Government’s current stance with regards to the potential Pfizer takeover of AstraZeneca sends mixed messages about UK recovery.
Chairman & CEO Ian Read
David Cameron’s stance with regards to Pfizer’s potential takeover of AstraZeneca is somewhat peculiar. Research & Development especially in the Science industry signals innovation, persistence and longevity. Therefore the employment associated to the Science industry appears to be the kind that the UK economy desperately requires in order to aid the fragile recovery. The anomaly comes as a surprise because both the Prime Minister and the Chancellor favour a takeover bid from US firm Pfizer, albeit with “more assurances” from Pfizer. The government are of course powerless to stop the takeover and Pfizer have no obligation to pander to Westminster’s requests, still, supporting a takeover bid that is most likely to remove highly skilled jobs away from the UK is not exactly a favourable position to adopt. More potently, the wrong message about the UK labour market is being sent.
Pfizer Chairman Ian Read will have fully comprehended the saving potential by transferring 20% of AstraZeneca’s R&D department to a more cost-effective location. Pfizer shareholders will support the move away from the UK as dividends will rise due to the vast savings, an estimated £595million will be saved if the Pfizer manage to forsake the UK for a more cost effective location. Savings on such levels will provoke a reaction from shareholders who will always look to maximise their dividends. It is their right to exercise that privilege and governments are powerless to stop such an action. It should be noted however that sovereign governments have a debt to its citizens to ensure that everything is done to at least show firms why the UK is an attractive place to conduct business. To stay silent would be questionable; supporting the bid that possibly ends some 6,700 jobs in such a specialist and labour-rich sector such as Pharmaceuticals is a surprise. When one considers the economic rhetoric propagated by the government has been focused on full employment, safeguarding highly skilled jobs should subsequently be high on the list of priorities for the government.
Shadow Business Secretary Chuka Umunna said the assurances Pfizer had given ministers were “not worth the paper they are written on,” as it had declined to rule out breaking up AstraZeneca in the future.
“The government could act immediately to work to put in place a stronger public interest test encompassing cases with an impact on strategic elements of our science base and seek a proper, independent assessment of the potential takeover as Labour has called for. Instead, ministers have sat on their hands.”
Although it is the job of the opposition to opine an alternative perspective to that of the government, Chuka Umunna’s point does reflect the public interest and the Society of Biology, Biochemical Society, British Pharmacological Society and Royal Society of Chemistry all reflect his views. Nobel Prize winning Professor Andre Geim “fears” for the future of R&D in the UK. They all concur that recent mergers have led to firms seeking economies of scale, simultaneously translating to laboratory closures and job losses. This makes it even more astonishing that the government would encourage this particular takeover.
Hitherto both the Prime Minister and the Chancellor have maintained their faith in British business, especially in creating long-term employment opportunities. Just last month the Chancellor pledged to “fight” for full employment and of course he was referring to employment on a much larger scale. In the case of Pfizer, some 6,700 jobs could be lost. This case is more poignantly about what kind of message the public receives. Economies need something that is not tangible to fully recover and that is confidence. This contradiction does make the government look somewhat inconsistent. Had the government distanced itself or highlighted some of the features that make the UK an ideal place to conduct business, features such as the lowest corporation tax in the EU or Universities with rich heritage and so on it could at least tie in with the other messages they are sending about the recovery. Its current stance however leaves them looking somewhat flustered.
How did the global financial crisis result in large government sector cuts?
The events of 2007 are very well documented. There has been a plethora of texts published, journal articles, books, magazine articles etc. dedicated to covering the horrific downturn of several leading financial markets in 2007. The crash ensured that several billions worth of Sterling, Dollars, Yen and so on were given to numerous financial institutions that were deemed “too big to fail.” The term “too big to fail” is theoretically questionable to say the least, a point I shall discuss further as this piece develops. The significance of the bailout funds were the fact that they were generated from taxes. What was clear however about the government bailouts, particularly in the UK, was the fact that institutions such as Northern Rock (now Virgin Money) and RBS would have collapsed had the government chosen to ignore their pleas and let them fail. It is worth remembering that between 1995-2006 a period of unfettered market capitalism allowed substantial financial products to penetrate several economies. A brand new phenomenon that several households had very little exposure nor knowledge too. It would become clear in the years to follow that this imperfect information would have devastating effects on the entire global economy. This period where credit was “pumped” into the economy was truly unique.
Stock crash
Austerity policies have been discussed in some depth on this blog, my pieces here and here are pieces I wrote, I attempt to ask certain questions about government policy and question the notion that government policy could actually be having an adverse effect on the UK economy. The UK (much like the rest of the areas affected heavily by the global banking crash) have adopted a set of rigid public sector cuts, designed to reduce the large dependency on government for goods and services and also because the current government deem the current debt-to-GDP too high. (86%)
If one were to assess austerity in the UK so far could anyone deem the set of policies a success? Of course, the government intends for their policies to have much longer effects, a legacy effect if you will, but that should not come at the peril of current generations, for governments should dictate policy for both now and the future. Moreover, economists such as Stiglitz, Krugman, Solow, Diamond, Sharpe, Skidelsky and several others all warned against excessive fiscal cuts. There is no empirical evidence of any large economy cutting its way to prosperity. Yet what could easily be described as a gamble or the set of ideologically driven policies have ensured that in the UK and much of the developed world have had their economies remain flat since 2011, having slumped from 2009-2011.
In 2009 the rhetoric around fiscal policy changed. If you go back to Tony Blair’s premiership I do not remember anybody on either side of the House quibbling about government spending, in fact the opposite. The then Shadow Chancellor of the Exchequer George Osborne stated that he would match Labour’s spending. Spending he would later tirade about once he became Chancellor. Moreover, Labour made several economic mistakes one of them was the heavy deregulation of the financial markets that actually allowed a steady and then volatile flow of cheap and available credit to flood the economy. Too many people binged on cheap and available credit and several institutions capitalised on this and were making substantial profits as a result. Making profits is part of our societal fabric and that is not my issue, but in the business world, if a firm does not make profit, eventually that business is driven out and replaced by one that will. This to me that is the essence of capitalism. Why then was RBS, Northern Rock or Lloyds bailed out? Okay, anybody with an account with those firms would have lost their money, which is very unfortunate, but in a market economy, an economy In which proponents of free-market capitalism constantly bombard against government interference, where more than happy to accept taxpayers money. Some clarity would be great because these are the same institutions that support, lobby and advocate for laissez faire policies yet accept the ultimate form of government intervention. This anomaly still baffles me and it is unfortunate that we are still paying the heavy price for the actions of a few financial institutions. Moreover it was the substantial bank bailouts, not excessive government expenditure that caused such a sharp rise in the high levels of public sector debt. Debt that is being tackled with austerity policies. Nothing should ever be “too big to fail” because that is the antithesis of a competitive free market, the kind of market that is encouraged in the UK. The government should have let the failing banks fail so other banks could learn that reckless and irrational behaviour should not be tolerated. It would have been a message of biblical proportions. Without bailing the banks out we would not need austerity and six years and more of lost or flat output. It appears that policy has not favoured the majority of the population who are still readjusting to the large structural changes that have taken place since 2009. The graph below is an economic outlook for the UK and makes for miserable reading.
My main qualm lies with blaming government spending. I have maintained from the outset that some government cuts are good, just like in a household or with your personal consumption; you assess what you are spending and cut what is not required. Fair enough. The extent at which the government in the UK and in several nations in the Euro Zone has undertaken huge public sector cuts and perhaps more importantly, the rate at which they have penetrated society is likely to have long lasting negative effects. So far they have proved highly ineffective in producing genuine economic growth as the graph above displays. It should be noted that anything above zero is “growth,” however, in reality people need what I call tangible growth. If more buildings go up, more roads are finished, more bridges and so on are completed then people up and down the nation will actually see growth for themselves. Obviously all those examples require large labour input. We have not had enough of that in the UK. Those examples also highlight investment and investment has what we call in economics a multiplier effect. Simply put, the government spends £1, that £1 generates more that the initial £1 invested say another £1, then the additional £1 can be reinvested on top of the original £1, so the good or service can generate a much higher multiplier, say £3 in the future. What is important is that it comes from the initial £1 investment. This period (2007-period day) of flat economic activity has needed and needs fiscal investment.
Even with an extremely accommodative monetary policy in the sense that the interest rate has been 0.5% since March 2009 the government’s reluctance to deviate away from an ineffective set of policies is detrimental to the economy. Now is as good a time than ever to undergo strategic and logical investment programmes. Instead, the large public sector cuts have actually been damaging to the government’s deficit reduction plan because unemployment is rising, therefore, transfer payments in the form of Job Seekers Allowances and Unemployment benefits have increased. If the government were to run public sector cuts with substantial investment programmes and run them simultaneously, shifting resources away from areas deemed to be wasting government funds and invest in areas with high returns this would be a better set of policies. Instead, we just have the negativity associated with public sector cuts, which has made the private sector less responsive as a result of the lack of economic activity and weak demand from majority of the public.
It is impossible to cut your way out of a recession; nations need to invest wisely in order to grow. America pulled itself out of recession because their production levels in the late 1930s and early 1940s substantially boosted their economy. The point is, they invested. There was an economic crash and the government invested. The New Deal (America’s recovery plan) took several years to have a noticeable effect on the economy, but it was investment that helped aid their recovery.
The government’s gamble still has not paid off and the UK does not appear to be changing any time soon. Governments need to spend in order to get a return. Without it, our economy shall remain sluggish for some time and this is a direct result of the aftermath of the global banking crisis, not excessive government expenditure.
Hello world. This is another great piece from Guardian journalist David Conn. I wrote a piece some time ago highlighting some of the benefits of the opposing models of football ownership. It’s certainly worth reading.
The Men Who Made Us Fat aired last year on BBC. It discusses obesity levels around the world, stating that two thirds of Britons are overweight and undernourished. The picture above shows a mushroom cloud of ten leading firms above their respective subsidiaries. Many of the firms pictured above are featured.
This is an excellent piece from today’s Guardian. It relates to spending levels in football. On one hand you have Bourssia Dortmund, a club that epitomise Germany in terms of values, work ethic and productivity. (If I were a betting man I would place some money on them reaching this years final.) And on the other hand Spanish side Malaga, who, despite some excellent performances this season have been in hot water with UEFA for financial irregularities. Both go head in tonight’s Champions League. The article
Personally, whilst I love football, I cannot help but think that it is losing some quality. The influx of foreign owners on European football have inflated transfer fees which has not only increased pressure on football clubs to become profitable. Inflated prices thus have an affect on every club and it is near impossible to not participate. Clubs like Newcastle have invested in excellent scouting and are able to find quality players like Yohann Cabaye, Moussa Sissoko and the like and sell them on for large fees. Moreover, Dortmund are a breath of fresh air because the current German champions have spent, but not on the levels of Malaga, PSG, Manchester City, Liverpool and other clubs with foreign owners and are both profitable off the pitch and excellent on it. UEFA’s toothless Financial Fair Play regulations have yet to have much of an impact on football. They need to enforce these regulations to ensure that football does not continue to spiral out of control and the inflated market reduces.
As I venture into my local supermarket what is clear to see is the increase in self-service checkouts. More and more supermarkets are replacing human labour with computers. Clearly this is related to cost and labour costs are a concern for some firms, so they are potentially saving millions if they replace till assistants with computers. In a competitive market, other firms will match their competitors, so my local supermarket is TESCO; if I go to the closest Sainsburys the increase in self-service checkouts is there too, same with the closest Asda and Waitrose respectively. This speaks volumes in a time where unemployment is relatively high and several household incomes contract as the burden of deficit reduction takes a toll on many low income earners, whose propensity to consume is reduced, even though a larger proportion of their income goes on living. Moreover, it must shatter morale in an organisation if you are told that computers are replacing colleagues.
It should be noted however that firms could suggest that they are prolonging the majority of jobs if they make crucial savings in this area. Undoubtedly some jobs will be lost if supermarkets continue to install self-service tills, but the savings could translate to more jobs being saved in the long run. Also, productivity could rise due to more personnel being available to assist customers, replenish stock levels and assist customers who are using trollies.
What the rise in self-service tills highlights is the rapid technological advancements in today’s society. A society where computers are critical to today’s workforce and this leads onto greater dependency as a result. In car factories, machines can complete tasks it could have taken several hours, even days for a group of humans to complete. So as time elapses, so must innovations in improving productivity and efficiency. This will come at a cost; human labour in some organisations, in the not too distant future will become virtually obsolete.
One could argue this is nothing new, of course. The Luddites of the 19th century staged several virulent protests against lower skilled, lower paid workers and they actively destroyed machines that replaced (what they deemed) their high skilled labour. There is no modern day equivalent to the Luddites, the point is more poignant than ever, labour is being firstly by lower paid workers and then eventually by machines.
Private firms besides obeying the law have no moral obligation to serve society. If they chose to do so, it is of their shareholders request or of their own freewill. Therefore, the gloomy economic climate and the high unemployment levels have little impact on the firm unless they are directly impacted by it. So it is in their own interest to do what they feel is right by their own business and reducing costs and therefore increasing profitability is their goal. How does one achieve this? By seeking efficient methods to solve costly problems. The rise in computers replacing human input is a global issue and it is directly related to unemployment levels. Paul Krugman writing in the New York Times on December 9 suggests
“There’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds, many of the jobs being displaced are high-skill and high-wage.”
This helps to understand why private firms have no moral obligation to help solve the current global unemployment problem because they are looking to help themselves and do what they need to do to ensure they make it through these challenging times. The cost is more unemployment.
Getting more people back into work is the government’s aim. The onus lies with the individual to ensure he or she is deemed valuable to their respective organisation. We are however living in difficult times and proving your value is proving tougher than usual, what is clear is the fact that firms are only going to look forward, so the computers are here to stay. What individuals must ensure is that they are working with and not being replaced by them.
There is very limited choice in many of the privatised industries including rail.
Privatisation in the UK during Margret Thatcher’s premiership was intended to shift the economic burden away from taxpayers into private hands. It was intended to erode the natural state monopoly and establish market-based competition. Economic theory suggests that privatisation eradicates the state owned monopoly and creates competition in the market, which should lead to better services and a lower cost. Government led businesses are said to be inefficient at providing services that a private led firm can do, so the appeal is certainly there.
Nationalised industries tend to provide goods and services with high social value, goods such utilities, agriculture and transport tend to be provided by the state because these derived demanded goods are viewed as essential. Unlike firms, the state’s intention is not to maximise profits, so there are no shareholders to appease, nor answer to. This has its advantages and disadvantages because constantly operating at a loss will impose a burden on the taxpayer, who may feel their taxes would be best utilised elsewhere, where there taxes are not being wasted.
This was central when Thatcher and her government suggested that a wave of privatisations across various sectors such as transport, telecommunications and utilities were the best way to reduce the burden on taxation and the optimal way for consumers to be provided with essential goods and services. The state was viewed as a natural monopoly and the highest consumer satisfaction and utility is gained through competition, it is competition that yields the greatest efficiency and the lowest possible prices. Therefore, establishing competition through several competing firms was central to this proposal. Economists Todaro and Smith suggest,
“Proponents [of privatisation] suggest that it curbs government expenditure, raises cash to reduce internal and external debt and promotes individual initiative while rewarding entrepreneurship”
Clearly the benefits of privatisation are clear, the eradication of the natural monopoly is perhaps the strongest because it opens the market and allow more firms to compete. However, in the UK this unfortunately has not been the case. The wave of sell offs during the 1980s continues to have a significant effect on life in the UK today. Services such as gas were privatised, so was telecommunications and parts of the rail industry. Some twenty years later after firms such as British Telecom (BT), British Gas and regulatory bodies such as Network Rail not only stifle competition, but they appear to have replaced the very monopoly it was created to replace.
John Moore was the Minister in charge of initiating the wave of privatisations. He said in 1983
“The long term success of the privatisation programme will stand or fall by the extent to which it maximises competition. If competition cannot be achieved, an historic opportunity will have been lost.”
He said at the 1983 Conservative Party conference:
“Our aim is that BT should become a private sector company…[but] merely to replace state monopolies by private ones would be to waste a historic opportunity. We shall continue our programme to expose state owned industries to competition.”
Moore explicitly states if privatisation cannot lead to a competitive market “an historic opportunity will be lost.” I could not agree more because had the privatisation initiatives been applied appropriately, with legislation implemented to prohibit cartels forming in the case of the rail industry or outright monopoly, like BT in the telecommunications market then these formerly stated owned industries would have created far more jobs on the sheer fact that the market would be significantly larger, they also would have lower prices. And they would have lower prices because there would be ten or more firms each competing to try and get customers, so lowering prices in order to attract custom. If however there are two or three firms, then they are more likely to collude, whether it is explicit or tacit, the outcome is the same and it is near impossible to detect.
Commentator John Gamble stating in 1994
“When BT, BG and the water industry were divested, the Conservatives failed to liberlise their markets meaningfully and as a result, were forced to create regulatory mechanisms and institutions to prevent the utilities from abusing their positions.”
I mentioned in my piece about regulation and the above inflation gas price increases and how regulators in many instances interfere with business activity and can actually do little to prevent firms from these price changes. It should be noted that the way a customer will have low prices is through competition. That was the reason why Mrs. Thatcher sold off many state controlled firms, but we are seeing today that the state monopolies have been replaced by cartels and monopolies in some cases. Moreover, this is conflicting to what was proposed. One could even suggest that a return to state operated firms were better, because at least they are accountable to the public. Private cooperations are accountable to shareholders are not obliged to disclose information to stakeholders.
Privatisation in the UK does appear to have shifted from natural monopolies to private monopolies in the case of BT and oligopolies in the case of Network Rail, British Gas and so on. Clearly, this is the oligopolistic market structure is not competitive and fails to provide sufficient customer choice. Customers are therefore left to demand essential goods from limited suppliers, resulting in high prices. Unless privatisation leads to a highly competitive market, with several competing firms, it is merely replacing the very entity is supposed to be replacing.
There has been no secret of the coalition’s economic policies. That has been to reduce the deficit, i.e. the amount of money the government looses each year. The government has also aimed to reduce the burden of high levels of government debt. How it implements these policies has a drastic effect on the UK economy and in particular, unemployment.
Clintons are one of many well known brands to feel the strain of these tough economic times
Government debt management affects all aspects of the economy. The substantial reductions in government spending have led to several members of the population forced to find alternative employment. George Osborne was confident that the private sector would compensate for the jobs lost through the government policies. It is therefore vital to analyse how government debt management has affected the rate of unemployment. UK unemployment is currently 2.53 million, which is 7.9% of the population, which has fallen from the previous is sixteen year high. Last year unemployment peaked at 8.4%. This was an increase by 118,000 from September to November 2011 and a further 28,000 from November to January 2012. Clearly the government’s policies have not had the desired effect.
OECD Economic Outlook 2011
Above is a graphical depiction of the rise in unemployment from 2008, with both jobs losses in the public and private sector also depicted. Despite the claim in the November 2010 Budget, Osborne claimed that the private sector would compensate for the jobs lost in the public sector, the evidence is clearly contrasting to the government’s claim. The Chancellor claimed,
“Public-sector job creation would far outweigh the job losses in the public-sector.”
Unemployment in the UK continues to rise to record levels and the jobs being lost in the public sector are a direct result of government policy. When The Chancellor made the premature assumption that the private sector would compensate for the jobs lost through the public sector it may have highlighted an inadequacy in government policy. High and rising levels of unemployment is detrimental for economic growth because it places a financial strain on those working as transfer payments such as Job Seekers Allowance (JSA) and benefits. The number of individuals claiming JSA has risen by 28,000 from November 2011 to January 2012. With further increases expected for the rest of 2012 and 2013. Moreover, there has been an increase in part-time employment as jobseekers have been desperate to earn some income, but it is proving insufficient to make a substantial difference in terms of contributing towards substantial economic growth.
In addition, the higher than target inflation, those in work will have less disposable income and the government will have to increase transfer payments out to those affected by unemployment. Secondly, tax revenue will also decrease simply because less people are in work, the government must therefore create employment in order to raise taxes so it can finance expenditure that can later contribute to economic growth.
Unemployment is therefore the greatest challenge facing the UK economy because it does not appear to declining. By making such large expenditure cuts, the government may have undermined any recovery effort and may find it very difficult to reduces its debt obligations. The most effective method to reducing government debt is establishing sustained economic growth, however, sustained economic growth in the UK is some considerable way away. Although the UK economy is no longer in recession, rising unemployment will continue to place a severe burden on those in work due to the inflationary and tax restraints already in place, with lower disposable income, growth is likely to remain very low. Moreover, the method in which the government has chosen to reduce its debt may have exacerbated the problem because of the sharp rise in structural unemployment.
How competition is the only way to drive prices down.
Consumer choice will always lead to lower prices. This is basic microeconomics and in competition theory the more competitive the market, the lower the prices. This unfortunately does not appear to be apparent in several markets in the UK and it is especially true in markets where demand is derived. Derived demand is basically when you demand a good or service not for its own sake, but for the goods or service derived from it. Transport is an example where customers don’t especially want to sit (or probably stand) on a train to get work because they enjoy the journey, rather, they demand this service because they know it is vital for them to get to work. It is in these markets, transport, utilities, telecommunication networks, supermarkets and the like where there is little competition and thus high prices as a result. Consumers have very little choice but to pay the competitive rate for these services due to the market structure.
The industries mentioned resemble an oligopoly, and market structure with a few firms. It has very high barriers to entry, which means it is usually very difficult for a new entrant or entrants to enter the market because there are usually very high financing costs or even legal parameters preventing new entrants. The problem with oligopolies is that because there is such little competition as a customer you end up paying more or less the same for your goods or services, so firms usually have to rely on non-price competition in order to increase their share of the market.
The global economic crisis has led to a sharp increase in the rate of unemployment and in particular in the UK. This has in turn placed a huge burden on households up and down the country and when you consider inflation is stubbornly high in recent years which reduces spending power, the price you pay for goods and services that are essential has a huge impact on your disposable income. If you look at inflation for a moment (currently 2.2%), if the rate of inflation is higher than your pay rise then your pay has not actually increased because all goods and services around you have increased in proportion, so your nominal wage may have increased, but your real wage (inflation adjusted) has not.
Now if we look at the oligopolies again, take energy for example. There are six major suppliers in the UK. They are EDF, E.ON, N Power, British Gas, Scottish Power and SSE. An important feature of this market structure is collusion. Whether it is deliberate or tacit it does not matter because if one firm reduces its prices then others are likely to follow suit because they know they are selling the same good, so there is nothing stopping a customer from going elsewhere for a cheaper price. Collusion will occur in an oligopoly regardless of the good or service. Energy firms advice customers to shop around for the best rates, the savings will be marginal at best and they only work because majority of people pay above what they actually should, so it balances out.
Five of the six major UK energy suppliers will increase their prices
Even David Cameron weighed in on the debate, exclaiming that he would “force” energy firms to offer their customers lower rates. Ofgem later published a document demonstrated that the simplification of retail energy tariffs would be complicated. Moreover, whilst his intentions may have been good, it has proved futile; customers are going to face high prices regardless.
John Kay in Financial Times last Wednesday alluded to the fact that regulation may actually hamper business activity, not aide or regulate it. Regulation is a surrogate form of competition, it can never and will never guarantee low prices or optimal consumer choice because there is nothing a regulator can do about tacit or overt collusion in a market. If the government wanted lower prices for energy they could break down some the legal barriers preventing newer entrants into the market. If for example there were ten to fifteen energy suppliers firms are likely to lower prices in order to increase market share because consumers would usually go for a firm offering the same good or service at a lower price. As it remains however, the six major firms can effectively charge what they want because they know that consumers cannot go without heat or electricity so they are forced to pay.
SSE: 15 October, gas and electricity up 9%
British Gas: 16 November, Gas and electricity up 6%
Npower: 26 November, Gas up 8.8%, electricity up 9.1%
Scottish Power: 3 December, gas and electricity up 7%
EDF: 7 December, gas and electricity up 10.8%
E.On: No price rise before the end of 2012
The energy sector is not the only market that has squeezed incomes and thus reduced spending power; mobile phone networks are also high on the list. There was a time in which a twelve-month contract was readily available. Again, in a market where there is such little competition the realization that you are more or less going to pay the same rate is again apparent in this market. The fact that T-Mobile and Orange have merged into Everything Everywhere makes matters worse for the consumer because it has reduced its competitiveness even more.
I personally feel that the government needs to make it far easier for new entrants to break into what appears to be closed off markets. There are legal barriers preventing new firms entering transport, so the same firms dominate the market, to the detriment of the consumer. This was the whole point of privatisation, to remove state ownership and open it up to the market, but state ownership has been replaced by private ownership and it is very much closed off. This issue is especially poignant as we see the standard of living continue to fall as a result of high inflation and sluggish economic growth. The fact that essential goods are rising accordingly only squeezes more out of the pockets of those who struggle to keep up with the price increases. Moreover, more competition ensures lower prices, regardless of regulation.
Starbucks is facing growing criticism in the UK for paying no corporation tax in the last three years and only paying £8.6m in the last fourteen years of trading. Despite revenue exceeding £3bn in that time, they have managed to pay under £10m and have not paid a penny in the last three years. This does beg the question of how a large corporation, with 735 stores nationwide can manage to pay such little tax. Starbucks has announced consecutive losses from 2008 to now, yet they have managed to expand their operations. It is difficult to comprehend how a business can expand its operations, whilst making substantial losses. Starbucks has adopted a rapacious approach to the coffee market in the UK. It is the global coffee chain and it is the leading chain in the UK.
The head of Starbucks operations in the UK and Ireland is a man named Kris Engskov. Engskov was a former aide to Bill Clinton and during Clinton’s election campaign. A strategy they adopted was to highlight the shortcomings of George Bush Snr’s lassies-faire attitude towards large corporations who were avoiding tax. They used several means to draw the elctorates attention towards it, including a host of ad campaigns
“This is the $825bn question. That’s how much foreign corporations operating in the US took in one year. But 72% of them didn’t pay a dime in taxes. Not one dime …”
The real issue however lies with what Starbucks tell Her Majesty’s Customs & Revenue (HMRC) and what they tell their investors. There does appear to some inconsistencies with what is being said. In 2008, Starbucks filed £26m loss in the UK, yet their CEO Howard Schutlz told an analysts call that the UK business had been “so successful” he planned to take the lessons he had learnt there and apply them to the company’s largest market, the United States. One does not even know where to begin to try and understand the reasoning behind such a move. Such losses would be a grave cause for concern, yet Schutlz seems adamant to replicate this model in a substantially larger market. Schultz even promoted the person who oversaw this substantial loss, a man named Cliff Burrows. Schultz said he was looking forward to Burrows “now applying the same drive and business acumen to leading our US business.” This seems very odd.
In 2009, Starbucks filed a £52m loss whilst the Chief Financial Officer Troy Alstead proclaimed that operations in the UK were “profitable.” This is clearly a contradiction, unless he does not understand what profit is, because announcing such losses that are exactly double of their previous year and to describe overall activity as “profitable” is quite frankly a farce. In 2010, £34m in losses was announced and Starbucks informed investors that sales continued to grow. And just for good measure, in 2011 they announced losses of £33m and John Culver, the President of Starbucks’ International Division told analysts on a call earlier in that year “we are very pleased with the performance in the UK.” How senior figures and investors alike within Starbucks can continue to be unreasonably optimistic despite losses of £145m since 2008 should have rung alarm bells at HMRC, it did not.
If we look at Starbucks competitors such as Costa Coffee, they actually sold less than Starbucks. 2011 sales in Costa were £377m, whilst Starbucks reported £398m. Yet despite achieving greater sales, they incurred much higher costs, £319m that was more than three times that of Costa. Consequently, Costa paid £15m in tax to HMRC and Starbucks paid nothing. Obviously, both companies are separate and would certainly have completely different balance sheets, but Starbucks are the market leader in the UK for coffee, not only have they been around for longer, but they are also have a larger proportion of the market, so how despite greater sales, it cannot pay tax may be beyond the scope of this piece. Moreover, if we look at McDonalds sales since 2008 they exceed £3.5bn, they paid £80m in tax. KFC paid £36m in tax, with sales of £1.1bn; Starbucks paid £0 in tax despite generating sales of £1.2bn.
This episode does raise key questions that may not receive the attention it may ought to have. George Osborne gave a stern assessment of what a lot of people in the UK thought of the benefit system in his speech two weeks ago at the Conservative Party conference. Whilst he is entitled to his opinion on the matter, it would be refreshing to see the same energy exerted at a more comprehensive check on all corporations with regards to tax avoidance and the mechanisms a lot of firms have in place to purposely avoid paying the correct fee. This is not an emotive matter; this is simply an issue of paying what is right. Moreover, this will continue to occur unless more politicians highlight it and if there are the legislative amendments that will fix what appears the loophole that many large firms can exploit.
We cannot demand transparency from a private firm, they have no obligation to disclose such information, and we can however demand transparency from the elected officials who are meant to facilitate business, whilst holding them accountable when necessary.
The Conscience Blog 