Brian Niccol’s strategy to improve Starbucks’ performance in its Chinese market might influence the company’s stock prices.

Following the unexpected leadership shift at Starbucks this week, Wall Street’s attention has turned to the future of its struggling China operations amid a challenging period for the stock. Starbucks recently announced that Chipotle CEO Brian Niccol will take over from Laxman Narasimhan as the new head of the coffee giant. This news led to a surge in the company’s stock and several analyst upgrades. Niccol is praised for his achievements at Chipotle, especially his emphasis on digital and online ordering systems. However, analysts are also examining his earlier roles at Yum Brands and Taco Bell to gauge how he might address Starbucks’ difficulties in China.

Starbucks, like many other brands, is vying for the Chinese market. The company reported a 14% drop in same-store sales in China for the quarter ending June 30, compared to a 2% decline in the U.S. Consequently, revenue from over 7,000 Starbucks locations in China fell by 11% during the same period. This has led investors to speculate whether the company might spin off its China business or find other solutions. Outgoing CEO Narasimhan mentioned during a recent conference call that “strategic partnerships” are being considered for the China segment, which could involve joint ventures or technology agreements. With Niccol’s appointment, there is a consensus that some form of corrective action will be taken. Market participants are also hopeful for improved stock performance, as Starbucks shares have dropped about 22% since Narasimhan took over in March 2023, while Chipotle’s stock rose by approximately 74% in the same timeframe.

Analyst Jeff Farmer from Gordon Haskett noted that the direction Starbucks will take in China remains uncertain, but a fresh perspective on the competitive landscape and development strategy is much needed. China’s challenges have long impacted Starbucks’ stock, prompting TD Cowen analyst Andrew Charles to downgrade the shares in September 2023. Charles, who later upgraded the stock following Niccol’s arrival, anticipates “prolonged headwinds” for the China operations due to competition and broader economic and geopolitical issues. He suggested that refranchising could slightly impact earnings, while a spinoff might slightly boost earnings per share. Charles emphasized that refranchising would signal a more prudent use of capital, a crucial step toward improving the company’s direction.

During his tenure at Yum Brands, Niccol oversaw the separation of its China business into Yum China, which now trades on the New York Stock Exchange under the ticker YUMC. JPMorgan’s John Ivankoe believes Starbucks should consider a similar approach. He argued that a spin-off could be neutral to operating income and enhance cash flow, pointing out that Starbucks’ efforts in China have yielded limited returns despite significant expansion. In fiscal 2018, the international market generated about $1.15 billion in operating income with over 5,600 company-owned stores and 6,200 licensed locations. By the end of 2024, international operating income is projected to be $1.05 billion, despite an increase to more than 9,800 company stores and 12,000 licensed ones. However, Yum China’s stock has faced its own challenges, with U.S. shares underperforming compared to Yum Brands amid difficulties for consumer-facing brands in China.

Other analysts, such as Citi’s Jon Tower and Evercore ISI’s David Palmer, also support the idea of a spin-off or joint venture for Starbucks’ China business. They argue that local operators could better manage the brand on the ground, allowing Starbucks to focus on revitalizing its U.S. operations. Deutsche Bank analyst Lauren Silberman noted that the company-owned model is primarily used in the U.S. and China, with licensed partners operating in most other markets. She also highlighted Niccol’s U.S.-centric experience as a reason why a spin-off might be beneficial.

Not everyone agrees with the spin-off strategy. BTIG’s Peter Saleh believes Niccol’s appointment indicates that significant changes to the China segment, such as a sale or spin-off, are unlikely. Morgan Stanley analyst Brian Harbour suggested a hybrid approach of owned and licensed stores is more probable, noting Niccol’s preference for company ownership in some international markets. Stifel’s Chris O’Cull argued that the stock’s performance might not be heavily impacted by the decision, but clarity on the strategic direction in China would be appreciated by investors. He speculated that Niccol might prefer to keep the China business as a company-owned operation to maintain control and flexibility in addressing issues.