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Starbucks Corporation (SBUX): The Importance of CEO Transition Plans

As we mentioned in our newsletter last week, Starbucks announced that long time CEO Howard Schultz would be retiring and handing over the leadership position of the company to current COO Kevin Johnson. Investors were clearly taken off guard and the stock dropped as much as 10% after the announcement.

This got us thinking about why investors reacted this way. Surely the company isn’t 10% less valuable because one employee in 191,000 decided to leave the company?

It is clear that Howard has done a remarkable job as the CEO of the company. He has taken the company from a small US chain, to an international coffee icon and arguably one of the most recognizable brands in the world. Starbucks now has operations in Brazil, Indonesia and the UAE. This international vision was developed by Mr. Schultz.

Mr. Schultz’s role in the company should not be understated, but the man appointed to take over his role is clearly up for the task of maintaining the company’s plans for the future.

Kevin Johnson currently serves as the COO and, as stated in the Wall St. Journal, has been responsible for the operations of the company for the past couple of months. He has worked hand in hand with Mr. Schultz in developing the company’s international strategy to continue to grow in foreign countries and maintain the company’s premium coffee experience.

Part of the worry for investors is that the new CEO of the company does not have the same decision making ability as the previous CEO. It is ultimately the job of the CEO to make final calls on strategy and make tough decisions that could affect the company going forward.

However investors should not be worried about the ability of Mr. Johnson to make decisions at the steering wheel of the company. Before spending seven years as COO, Mr. Johnson served on the board of directors. Needless to say he has the experience and skill to make the right call after being responsible for the day to day operations of the thousands of stores that Starbucks operates around the world. He knows the business in and out, and knows what the company needs to continue to do right to make the brand grow.

This brings us to the importance of transition plans. As Mr. Schultz has gotten older (he’s currently 63), the company has been aware of the need to find a suitable replacement who can do as good of a job, if not better, when Mr. Schultz decided to retire. They’ve given candidates, such as Mr. Johnson, plenty of hands on experience to give them the tools for the job they are about to inherit. A coffee chain is all about customer experience, and no one should know that better than the chief operating officer.

When picking a new CEO, the company wants to make sure that they have someone with the right skills and experiences to make the right calls. Investors need to remember that companies always have this in mind. Before Howard Schultz announced his retirement, Starbucks already knew that Kevin Johnson would be the right man for the job.

Investors has since realized this as well and the Starbucks stock has already regained all of the losses since the announcement. Nothing has changed fundamentally about the company and long-term prospects for the stock remain as strong as ever. The next time a major company announces a change in CEO, investors should remember that most of the time, nothing is fundamentally changing about the company.

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