From Tokyo, Japan and Changsha, China – this is Down to Business English. With your hosts Skip Montreux and Dez Morgan.
Hello Skip.
Hi Dez.
Did you have a nice Thanksgiving last week?
Thanksgiving? Wha …what are you talking about? Oh! Oh, you’re referring to Thanksgiving in the US.
I thought Canadians celebrate Thanksgiving as well.
Well, we do. But not at the same time. American Thanksgiving is celebrated on the 4th Thursday of November. So you're right, Thanksgiving in the US was last week.
But it's different in Canada?
It is. In Canada, Thanksgiving is celebrated on the 2nd Monday of October.
That’s much earlier. Why’s that?
Mainly because harvest season in Canada is earlier than in the US.
Right, of course. Because of Canada’s more northern location, the growing season ends sooner.
And because Thanksgiving is all about giving thanks after the annual harvest, it takes place earlier in Canada than in the US.
Skip you are a wealth of information. I did not know any of that.
Well you didn’t grow up in Canada so why would you.
So, did you have yourself a traditional Canadian Thanksgiving dinner back in October? I’m assuming it’s the same kind of food as in the US. Thanksgiving turkey, mashed potato and of course pumpkin pie.
Well, don’t forget the Cranberry sauce. Yes, Canadian and American Thanksgiving dinners are very similar. But no, I did not treat myself to a Canadian Thanksgiving back in October. Some of those items are a little difficult to get here in Japan.
But not impossible.
No, not impossible. But making a Thanksgiving dinner is way more work than I am up to.
Oh, I understand. If I was in your shoes, I would probably opt out of Thanksgiving as well.
Well, enough small talk. Why don’t we fill our listeners in on what today’s report is going to be on.
Good idea. There has been a lot going on in the world of coffee at the moment and particularly over at the world’s largest coffee chain — Starbucks.
Mm. There sure has been.
So today on Down to Business English we thought we would take a look at two business stories, both related to coffee.
First, I will report on the revolving door of CEOs at Starbucks.
And then, I will report on a new Chinese entrant into the US coffee shop market. One that will likely be providing Starbucks with some stiff competition as early as next year.
So let's do it. Let’s get D2B … Down to Business with Coffee Talk: Starbucks CEO turnover and Luckin's international expansion.
So Starbucks has seen a high turnover of CEOs recently?
They have. And to put this turnover into some kind of context, I want to start my report off with a brief overview of Starbucks’ history.
If you think it’s necessary.
Mm. I do. Starbucks was founded in 1971 in Seattle, Washington by three friends. Gerald Baldwin, Gordon Bowker, and Zev Siegl.
I knew that it originated in Seattle, the same city as Microsoft.
And Boeing.
Oh that’s right. Yeah, I forgot Boeing is based there. It’s interesting that Seattle is the home to so many big corporations.
That is interesting. And also interesting is that initially, Starbucks wasn’t a coffee shop. They only sold high-end coffee beans and brewing equipment.
It wasn’t a coffee shop? They didn’t sell actual brewed coffee?
No, they didn’t. But all of that changed in 1987 when their operations manager, a man by the name of Howard Schultz, bought the company from the founders.
Well, that’s one way to get a promotion — buy the company.
Well, Schultz also had a clear vision for Starbucks and he is the one who turned it into the coffee shop chain that we know today.
But Starbucks is a publicly traded company, isn’t it? It’s not privately owned.
No, it’s not. It went public in 1992.
With Schultz as CEO?
Yes. Schultz was CEO from '92 until 2000, at which time he handed over the reins to Orin Smith who then led the company for the next 5 years.
I was living in Tokyo around that time and I seem to recall a new Starbucks location opening up it seemed every other day.
I remember that too. It was a period of rapid expansion in Starbucks' history. Under Smith’s leadership the chain grew from 45 stores in the US to over 9,000 worldwide.
Wow, that is incredible expansion — in just 5 years!
It sure was. Then, in 2005 Jim Donald took the CEO helm from Smith. He continued to expand at a rapid rate. But by 2008, Starbucks started facing significant headwinds, mainly due to this rapid rate of expansion.
2008? That was the year of the Financial Crisis. That must have added to their challenges as well.
It certainly played a part. In January of 2008, Donald was ousted and Schultz was brought back in as CEO to lead the company through the crisis.
And how did he handle the situation?
He immediately started closing non-performing shops and shifted the business focus away from expanding to locations to selling ethically sourced products and fair trade.
And did this strategy work?
It sure did. Not only did it put Starbucks back on track, they came back stronger than ever. Schultz remained at the helm until 2017 when he handed over control to Kevin Johnson. Under Johnson’s leadership, Starbucks focused on streamlining operations and developing a mobile app that customers could use to place orders before arriving at a store for pickup.
I’ve used that app. I must say, it was pretty convenient.
Well, one unintended consequence of developing a mobile ordering system was that in-store sales started to suffer, at least in the US market.
So, I’m guessing there was another change at the top?
All in all, Johnson’s tenure can be seen as positive but you’re right there was a change. After five years as CEO and 13 years at the company, Johnson retired in 2022
Okay hold up there Skip. Before you go any further, let me make sure I have this straight. From the time they went public in 1992 until 2022, Starbucks went through four different CEOs.
Hm. Correct.
Howard Schultz, who served as CEO on two different occasions.
Yes.
Orin Smith, who held the post for five years.
That’s right.
Jim Donald, for three years. And Kevin Johnson for five.
You’ve got it.
Four CEOs over a period of 30 years — that seems reasonable.
Yes, but since 2022, Starbucks has seen three more people hold the CEO spot and they are currently on their fourth.
Okay yeah, that is high turnover. What happened after Johnson departed?
Well, you would never guess who took over after Johnson.
I’m going to venture a wild guess and say that Howard Schultz came back.
That’s a pretty impressive guess, Dez. You are 100% correct.
I just thought at the time …. in 2022, the world was just reopening after COVID. It makes sense the company would want someone with experience in charge.
That’s exactly right. However, Schultz only returned on a temporary basis as the board searched for a permanent replacement for Johnson.
So, who eventually took over?
In 2023 Laxman Narasimhan was appointed CEO. He was a former PepsiCo executive and also served as CEO of Reckitt Benckiser.
The British consumer goods company?
That’s the one. He was their CEO from 2019-2022 and was responsible for rejuvenating their sluggish growth.
That was at the height of the COVID pandemic. How did he manage that?
He focused on expanding e-commerce sales, simplifying operations, and introducing their core brands to new markets.
Sounds like his skill set was just what Starbucks needed. How did he work out as their CEO?
Not well at all. Sales were up 11.5% in 2022 under Schultz, but they immediately fell after Narasimhan took over. They were down 3% in the second quarter and 4% in the fourth quarter of 2023.
Oh dear. What was behind that drop?
A combination of things but one notable factor was the impact Starbucks’ mobile app was having.
Why would that cause trouble? Like I said, I found it very convenient to order online and just show up at the store later to pick up my coffee.
Hm. Well, on the surface it does sound like a good idea. But in reality, it was problematic. You see, the app made it easier for customers to place more complex orders. You know like, a venti iced caramel mochaccino with almond milk and an extra shot of espresso. Add 3 pumps of mocha syrup, 2 pumps of toffee nut syrup, and a sprinkle of cinnamon on top.
I would personally never order a monstrosity like that. But I do know some people who do. So yes, I get the picture.
Well these complicated orders all coming in at the same time, resulted in baristas not being able to keep up and large lines of customers picking up their orders all at once.
I hadn’t thought of that.
Nobody was happy. Long wait times irking customers, and the burden on staff led to another issue erupting during Narasimhan’s reign.
And what was that?
In the US, Starbucks employees, with the help of the NLRB, tried unionizing.
The NLRB?
That's the National Labor Relations Board, a federal agency that protects worker's rights.
Did the workers win?
No, they didn't. In June 2023, the U.S Supreme Court ruled in favor of Starbucks and severely limited the NLRB’s ability to act on behalf of the workers.
So Starbucks remains non-union then.
For the most part, yes. But it is an ongoing fight. In fact, we could do an entire episode just on that topic. Let’s just say that at the moment less than 5% of Starbucks stores in the US are unionized.
Well, with unhappy staff and irked customers, I'm guessing Narasimhan didn't remain CEO for very long?
Not to mention investors. Earlier this year, with share prices nosediving, investors started pressuring Starbucks' leadership to replace the CEO and boost profit. By August Narasimhan was gone.
Don’t tell me they brought Howard Schultz in again?
No, not this time. At age 71, he didn’t want to step back into the role. Instead, they appointed their CFO, Rachel Ruggeri as interim CEO. Ruggeri started her career in the accounting department at Starbucks in 2001 and had held a variety of positions in the company.
So, after climbing the corporate ladder she clearly knew her way around the organization. Why didn’t they just make her the permanent CEO?
She was already CFO, and her appointment was only meant as a stopgap measure while the company searched for a permanent CEO.
And who did they settle on?
In August, Brian Niccol was appointed CEO and he officially took over on September 9th. Previously, he had served as CEO of Chipotle Mexican Grill.
The fast casual restaurant chain?
That’s right. He was CEO at Chipotle from 2018-2024. Before that, he had an extensive career holding senior positions at Procter & Gamble, as well as Taco Bell and Pizza Hut, subsidiaries of Yum! Brands. He is best known for doubling sales, increasing profit seven times, and driving an 800% increase in share price in the six years he was CEO at Chipotle.
In other words, he has a proven track record as a CEO.
Yeah, but so did Narasimhan.
True, but that track record wasn’t in the food industry.
Hm. Good point.
And how has Starbucks been performing since Niccol took over?
Well, share prices immediately jumped when his appointment was announced in August. But since then they have remained somewhat flat.
Ah, perhaps it's too early to judge how he's doing.
True. But he has stated that his strategy is to return Starbucks to its roots by focusing on enhanced customer experience and the concept of ‘The third place’.
The third place?
It was a concept introduced by Howard Schultz back when he first started Starbucks. The idea was to make Starbucks a warm and welcoming environment. A third place between home, the first place, and work, the second place, where people could gather, relax, and connect.
That sounds like a central part of Starbucks’ brand image.
Exactly.
I guess only time will tell if Niccol can improve Starbucks’ situation. But I’m afraid that he’s going to face new competition next year in the US. In fact, Starbucks is already facing fierce competition in the Chinese market from this new, up and coming coffee chain.
And who would that be?
China’s largest coffee chain — Luckin Coffee.
Luckin Coffee? What can you tell us about them?
Luckin is a much younger company than Starbucks. It was founded just seven years ago in Beijing, but has gone on to become China’s leading coffee chain.
They are bigger than Starbucks?
Yes, they are.
But Starbucks has 7500 stores in China and the Chinese market accounts for 20% of their sales.
Well, Luckin reported revenue of around $3.5 billion last year compared to Starbucks’ $3.05 billion. Luckin wins.
Hm, well that is sure impressive. Luckin must have expanded at a breakneck speed.
They did. Some estimates are that Luckin opened 16.5 new outlets every day over a two year period from 2023 to 2024.
Like Starbucks in the late 90s.
However, Luckin’s growth has not been without problems.
For example?
In 2020, Luckin admitted that it had inflated their 2019 sales figures by $310 million. This admission resulted in their stock crashing, executives being fired, and the company being delisted from the NASDAQ.
How embarrassing. That’s something that doesn’t happen everyday.
No it isn’t. However, since then the company has restructured. They’ve replaced senior management and, as I mentioned, gone on to become China’s leading coffee chain.
Giving Starbucks a run for their money in the process.
Luckin’s business model is somewhat different to Starbucks though. It’s almost entirely app based and most of their outlets are take-out only with very little in the way of seating.
So they are not going after the ‘third place’ concept.
Not at all. But where their story becomes really interesting is Luckin’s plan to expand internationally.
At the moment they are only in the Chinese market?
Mainly. They do have 45 outlets in Singapore, but that is their only footprint outside of China at the moment.
And that is going to change.
In a big way. They are reportedly planning to open across all of Southeast Asia and in some parts of the United States next year.
That’s brave, going up against Starbucks on their home turf.
But you know what though, Skip — I think they just might pull it off.
You do? Why’s that?
Starbucks prices are mostly in the $5 to $6 range per drink. Luckin on the other hand, says they’re aiming to sell their products in the $2 to $3 range.
How can they pull off those prices?
Easy. They won’t have the overheads Starbucks has because they operate primarily through a mobile app for ordering and payments.
Okay so, less staffing costs.
And their outlets are more like kiosks for pick up rather than comfortable living rooms. So they have a smaller, less expensive physical presence.
Add to that the US still has a cost of living crisis. American consumers would love to get their morning coffee fix at a considerable discount. If it's good quality coffee then you're right Dez, Luckin might be able to sway some of Starbucks customers. I’m assuming you have tried Luckin Coffee in Changsha. Is it any good?
I like it. I find the coffee is not as bitter as some of Starbucks offerings. So, if I lived in the US I would definitely be a customer.
Wow, and I know just how seriously you take your coffee Dez. So listeners there is a glowing recommendation for you.
I have no problem recommending people give Luckin Coffee a try.
Well, before they do that, I think it is time for us to get D2V … Down to Vocabulary.
Let’s start off today with a very important business term that appears in the title of our episode — turnover.
Yes, turnover is an important business term and it has two very different meanings.
One meaning of turnover is the amount of revenue a company takes in over a period of time.
For example, Tesla's turnover last year was $96 billion.
Turnover can also refer to the rate employees leave a company and are replaced. This is how we used it in the title of today’s episode - Starbucks CEO turnover. In other words, our report was on the rate CEOs have been leaving, or have been replaced at Starbucks.
Our next item on D2V today is the idiomatic expression ‘a revolving door’. Now we all know what a literal revolving door is. It's the type of door department stores and hotels sometimes have that revolve in a circle as you enter the building.
I’m always worried I might get my briefcase stuck in the door when I go through a revolving door, although I never do.
Okay well anyway, that’s the literal meaning of a revolving door. But as an idiom, a revolving door is a situation in a company or organization where employees change quickly. In the introduction to today’s episode, I said I would be reporting on the revolving door of CEOs at Starbucks.
In other words, he was saying that he would report on the fast changing CEOs at Starbucks.
Can you give us another example Dez?
Sure, recently the premier league football club Chelsea has a reputation of having a revolving door for the post of manager.
Mm. Is that right?
Yeah. They’ve had six managers in the last two years.
Okay. Yes, a revolving door indeed.
Moving on, we have the stock market expression to go public. When you say a company goes public, you’re saying that it has been listed on a stock exchange. In the story Skip reported that Starbucks went public in 1992, meaning that was the first time it was listed on the NASDAQ.
The opposite of ‘to go public’ is ‘to be delisted’.
That’s right. In fact I reported that Luckin Coffee was delisted in 2020.
Unlike being delisted, there is often a lot of excitement around a company when it goes public.
Of course, it’s usually a good investment opportunity when a company goes public. There was a lot of hype when Birkenstock went public last year.
Birkenstock? The German shoe maker?
That’s right. I think their share prices increased something like 50% since going public.
Ah, I guess the hype was valid. Our final word for today is the verb to irk. When you say something irks you, or you are irked by something, you are communicating it annoys you. In the story, I commented that Starbucks customers were irked by waiting in long lines to pick up the orders they had made on the mobile app.
And who isn’t annoyed waiting in line.
I can’t stand waiting in line.
The adjective form of irk is irksome and it’s quite a high frequency word.
Can you give us an example?
Well, even though I like their coffee, I must say that Luckin Coffee’s app is quite irksome. It's constantly sending me ads and special offers.
Well, what’s so irksome about that? Don’t you like getting discounts?
Unfortunately, they are all in Chinese so I can’t read them.
Okay, I completely understand that. Well, it might be worthwhile taking some Chinese classes then.
And that is our report on Starbucks and Luckin coffee.
We hope everyone found it informative.
The Bonus vocabulary episode for today’s D2B will be released sometime over the next day or two. The words and phrases we will focus on will be — to hand over the reins, an unintended consequence, to rejuvenate, a monstrosity, and home turf.
D2B members, you can listen to that D2V episode in your Members-only RSS feed so you want to make sure to have copied that feed URL from your Membership account on the D2B website and paste it into your favorite podcast app.
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Thanks for listening everyone. See you next time.
Bye bye