Starbucks replaces CEO Laxman Narasimhan with Chipotle CEO Brian Niccol

Starbucks announced Tuesday it’s replacing CEO Laxman Narasimhan with Chipotle CEO Brian Niccol as the coffee chain tries to reverse a sales slump, sending its stock soaring more than 20%.

Chipotle’s stock fell 10% on the news that Niccol would leave after a successful tenure at the burrito chain.

Narasimhan’s departure is effective immediately. Starbucks CFO Rachel Ruggeri will step in as interim chief executive until Sept. 9, when Niccol officially takes over the top job.

Narasimhan took over as chief executive in March 2023. The coffee giant’s performance has struggled this year, hurt by weak sales in the U.S. and China, its two largest markets. In its latest quarter, Starbucks reported a 3% decline in same-store sales.

Pressure on the company mounted as it struggled to drive traffic to stores. Former CEO Howard Schultz, who handpicked Narasimhan as his successor, had written an open letter in May, weighing in on the company’s issues and offering advice but never addressing Narasimhan by name. Activist investor Elliott Management had acquired a stake in the company in recent weeks.

“Elliott has been engaged with Starbucks’ Board over the past two months regarding our perspectives on the Company’s key issues, and we view today’s announcement as a transformational step forward for the Company,” Elliott managing partner Jesse Cohn and partner Marc Steinberg said in a joint statement. “We welcome the appointment of Brian Niccol, and we look forward to continuing our engagement with the Board as it works toward the realization of Starbucks’ full potential.”

Schultz, now chairman emeritus of the company, also backed Niccol as the new chief executive.

“I believe he is the leader Starbucks needs at a pivotal moment in its history. He has my respect and full support,” he said in a statement.

Fellow activist Starboard Value also bought a stake in Starbucks recently, the Wall Street Journal reported on Friday.

Starbucks’ shares have fallen 21% during Narasimhan’s tenure, excluding Tuesday’s move.

Before joining Starbucks, Narasimhan was chief executive of Reckitt, which owns brands like Lysol and Mucinex. After being tapped as incoming CEO, he spent months learning about Starbucks’ business, including training as a barista.

Niccol has served as Chipotle’s CEO since 2018, and previously led Yum Brands’ Taco Bell. During his time at Chipotle, its stock soared 773%. As CEO of Chipotle, he helped the chain rebound from its foodborne illness scandal and led its restaurants through the pandemic. In recent quarters, while other restaurants have reported a sharp pullback in consumer spending, Chipotle has seen its traffic and sales climb, bucking the trend.

Mellody Hobson, who stepped down as Starbucks chair to become lead independent director as part of Tuesday’s leadership shakeup, said the board had been thinking about replacing Narasimhan for several months.

“Our board, a couple months ago, started to engage in a conversation about the leadership of the company, and I made an overture through someone to Brian, and he took the call,” Hobson said on CNBC’s “Squawk Box” on Tuesday. “We thought we had the opportunity to engage with one of the biggest names in the industry, someone whose track record is just clearly proven, not only through the spectacular results that he’s had at Chipotle, but also before that at Pizza Hut and Taco Bell. He knows this industry, and we thought he would be the right leader for this moment.”

Hobson acknowledged that Narasimhan faced some challenges coming into Starbucks without restaurant experience, but added that he helped decrease turnover and address supply chain issues. However, it appears that the board has more confidence that Niccol will be able to turn around the business quickly.

“But what we saw with Brian was someone who’s, quite honestly, been there done that — through all sorts of market environments, all sorts of cycles. When I talked to him I remember him saying, ‘I know what to do,'” Hobson said.

One of Chipotle’s strengths under Niccol has been its app, which has helped fueled its strong performance in recent quarters. Starbucks’ app has been one of the scapegoats of its weak performance. Schultz and other Starbucks critics have pointed to the glut in mobile orders, which slows down service and hurts the customer experience.

Chipotle, on the other hand, has added a second assembly line to its restaurants specifically for mobile orders to keep up with digital demand. The burrito chain has been building locations with “Chipotlanes,” which are reserved for digital order pickup.

Narasimhan’s surprise ouster also suggests that Starbucks’ board isn’t interested in a deal with activist investors. When news of Elliott’s stake in Starbucks first broke in July, the hedge fund offered Starbucks’ board a settlement that would protect Narasimhan’s job, CNBC previously reported. The board hadn’t told Elliott about its leadership shakeup ahead of time, Hobson said Tuesday.

Starbucks’ board did not initially respond or engage with Elliott for some time, driven in part by the lingering influence of Schultz. Elliott has amassed a stake that was worth as much as $2 billion.

However, the two sides met as recently as last week to discuss a settlement offer, CNBC previously reported.

— CNBC’s Robert Hum contributed reporting to this story.