Hey, Guess What? Starbucks Really Doesn\’t Make Profits In The UK!

So, Alphaville has been looking through the Starbucks accounts to see whether the royalty payments, the interest to the American parent, the coffee margin to Switzerland, whether if we add them all back in, is Starbucks UK making a profit?

And the answer is, erm, no.

For everything up to the coffee margin it was still a £5 million loss, after that royalty and the interest were reversed back in.

A friend of FT Alphaville, familiar with the coffee trade, got in touch with us on Wednesday and said person reckoned coffee cost is 4 to 6 per cent of sales. For Starbucks UK, that would make the above concession worth £16-24m.

Remember, the complaint is about the 20% margin paid on that coffee bill, not the coffee bill itself. Everyone, at least I hope everyone, accepts that the coffee bill to a chain of coffee shops is an allowable expense.

So that margin is £3.2 to £4.8 million.

Which is still less than the £5 million loss which means that the reason Starbucks don\’t pay tax on its profits in the UK is because it don\’t make a profit in the UK.

Something which, if I\’m honest about it, seems reasonable enough really.

22 comments on “Hey, Guess What? Starbucks Really Doesn\’t Make Profits In The UK!

  1. Well, it wasn’t enough for them in Dorchester (Dorset) the Starbucks there closed some months ago. Mind you, the town has intense competition to supply watery coffee…

  2. Starbucks will make a profit when it stops opening new stores and consolidates its base in the towns where it exists. It’ll be keeping prices low as long as possible to force out competitors and then it’ll start putting up prices. All funded by money from other countries where it already is making a profit.

  3. A thought occurred to me today. Margaret Hodge got an apology from the Telegraph, because it turns out her parents 60 year old company (very proletariat!) was only paying little tax because it made a loss last year. Fair enough. Won’t begrudge that.

    So why is Starbucks being singled out by UK Uncut and all the other losers when Stemcor isn’t?

  4. Then quite frankly what the hell is causing them to make a loss!

    If the cost of sales excluding wages is 4-6% of sales then for a basic analysis we can simply ignore it. Are we saying wages/rent/insurance/rates and other minor expenses are greater than the gross profit?

  5. Lee: I sort of think that they have some other cost of goods sold as well. Some that come to mind include:
    – milk
    – cream
    – various flavourings
    – sugar
    – donuts and other similar sweets
    – paper cups, napkins, etc

  6. Lee

    Rent is normally the killer, with wages a hot second.

    Coffee chains want exclusive sites where millions walk past. The people who have the sites can virtually auction them between food and coffee outlets. Good for them., bad for the cost of your coffee and worse it seems for HMRC

  7. SBML

    “It’ll be keeping prices low as long as possible to force out competitors and then it’ll start putting up prices. All funded by money from other countries where it already is making a profit.”

    It’s not hard to start up a coffee shop, I don’t really think sweating out the competitors and then jacking the prices will work for them.

    In Aussie, it was Starbucks that got sweated out.

  8. ‘So why is Starbucks being singled out by UK Uncut and all the other losers when Stemcor isn’t?’

    They probably haven’t heard of Stemcor. Even if they have it’s far easier to blockade a starbucks shop for the telly pictures than whatever it is stemcor does (steel trading?).

    Cheers,
    Fatty

  9. It’s not hard to start up a coffee shop

    I agree. This “they’ll drive everyone out of business then hike the prices” thing never works without enforcement of the monopoly (I owe my soul to the company store etc). Look at air travel, a business with huge barriers to entry, but discount airlines have managed to start up and survive. In Australia, Virgin drove one of the incumbents broke and have forced the other to radically restructure their business.

    The threat of competition is just as good as actual competition.

  10. True. We’ve gone from businesses with 100% monopoly or close to monopoly to them losing a chunk of customers to competition.
    Gas, mail, telephone etc.
    Often with big barriers to entry into the market.

  11. look at the business model. Starbucks are on the major roads and in the big shopping malls. there will be a Cafe Nero and a Costa within 100 feet. Now compare with the traditional italian deli/espresson cafe, hidden away down side alleys….get the picture?

    now, we all know that costa alias Whitbread are singularly virtuous, but this is because they have been morphing over the last 20 years into a huge property company that happens to own a few pubs, restaurants and coffee shops.

    Starbucks does not have that accumulated mass of property development profit and rent gauging behind it.

    Private Eye will never figure this one out.

  12. Diogenes,

    Perhaps then the people who profit from the coffee market are the landlords & property owners?

    They are the monopoly holder (to some degree) in terms of location.

  13. The reason they targeted Starbucks is a) they know capitalism is evil and b) they didn’t understand (or could misrepresent) the difference between overseas company, Starbucks, which makes a profit on imports to UK and it’s UK based distribution business, which struggles to make profits.

  14. Of course Costa is a UK company exporting it’s business to many countries where it behaves the same way as Starbucks does in the UK.

  15. Wherever there’s a tax controversy, you can be sure that pretty soon, like a bad penny, Richard J Murphy will show up. But his silence on Stemcor is absolutely deafening. What’s up? Does he really have *nothing* to say about them?

  16. Pingback: Oh Dearie Me: Polly tries to explain tax

  17. Pingback: So this is interesting about Starbucks and that Swiss payment for coffee | Tim Worstall

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