrible earnings report, a hot cup of cappuccino costs$5.50. And if you want a cold caramel ribbon crunch creme frappuccino, well, you better dig deep enough into your pocket to pony up almost seven and a half greenbacks. But Narasimhan is underplaying the bigger story, and he catches heat for doing so in the business press.

16:58Think about it like this. Duncan and Pete's and Tim Hortons have had to deal with the higher cost of coffee beans, too. The fact that fewer people are darkening Starbucks' door to get a cup of that dark roast suggests that something else is going on here. Starbucks' value proposition has long been about pairing great customer service with great drinks, even if those drinks cost more than your average diner's cup of joe. But for much of Nara Simmons' tenure, customers have griped about messed-up orders and a clunky Starbucks ordering app and long wait times at understaffed Starbucks stores. Days after the company releases its concerning earnings, another voice joins the chorus of complainers.

17:41It's Starbucks' visionary leader, Howard Schultz. He posts a screed to LinkedIn. In it, Schultz says that Starbucks has had a fall from grace. He chastises senior management for focusing too much on data and not enough on the Starbucks workers who wear the company's iconic green aprons. Let's rewind here. The most senior manager on the Starbucks payroll is Laxman Narasimun. When Schultz announced that Narasimun would succeed him as Starbucks' boss back in 2022, remember he called Narasimun his number one draft pick. But there were signs of trouble between Schultz and Narasimun just months later.

18:22In early 2023, Schultz brought Narasimun an idea. Schultz had recently watched a New York Giants practice, and he noticed that the Giants' defense was on one part of the practice field, offense on the other, and special teams in yet another. Schultz suggested that Starbucks consider compartmentalizing its store teams, too. Schultz figured that by having workers specialize in just one area, they might be able to break the service log jams the company had been experiencing. Nera Simmon flatly dismissed Schultz's suggestion. He told Schultz that the New York Giants are a football team. Starbucks is a company.

18:59Very different things. Schultz politely laughed off the rejection. But now, in May 2024, his terse LinkedIn post is anything but polite. Soon after, his post causes its own buzz in the business press. Schultz appears on a three-hour-long podcast. And while he's there, he doubles down on his criticism of Starbucks. The company has not executed the way that I think it should have. I go into the stores, you know, like I know the company and I think we're not our best right now. As Starbucks sputters, the scuttlebutt on Wall Street is that Nara Simmon may no longer be the right player for Starbucks' CEO position.

19:43But if Starbucks' number one draft pick can't lead the team to success, then who can? To answer that question, Starbucks' board of directors is about to throw a Hail Mary.

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22:54It's July 2024 in Seattle. At Starbucks' headquarters, Laxman Nara Simmon pulls on a green and white varsity jacket. The Starbucks logo is on one sleeve. Not long ago, Nara Simmon told Howard Schultz that Starbucks is a business and not a football team. But today, he's dressed like a jock and taking the stage for a football-style pep rally with headquarters employees. The company's troubled, but the company has had one big win lately. A few weeks ago, the Supreme Court ruled that the Federal National Labor Relations Board had overextended its authority months earlier by ordering Starbucks to rehire several union activists the company had fired.

23:36That could could have a ripple effect on other labor cases at Starbucks. And yet, today, Nara Simmons' pep rally is being held after yet another tough earnings report. Net income falls again. Put traffic into the stores declines again. And same-store sales slide again. On stage, Nara Simmons waves to the crowd and smiles. He says that despite the bad numbers, he sees signs of a turnaround. But what Nara Simmon doesn't see is that Starbucks' board of directors is plotting behind his back to take him down.

24:23It's August 2024 in Provence, France. Melody Hobson swings open the casement windows inside her European country estate. The 55-year-old Hobson, the chair of Starbucks' board of directors, takes a deep breath. The scent of nearby flowering plants fills the room. But that does little to calm Hobson's nerves. Hobson, who owns this estate and vineyard, along with her husband, filmmaker George Lucas, is waiting on a very important call. This is a call that could change Starbucks' future. For weeks, Starbucks' board of directors has been secretly contemplating making a change at the very top of the organization.

25:04They've told almost no one outside the boardroom, including current Starbucks CEO Laxman Narasimhan. Now, they're ready to move forward with a candidate. His name is Brian Nickel, a 50-year-old executive who swooped in to rescue Chipotle after an E. coli outbreak in 2015 that nearly cratered the company. Starbucks board believes Nickel, who also ran Taco Bell, is the best person in the country to save Starbucks. What they don't know is whether Nickel will take the job. Hobson has asked one of her most trusted associates to ask Nickel if he's interested. Her associate calls with good news. Nickel wants to talk about the job, and he wants to talk to Hobson directly.