From the September 2011 issue of Treasury & Risk magazine

Intense Times at Starbucks

On the steep road to growth, Treasurer Richard Lautch and his team conquer the challenges of commodities hedging, debt and free cash flow.

When Richard Lautch joined Starbucks as its treasurer in 1999, the Seattle-based company had fewer than 2,500 stores in four countries—the United States, Canada, Japan and the United Kingdom. Today, its global empire comprises more than 17,000 stores in 55 countries. You can order a double mocha latte venti in such faraway places as Oman and Qatar. All this is the stuff of legend, but the company’s extraordinary growth still startles Lautch, a youthful 46-year-old Brit whose whippet build is thanks to years as a competitive ultra-marathon cyclist. “It has been an amazing ride,” he says, sitting in a conference room at Starbucks’ headquarters building, a former Sears catalog warehouse built in 1912, in Seattle’s trendy Sodo area.

For natural gas, which is what Starbucks’ roasting plants use for fuel, treasury was able to ink fixed-price contracts with producers. Diesel, burned by its trucks, was more complicated. “We’re hedging using the Weekly Retail On-Highway Diesel Prices, which is published by the Energy Information Administration within the Department of Energy, and then executing swaps with the banks,” he says.

When it comes to coffee, Starbucks’ coffee trading group, which buys coffee worldwide, executes the risk management. “We measure their risks, but they have the tools, using futures and some fixed-price purchases, to manage risk over the next 12 to 18 months,” Lautch explains. “That said, we are looking to help them by designing structures to hedge much longer term—out two to four years.”

Lautch was next tasked with increasing Starbucks’ return on invested capital. The target is 20%—a bit of a stretch given the company’s previous peak was 14.6% prior to the financial crisis, at the end of fiscal 2005. In fiscal 2006 and 2007, ROIC fell—the company was growing its lease portfolio faster than revenue and profits. “Some of those stores weren’t good stores,” he acknowledges. “Cost was creeping up, and performance wasn’t as good as could be hoped.”

The low point, not surprisingly, was fiscal 2008, when ROIC crawled into the mid-single-digits. Since then, it has been up, up and away. “We rationalized the store portfolio,” Lautch says. Starbucks axed about 900 underperforming shops in the last 18 months. The company “took out some capital with that, and since these stores were negative cash flow and negative P&L, it boosted our return,” he says. “We have transformed the company, are focused more on cost than ever before, and are taking it out while still improving customer experience.”

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