Starbucks: The Bitter Taste Of Success.

Starbucks in hot water over conduct

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.