A Vulture Fund Is Coming for Starbucks

After the abrupt replacement of the CEO with the head of Chipotle, what’s next?

Elliott Investment Management, the $69 billion activist investment fund that previously commandeered an Argentinian naval ship after a debt dispute with the country, has identified its newest target: Starbucks.

The firm uses a mixture of legal maneuvering and executive arm-twisting to mold its investments in its image. Founded by Republican megadonor Paul Singer, Elliott’s investment approach destabilizes developing countries while often generating mass layoffs for workers unlucky enough to work for companies it invests in. Critics call the firm a “vulture”, while proponents who say it unlocks more money for shareholders through efficiency call it an “activist.” 

Activist investors typically buy a small portion of a company, and leverage that ownership to push management into adopting harsh cost cuts. The approach often boosts stock values temporarily, allowing the activist to exit the investment with a profit. “You’re dealing with somebody whose tactics it is to intimidate, to splinter, to do everything they can to be disruptive,” a rival investor told Fortune in 2017.

Starbucks stock is down nearly 30 percent since November, leaving investors looking for answers and ripe for activism. The company, which rose to prominence by offering affluent consumers a better cup of coffee and a “third place” for meeting, faced a series of self-inflicted mishaps. For months, Starbucks refused to engage in good faith union negotiations, which fueled a negative PR campaign among its core customers. 

In parallel, price increases at the chain pushed iced coffees to $6, while the in-store experience suffered, with consumers facing long wait times and inconsistent online orders. Last quarter, Starbucks sales dropped 3 percent across the world.

In July, the Wall Street Journal reported that Elliott had amassed a significant stake in the company, and was privately pushing management for changes to boost the stock price. This week, some of the changes became public. 

The company unceremoniously fired CEO Laxman Narasimhan, who previously led PepsiCo’s beverage division. In his tenure, which lasted less than a year and a half, Narasimhan tried to combat sagging sales with a companywide efficiency program and ended the labor stand-off by agreeing to negotiate with Starbucks Workers United. 

Narasimhan’s decision to negotiate with Starbucks United may have been his ultimate downfall. When a unionizing effort caught fire in 2021, Howard Schultz, Starbucks’ influential founder, told a crowd at the New York Times that he would never engage with the union. As the company struggled, Schultz became increasingly erratic. In early 2023, he hyped a new coffee product to turn around sales–which turned out to be dumping a dollop of olive oil in coffee. And this year, he began to criticize his hand-picked successor on LinkedIn. 

Narasimhan was replaced with former Chipotle CEO Brian Niccol, who has taken a more Schultz-like position on unions; he said in 2022 that he was “disappointed” in a Lansing location’s vote to unionize with the International Brotherhood of Teamsters. In 2023, under Niccol’s leadership, Chipotle agreed to pay past employees $240k, after it allegedly shut down a Maine location after the staff unionized. 

Starbucks has not announced what additional changes it plans to make after an onslaught of pressure from activist investors like Elliott, but if history is any indication, it does not bode well for workers or investors. 

In 2010, the Obama administration and General Motors engineered a sale of mega auto-parts manufacturer Delphi, which would have saved 36,000 manufacturing jobs in the country. Elliott blew up the deal, netting itself billions of dollars while sending the equivalent of a mid-size city to the unemployment line. 

In 2015, Elliott purchased Cabela’s, ultimately merging it with Bass Pro Shops. It’s believed the company netted over $90 million while eliminating over 2,000 jobs in the process. 

And three years, later, Elliott bought about 5% of the energy company NRG, and pushed the company to sell off assets and cut the workforce. In the next two years, the company laid off 45 percent of its workforce.

Meanwhile, the academic evidence suggests that the activist approach does little to benefit investors. Research at Penn State University found that stock gains from activist investing are mostly temporary. Targeted companies saw their stock price increase 7.7 percent in the first year, only to crash down 5 percent in the following three years. Rhode Island’s state employee pension found that the pension would have been better off investing in a generic S&P index fund, which returned investment gains of 16 percent, compared to 9.2 percent at Elliott.

In the immediate aftermath of the news, however, Starbucks’ stock increased 24 percent.