Ritchie asks Starbucks

Starbucks says it’s here for the long term. But why if it’s making a loss as its accounts say? Might they explain?

Apparently an accountant thinks that making a loss means you must close the business. Not, you know, try and work out why you\’re making a loss and correct it.

25 thoughts on “Ritchie asks Starbucks”

  1. Can someone clear up for me exactly what Starbucks is doing? I’ve heard two things:

    1) They pay all their profits as brand royalties to the brand owner in the US.
    2) They are reinvesting their profits.

    Which is it? Or is it both?

    Either way, they can’t make a loss indefinitely, or they will run out of cash. If they want to go on paying brand royalties indefinitely, they will have to pay an amount equal to their profits, not exceeding them.

  2. Well I’m going to put my children on the company payroll (to use up their personal allowances) and then claim the wages back to myself as a brand royalty fee for allowing them to use my surname.

  3. If you are in it for the long term, you can stand a loss provided you expect to make a bigger profit later. It is those focussed on the short-term who quit if they make a loss one year. Maybe Murphy doesn’t know the difference between short-term and long-term?

  4. Or, you can have unprofitable sub-divisions (whether or not they are separate legal or accounting entities) of the company that are maintained in order to enhance or preserve profits overall. It’s not hard.

  5. In today’s DT:

    Kris Engskov, managing director of Starbucks UK & Ireland said: “We were investigated in 2010 and found to be compliant. If HMRC wants to take a look again we would welcome that.”

    “We don’t see paying taxes as a bad thing. We believe strongly in paying our share and although our lack of profits have meant we haven’t paid much corporate tax, we have contributed £160m, in the last three years alone, in terms of national insurance, VAT, and business taxes.’

    Mr Engskov… said that the company had created 5,000 UK jobs, was working towards providing 1,000 apprenticeships and contributed to numerous UK charities and social entrepreneurship programmes.’

    (‘Y)ou have to sell a lot of lattes to run Oxford Street because the cost of business here is very high…’

    £160 million paid in, 5,000 jobs created – just a teensy weensy bit more than the sum total produced for what we might call the public good by Monbiot, Murphy, Toynbee, Hutton, Serwotka et al.

    Personally, as I said on another thread, I am honestly looking forward to the day when Starbucks, Top Shop and all the rest say, ‘Fuck it, we’ve had enough of this shit, we’re closing down and retiring with our cash. You can make your own coffee, clothes etc.’

    I will be able to emigrate, as, of course, will some of the above-named and our own William M Connolley and PaulB (JohnB already has); but the vast majority of the people they all claim to speak on behalf of will be properly fucked, which will tickle me no end in a depressing sort of way.

  6. Emil, give it a rest. Cash position is completely irrelevant to the question of whether the UK business is viable, since the parent company has oodles of cash (so if the UK business were profitable but cash-negative, then that wouldn’t be a problem, unlike a standalone).

    JJ: it’s 1.

    Pechorin: excellent call.

    john77: they’ve been going for 15 years in the UK. They’re a retailer. They’re no longer expanding. If you think that’s a business with the characteristics that support the diagnosis of “making a loss in the short term in order to make a profit later”, then I’ve got a dozen bridges to sell you; contact me at the usual address.

    SE: no, you can’t, if your accounts are honest. Which is the whole point.

  7. john b:

    “Emil, give it a rest. Cash position is completely irrelevant to the question of whether the UK business is viable, since the parent company has oodles of cash”

    No, a rational investor will make a decision on whether to close down an operation or not looking at future cash flows and disregarding past investments (these are sunk costs).

    Net profit on the other hand takes into account past investments (in the form of depreciations).

    Ergo it is cash flows that are important and not profits…

    “they’ve been going for 15 years in the UK. They’re a retailer. They’re no longer expanding.”

    This is exactly the point that I’ve trying to make to you for a long time. It is perfectly possible (even expected) that your cash flows are more positive than your net profit when you have stopped expanding (whereas during expansion it is usually the opposite).

  8. SE: no, you can’t, if your accounts are honest. Which is the whole point.

    Yes you can. And honest accounts would show you making a loss.

    Two examples – one customer of ours has 3 separate legal bodies. Two are normally commercial companies, variously making profits and losses. The third supports the charity the founder has doing good works in Africa. It consistently makes a loss. But is supported by the other two companies – not as payment for services or products – therefore not as potentially taxable income.

    Or, alternatively, when I rented out what had been my student flat, I made an accounting loss on it every year (carried forward losses were enough to allow this even in good years.) Partly this was due to the difference between “taxable profit” (after you have subtracted tax allowances and other permitted expenses) and cash surplus (vice Emil at #2) and partly because I was willing to take a loss because:

    1. There was a capital asset and the loan was one of those allowed expenses.

    2. If I had needed somewhere to live, my parents would have only had to put up with me for a max of 6 months.

  9. Corporation tax in the UK is, for 2012, 24% (down from 26%?): in the US the equivalent rate is around 34%. Thus, it doesn’t seem that Starbucks is remitting royalties to save aggregate tax (for itself as well as its shareholders) if its royalties are remitted to the US.

    Moreover, if Starbucks remitted no royalties to the US, it’s probable that Starbucks would get a tax break against its US tax in respect of the CT paid here (under the UK-US double tax agreement). Furthermore, as I understand it, there is no tax credit equivalent to our 10% credit for shareholders in the US on dividends.

    If the above is correct, it seems that the motive for the payment of royalties is cash-flow not tax-mitigation based.

  10. @Emil ‘This is exactly the point that I’ve trying to make to you for a long time.’

    Emil, with JohnB you can explain it to him, but you can’t understand it for him.

  11. john b
    I was pointing out Murphy’s ignorance. But if you think that a double-dip recession is the best time to expand a chain selling overpriced coffee that looks like a milkshake and sells chocolate under the name of a coffee bean then I can understand why you have conned into buying a dozen bridges.

  12. SE: a more interesting (real) example would be GMG, would it not?

    I might even be prepared to envisage a tax rule outlawing consistent loss making businesses if it closed the Guardian newspaper down for good.

  13. We don’t know the breakdown of the company losses. Some shops may be profitable one year, loss making the next. Some might be loss making every year – but with lease thats more expensive to get out of than keep going. Don’t know the staff turnover, don’t know the staff recruitment and training costs. But presumably as high as similar work elsewhere.

    John77, a recession can be a good time to expand. More places available to rent, competition may be different, competitors may go to the wall, and may be able to get good deal on lease. Lost count of companies in our local free paper who have announced expansion or opening of new stores in the past couple of years – some people seem to think that a recession is the ideal time to expand. I’m barely keeping up with my own company expansion (4 times increase in turnover from last year).

  14. @Martin Davies
    The two leading pawnbrokers are expanding at a record rate as are “discount stores” (if Woolworths was still around it would do quite well). I was querying whether it is the best time for a chain *that sells overpriced coffee* to expand.

  15. john77

    Many years ago, an (Indian immigrant) owner of a Dunkin Donuts franchise explained that such businesses (and including fast-food franchises) always increased business in hard times, especially for lunch and breakfast fare. People who would have eaten meals in small restaurants would shift a good part of their consumption to fast food, donuts, and the like.

  16. John77 – its a chain that sells a considerable amount of coffee. Far from the cheapest, far from best food. But its convenient and its standardised.
    Who is to say its overpriced? Its customers will pay so they may think its overpriced (or may not) but as they are willing to pay the price given, who cares?
    The non-customers? They can say its overpriced but as they aren’t buying it they don’t make a difference to the turnover of the company.

  17. Corporation tax in the UK is, for 2012, 24% (down from 26%?): in the US the equivalent rate is around 34%. Thus, it doesn’t seem that Starbucks is remitting royalties to save aggregate tax (for itself as well as its shareholders) if its royalties are remitted to the US.

    According to the Reuters report Starbucks UK pays royalties of six percent of sales to Starbucks in Amsterdam. Despite this, the Amsterdam operation manages to make almost no profit. It’s unclear why not, but it ‘s tempting to look to Starbucks Switzerland, which supplies coffee beans to Amsterdam, and is not obliged under Swiss law to publish accounts.

  18. On the “why would you dodge tax in the UK when you’d have to pay 35% in America anyway”, the short answer is “you wouldn’t have to pay 35%”. There’s an entire academic literature on US companies, tax repatriation, and how this affects business decisions.

    But in short, major US companies play chicken with the government: they leave offshore profits offshore until the government declares a tax amnesty (as it did in 2004, when it cut the rate to 5.25%), at which point they bring them back at the amnesty rate.

    Since everyone believes there’ll probably be an amnesty at some point, and since the incentive for the government to declare an amnesty is greater the more money is currently being held offshore, game theory suggests that assuming you’ll pay next-to-nothing on remitted profits is a reasonable call.

  19. Emil: that is true *if and only if you are a heavily capital intensive business*. Which they aren’t. The vast majority of the cash outlays associated with both a) setting up a physical coffee shop b) establishing yourself as a major national brand are, in accounting terms, *expenses* rather than *acquisition of capital assets*.

    (your Gaggia and your fridges and so on are capital assets, yes. They are a small % of total costs for opening a foodservice outlet)

    On the other hand, if your accountant does reckons it’s legit to capitalise advertising spending, then please give me his number – this could prove financially advantageous.

  20. @ john b
    How can it be better to capitalise advertising spending than charge it as an expense – that just brings forward tax payments?
    Incidentally, that is now deemed unacceptable under IFRS. Businesses can no longer attribute advertising costs against the value of business that they are estimated to generate.

  21. @ Martin Davies
    *I* say its overpriced but that is not the sole reason why after one visit I shall never go back: it’s trendy rather than good coffee. Last time I did the sums it cost less than 10p to make a cup of coffee, so it’s probably around 20-30p by now.
    In a recession the amount of spare cash to buy expensive cups of coffee goes down and there is the temptation to trade down to better-tasting but less trendy coffees instead of wasting money in the hope that someone will notice how successful you must be if your buying a Starbucks latte instead of brewing a quick coffee in the office.

  22. Pretty much any idiot can make a nice coffee cheap. But they don’t outsell Starbucks. What Starbucks do is sell a lot of coffee – you say its overpriced but as you aren’t going back you aren’t a customer any more. Others are – and will pay the price set.

    If the amount of spare cash to buy expensive cups of coffee goes down in a recession then you’ll have seen town centres losing all their coffee shops in that time? I’ve several near me – even got one in my village centre thats less than 4 years old, almost opposite a McDonalds that does cheaper coffee. Not seen any coffee shop shut locally in the past 4 years myself, but I’m more likely to notice the named brands rather than any small independant who may change hands to new owners.
    Just out of interest, in this recession how much has Costa shrunk in terms of numbers of stores and how much has Starbucks shrunk in numbers of stores? Anyone know?

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