So where is all Starbuck\’s money going?

I have a feeling that a few more people need to go and read Tim Harford\’s Undercover Economist. It\’s got one of the best explanations of Ricardo on rent out there. And he uses coffee shops as his example.

In a competitive market we would expect all of the profits to accrue to the landlords, not the coffee shops. A very interesting thing to look at would be whether Costa owns its shops and Starbucks rents them for example….

10 thoughts on “So where is all Starbuck\’s money going?”

  1. In hilarious related news, Starbucks has come forward with the first of the two alternatives I suggested the other day, which is that the UK business has always been a dog (so in the past when they told their investors it made loadsamoney, they were… erm… mistaken).

    Costa leases all its high street/shopping centre sites, by the way. Net Costa assets were gbp178m, which I believe is pretty much the same as the sum of net assets across the two Starbucks UK operating companies, and obviously isn’t consistent with a large retail property estate.

  2. The hysterical “reports” also ignore the payments made from the UK subsidiary to the other parts of the business for use of the Starbucks brand, trading style and know-how. On Newsnight they blithely lumped this into “patents” and implied that this is part of Starbucks’ scam.

    But for the most part people only go into Starbucks BECAUSE it’s called Starbucks and they know what they are going to get. So any licence fees they pay to the head company should be significant.

  3. In the same way as we buy other licensed products without complaining…. well, not complaining too much. Haven’t noticed anyone complaining about Bargain Booze yet. Nice little franchise…. or Avon anyone?

  4. The comparison with turnover is entirely spurious; with a 10% margin, the most they should pay is 3% of turnover. Also don’t forget they pay (heinous) rates, payroll taxes and collect VAT. Then there are rents, wagess over-priced power etc. You can keep the fire going by shaving the legs of the chair for so long, then the chair collapses. The real problem is not the taxes paid, but the taxes spent..

  5. “The real problem is not the taxes paid, but the taxes spent.”

    Don’t worry, I’m sure Ritchie can work out a way that’s Starbucks’ fault as well.

  6. Yes, can’t forget the 1/6th VAT due to the government and accounted for within many sales. You may pay £6 for a coffee, cake and whatnot – but only £5 of it is due to the company, the other pound belonging to government.

  7. As we’ve gone over ad nauseam, the proportion of British Starbucks customers who go to Starbucks because of the marketing work done *by the overseas parent company* is small.

    Most Brits haven’t been to America, don’t watch US commercials, don’t read US magazines, and so on. The Starbucks brand has been created in the UK primarily by the UK subsidiary’s marketing spend – not by the Dutch company to which it pays the 6% franchising fee.

    This isn’t equivalent to opening up a Burger King or Bargain Booze outlet: if you open a franchise outlet, you benefit from the large amounts of money that the franchise company spends on advertising and marketing.

    The international brand has a non-zero value, of course: a few percent of Starbucks customers are tourists, and when the company was establishing itself people who were familiar with the brand from the US will have been early adopters. But it is trivial compared with the share of value created in the UK.

    (Starbucks charges a 7% franchising fee to Seattle Coffee Company franchise outlets in the US. So if we’re taking their word for it on the value split, then we have to believe that 86% of the operating profit in the UK business is down to tourists and America-lovers, while only 14% is down to the UK business’s brand-building efforts…)

  8. So Much For Subtlety

    john b – “Most Brits haven’t been to America, don’t watch US commercials, don’t read US magazines, and so on.”

    But they do watch Friends. Don’t assume that product placement doesn’t work or isn’t expensive. I have never seen a Starbucks advert in my life, but I have seen enough American TV to know a lot about them.

  9. The Starbucks brand never featured in Friends, and the company never sponsored it. Friends sold Brits the concept of that *kind* of US-style coffee shop, sure – but that’s a concept that anyone can pick up without paying royalties, and which several chains (Coffee Republic and Seattle Coffee Company, the latter of which Starbucks bought to enter the UK) had already spotted and rolled out before Starbucks entered the British market.

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