You’d have to think Starbucks was regretting the day that they first started trying to sell their milky, syrupy coffee-based confections in the UK. Last month it was announced that for the third year in succession the US-based multinational coffee chain had been unable to make a profit in the UK. If the firm sounds guilty of some spectacularly poor business performance then they certainly could not be accused of being guilty of a lack of perseverance: after all, 14 of the last 15 years have brought about the same result.
I have to declare a slight interest at this point. There is probably nowhere else in the world that my 9 year-old-daughter would prefer me to take her on a Saturday morning than for a little catch-up over a caramel macchiato. See, we both quite like Starbucks’ milky, syrupy coffee-based confections. And if my struggle to find a table on a week day lunchtime in Starbucks’ outlet in Westbourne is anything to go by, so do plenty of other people. So many other people in fact, that Starbucks managed to ring £398m through their tills last year. Somehow however, all those sales were in vain. The final twist of the knife for the austerity-battered UK taxpaying coffee-drinker was that no profit also equals no UK corporation tax going to The Exchequer.
If you are thinking that sounds a bit awry then you’d be in good company; so did Parliament’s public accounts committee which decided it might be an idea to invite Starbucks in, along with representatives from Google and Amazon, for a long overdue little catch-up of their own. If you were the sort of person who enjoyed lessons in sleight-of-hand accounting practices involving different nations’ tax regimes then you were in for a treat. It turns out that if you try really, really hard then there are a number of different tactics that you can employ to ensure that your business looks as much of a failure as possible in the eyes of Her Majesty’s Revenue and Customs. The first quirk for Starbucks UK is that it is treated so harshly by Starbucks’ European operations, which are based in the Netherlands. Harsh in that Starbucks UK is made to pay a royalty of 4.7% for the use of the Starbucks recipe and logo. Talk about precious. But then that’s not remotely as bad as the 20% premium it gets charged by Starbucks’ own Swiss operations for its coffee. Yes that’s Switzerland, that famous coffee-producing nation.
It’s when you start looking at some of the global figures that things start to make sense. The reputed $200 million that Starbucks makes from selling itself around $1bn of coffee for its UK customers demonstrates Starbucks’ ability to make a profit when it feels like doing so. But it makes sense in a global market to do so in a country where the corporation tax rate is less than half of that in the UK. There’s nothing whatsoever illegal about it. Even our own HMRC allows companies to charge arms-length intellectual property fees, although it had to have a little word in order to reduce the whopping 6% that Starbucks used to levy itself. Starbucks also pays corporation tax in the Netherlands, although it has arranged a special deal with the tax authorities there, the details of which they didn’t feel they could share with MPs on the public accounts committee.
Yes. Starbucks has its expensive UK overheads; property rents for example are particularly expensive and held up by the company as a significant reason for their appalling performance. But the cynics amongst us could be in danger of suspecting that Starbucks started with the intention of making no profit and then worked out how it could wipe out the value of all its sales in order to achieve it.
So what we are left with is a triumph of accountancy. But how does Starbucks set about attracting investment to this non-profit-making disaster of a subsidiary? If Starbucks was going to be slightly economical with the facts then they could of course tell investors that in fact it is a profitable business. Astonishingly, that is exactly what Starbucks’ Chief Financial Officer Troy Alstead said to analysts in 2009 despite telling the committee last week that it wasn’t. Hopefully this is all making sense so far.
We have already established that Starbucks hasn’t done anything illegal, so you’d perhaps have thought that they would simply come clean and say so out of a duty to their customers who despite these tough times continue to find a few quid for an americano. Howard Schultz, a man so powerful that he is CEO, Chairman and President of Starbucks decided it would be best not to, issuing a defence of Starbucks’ UK strategy that many UK consumers found arrogant, patronising and downright erroneous. Mr Schultz was keen to point out that in the UK Starbucks had paid over £160m in taxes in the last three years alone. What he neglected to point out was that the VAT figure he had included in his calculations was simply tax that he had collected from British coffee drinkers and passed on to HMRC. So were the employee National Insurance Contributions he had included and not forgetting the business rates that he had also cited which although a genuine cost to the business were tax-deductable along with employers’ NICs. Pesky costs again you see, but at least the silver lining is that they help you avoid making a profit. He signed off by making sure we were all aware that Starbucks pays a lot of tax in the US. Little help for those of us more concerned about UK public services; some of which, roads for example, Starbucks in the UK relies upon for the daily functioning of its not-for-profit business.
This is where Starbucks’ attitude is in danger of sticking in the craw; with a raking in of sales, the redirecting of profitable income and the lack of a contribution in UK which could be seen as fair or representative of the true success of the business (the one Mr Alstead tells the analysts about). The question many are now asking is, “what should we do about it?”
Some are suggesting moving their custom to UK-based Costa Coffee which enjoys a similar turnover to Starbucks but did at least pay £15m in corporation tax last year. Others want to see a mass return to local, independent coffee shops, the irony being that the big corporates have been largely held responsible for their decline in numbers. What is clear is that Starbucks’ announcement last month seems to be the final straw for many loyal customers. Worse still for Starbucks, if Howard Schultz’ defence of his company’s tactics wasn’t enough of a PR disaster, pressure group UK Uncut plan a day of protest in Starbucks stores on 8th December, intending to turn the coffee shops into crèches and refuges for the day to highlight cuts in public funding for women. In the meantime, an apology seems a long way off and an acknowledgement of a duty to the country it trades in rather than just its shareholders is equally unforthcoming from Starbucks.
Margaret Hodge of Parliament’s public accounts committee made it clear where the real argument over this issue lies. The time has come for Starbucks to think carefully. It is no longer just the legality of its behaviour that is important; the time has come to consider morality too. There is a danger that if Starbucks won’t “do the right thing”, its customers might just feel compelled to do so instead.
There’s one of them, and his daughter, right here.
Iain Dalgleish
