On the Starbucks premium to Switzerland for coffee

Looks like even that 20% premium Starbucks pays to the Swiss office wouldn\’t get them into profit.

As the FT says, sales of £398 million.

Even after you put back in the royalty and the interest to the parent company, there\’s a £5 million loss.

But what\’s the size of that payment to Switzerland then? That 20% margin?

Hmm.

Assume that all Starbucks sells is coffee. At £3 a cup (about right?).

You can get 32 cups of coffee out of a lb of coffee beans. Coffee beans cost $1 a lb (all close enough).

So Starbucks gets £96 of sales out of a $ on beans, yes?

£398 million of sales is $4.1 million of coffee beans. On which a 20% margin is $800,000.

But they\’re making a £5 million loss: so even if we add this back in again they\’re still making a £4.4 millionish loss in the UK.

They\’re just not making a profit to be taxed upon, are they?

25 thoughts on “On the Starbucks premium to Switzerland for coffee”

  1. Doesn’t really matter, Tim. The new court of public opinion isn’t interested in icky profits and things like that. They are demanding that Starbucks should pay tax because it has lots of revenues and they have a champion in the BBC:

    The company has paid just £8.6m in corporation tax in its 14 years of trading in the UK, and nothing in the last three years, despite UK sales of nearly £400m in 2011.”

  2. So telling the world “if you come to trade in Britain we shall do everything we can to force you to pay moral taxes as well as legal taxes, moral taxes to be decided by the local mob for the privilege of running a business”.
    Used to be we were known for the rule of law. No longer.

  3. They’re making a profit somewhere along the line or they wouldn’t bother. Occam’s razor of applied economic rationality tells us that. Company owners are in it for the money. Nothing wrong with that at all, whatsoever, it’s good for all of us, competition, consumer surplus and so on. But please let’s assume that that lies at the root of all motivation for spending your time and risking your capital on a business venture.

    Thus in addition to schick in-country accounting the profits are moved around and about through different jurisdictions such that the net payout to the owners is as high as possible. Again, economic rationality 101. If shifting money through various shell companies, “interest” on “loans” from your own subsidiary in Luxembourg, or “royalty payments” to supposedly independent owners of trademarks or whatever results in a higher tax saving than the increased associated costs in hiring bankers, accountants, and lawyers, it will be done.

    And tax competition between states is a great thing because it keeps tax rates down. Yet, in the real world, capital is rather more mobile than are the workers. So the workers end up with the brunt of the tax burden and capital can, increasingly, do what the fuck it pleases.

    I don’t know how we solve this problem. We have a society to run and that costs summat. We all benefit from it – both capital and labour (and very few people nowadays are just one or just the other – the class war is over), so we should all put something into it. But the last thing I would like to see is the EU or whoever introducing a standard minimum corporation tax (or income tax) rate. For it would soon hit the 97% level we saw before the latest wave of globalisation hit.

    So how do we get global capital to pay its fair share while persuading everyone – especially the beneficiaries of government largesse – that government should be as small as possible? Ideally so small that no one notices it is there most of the time? Oh the joy of being a classical liberal in the 21st century.

  4. There is no “global capital” to pay its “fair share”.
    There are only owners, customers and employees.
    The evidence suggests that taxes on “global capital” actually fall on the employees.

  5. JamesV>

    “They’re making a profit somewhere along the line or they wouldn’t bother.”

    Not logically true. It is perfectly possible that Starbucks’ UK activities are loss-making. Their rationale for continuing may be that they make the money elsewhere, and that being in the UK is a cost of doing business elsewhere as a global brand, or it may be that they expect to make money in future from the business in this country – but also, they may just be wrong in thinking they can make a profit in the UK market.

    Perhaps it bears pointing out that based on the figures the UK is in fact an insignificantly small part of the Starbucks business.

  6. @cjcjc

    There are still owners. Trouble is, there is an argument (and it’s a largely convincing one) that the incidence of corporate taxation does not in any case fall on the owners. Which only makes it harder for us to make global capital pay anything towards the cost of running our utopian low-maintenance, liberal, small-government society.

    I don’t want to see governments running amok taking all the tax they can. Neither do I want to see ownership of all the world’s business in the hands of technical residents of The Campione-Balliwick of Caymonacobermudachsteinberghamasbraltar.

  7. “Which only makes it harder for us to make global capital pay anything”

    No, it doesn’t. What you do is abolish taxes on outside investment, and let them pay business rates, VAT and so-on, and employ people who pay taxes.

  8. @Dave. You and I both know that is, to use a technical term, bullshit. The “global branding” is either contributing to global profitability or it gets killed. Besides which “global branding” activities only require loss-making operations at prestigious city-centre locations and major airports (where they are in any case ignored by the target customers who all have C-lounge access). Your global branding is not helped by having loss-making operations at the Gateshead Metro or what is left of Swindon high street.

  9. Coffee is quite a bit more expensive than Tim thinks. Arabica beans cost about $2.70 a pound in 2011 (ICO prices), plus there’s a 30c Fairtrade premium (Starbucks UK is all Fairtrade), making $3/lb. Then you get a fair bit of shrinkage when you roast coffee, giving say $3.50/lb. And there are energy and labour costs to doing the roasting, make that $4/lb. And I suspect Starbucks makes coffee a bit stronger than Tim thinks.

    However, I agree that 20% of the cost of the beans is unlikely to add up to £5million.

    Starbucks’ accounts are baffling. They list staff costs, leases, royalties, interest, depreciation, impairment, disposals, share schemes, and auditor fees. Add all that up and it comes to £234m in 2011 and 245m in 2010. But the actual difference between turnover and profit is £431m in both years. The unitemized costs are therefore £197m in 2011 and 185m in 2010.

    Any ideas what’s costing Starbucks almost £200m a year? Coffee beans, milk, paper cups, heating and lighting, no I don’t think so.

    Tim adds: err, £200 million a year? Rent? Rates?

  10. JamesV>

    Perhaps I was unclear. I meant that their brand is as a globally ubiquitous business. For that, yes, they need to be in wherever, the middle of nowhere, and Swindon. The point I was making there is that it actually costs them next to nothing, because even though they’re making a loss, they are at least close to breaking even. I haven’t checked, but I’d be willing to bet that their marketing budget is far larger than any losses in the UK market.

    Then again, I think it’s perfectly plausible that they are merely tolerating the losses in the expectation of profitability in future – and probably expected to be profitable here by now until the recession came along.

    We shouldn’t lose sight of the possibility, however, that Starbucks’ management is simply making a mistake. Clearly they’re unlikely to continue making the same mistake long-term (although if it’s a small enough mistake, might do), but we’re not talking long-term at this stage. If they’re still not profitable once the economy picks up, it’ll be interesting to see what happens.

  11. I think it is plausible that demand for £2.50 cups of coffee is highly cyclical, and Starbucks is the sort of company that is hit hard by hard economic times, too. “Amazon and Starbucks don’t pay much corporation tax because they are not very profitable” seems plausible to me. On the other hand, they pay VAT, their employees pay income tax etc. There is plenty of tax on the economic activity they create.

  12. @KJ,

    Yeah, we have this narrative that no matter how hard you try to pin a tax on capital you can never make it stick and that is how the gods intended it. Nevertheless, all taxes that fall on labour and consumption (whether targeted thereat or not) are ultimately down to capital generously creating the conditions in which they may be paid, thus ascribable to capital.

  13. Isn’t a 20% margin on a T/O of £398 million £80 million profit not £800,000?

    Tim adds: It is. But no one at all is saying that Starbucks UK pays 20% of turnover to Swiss.

    20% of the cost of coffee, yes.

  14. It’s not unheard of for global brands to stick around in major markets even if they are making a loss. I suspect in some cases, their absence would cost them dearly in terms of reputation (why isn’t such-and-such here?) and by providing an opportunity for their competitors to gain a foothold. For whatever reason, Total maintained petrol stations in the UK for several years after the stopped making money (they’re in the process of pulling out entirely now). Declaring that “companies make a profit otherwise they would not be here” is not supported by precedent.

  15. Any tax on Starbucks’ economic activity, be it VAT, be it corporate tax, be it property tax, be it income tax on the employees, is being paid by a mixture of the customers, the employees, and the shareholders. Get rid of VAT, and all three groups of people would probably have more money in their pockets. If the price of a cup of coffee was reduced to the precise amount of the present price minus VAT, then they would sell more of it, meaning that there would be more money to go the shareholders and with which to pay employees, which means that these two groups are bearing some of the brunt of the tax now. Except that price of a cup of coffee probably wouldn’t be reduced by exactly that much, so things are more complicated, and one can’t be exactly sure how. All one can really say is that the economic activity being created by Starbucks is definitely being taxed, and VAT is one way it is being taxed.

  16. The Catalan fashion chain Mango has stores in all kinds of weird places – Kosovo, Moldova, various strange places in Africa. They have stated that it is their ambition to have stores “in every country in the world”. They certainly mention this in their advertising and in the decorations to their stores – whether this actually helps them sell more frocks to the ladies is a unknown – but they cannot possibly be making money in all these places. I think it is largely about ego in management. (Their much bigger Galician rival Zara is very, very, careful to only open stores in places where they think they are going to make money, however). Large international companies can still do strange things. And they can certainly make losses simply through making mistakes and misjudging markets.

  17. JamesV said “They’re making a profit somewhere along the line or they wouldn’t bother … Company owners are in it for the money.”

    Owners are indeed in it for the money. But management are, notoriously, in it for their own salaries and prestige. This is the principal-agent problem.

    One well-known aspect of this is that management prefer to maximise turnover rather than profit (once a minimum profit has been reached to stop the shareholders from sacking them). Turnover gives them prestige (running a big global business) and means that they can take a large salary whilst still keeping it a very small percentage.

    Therefore it is very believable that the management would keep a UK operation going even though it was loss-making, provided it wasn’t sufficiently damaging to threaten the business as a whole.

  18. And if it was loss making because of expansion, the company is becoming worth more and therefore at some point in the future would be possible to make considerable profit. Something to be said for management that can grow a company to a decent size. Other companies may want those management people…

  19. “£96 of sales out of a $ on beans, yes?” – methink No. I sorely doubt that they put just 2p worth of coffee in two and a half quid latte. Nearer twenty pence I would have thought.

    They do actually use good coffee beans (though put far too much water in it) , costs are likely somewhat more than less than 1 percent.

  20. JamesV>

    “They’re making a profit somewhere along the line or they wouldn’t bother.”

    I seem to recall Starbucks being in quite a lot of strife a few years back and they guy who created it came back to take control. Part of the problem was expanding faster than they could afford and into places that never turned a profit.

    2008 was when he took back the top slot and they closed 1,000 stores following that.

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