Starbucks is not profitable in the UK. Apparently.

15 October 2012

dump_starbucksIt must be nice to be a multinational corporation operating in the UK. You get to live in this legacy-filled country, with comparatively stupid rich consumers who don’t mind paying several pounds for a cup of coffee that costs about 7.6p to make*. And if you’re Starbucks, you don’t even have to pay any UK tax at all. Winner!

Yes, it appears Starbucks are the latest corporate baddie to be taking advantage of our UK hospitality, while refusing to pay towards the upkeep of the country. A special report by Reuters has analysed their accounts over the last 12+ years, but compared the accounting data with information provided by the executive team to investors. And it seems this is all very deliberate.

According to the report, Starbucks is the second-largest restaurant or cafe chain globally after McDonald's, with a market value of worth $40 billion, and it hasn’t been doing very well in the UK.

Over the past three years, Starbucks has reported no profit, and paid no tax, on sales of £1.2bn in the UK. Just for comparison purposes, McDonald's paid £80m tax on £3.6bn UK sales and the group that owns KFC (the number 3 chain) paid £36m on £1.1bn sales.

In fact, Reuters found that the accounts of the UK subsidiary of Starbucks show that, since it opened in the UK in 1998, it has earned over £3 billion ($4.8 billion) in coffee sales, and opened 735 outlets but paid only £8.6 million in corporation taxes, and those “largely only because the taxman disallowed some deductions.”

However, despite the shocking performance in the UK, the men at the top seem to be telling investors how well the business is performing- Reuters have painstakingly analysed transcripts of investor telephone communications. In the 2007 financial year to end-September, Starbucks' UK unit's accounts showed its tenth consecutive annual loss. Yet that November, Chief Operating Officer Martin Coles told analysts that “the UK unit's profits were funding Starbucks' expansion in other overseas markets.” Chief Financial Officer Peter Bocian said the unit had “enjoyed operating profit margins of almost 15 percent” that year which would have given a profit liable to UK tax of almost £50 million.

And the fairy tales and disappearing profits don’t end there. In 2008, a £26 million loss in the UK was described by CEO Schultz as “so successful he planned to take the lessons he had learnt there and apply them to the company's largest market - the United States”. 2009 accounts showed a record loss of £52 million but CFO Alstead told investors that the UK unit was "profitable."

John Culver, President of Starbucks' International division, told analysts in 2011 that "we are very pleased with the performance in the UK." Starbucks UK unit's accounts for that year showed a £33 million loss.

So what is the true story? Are Starbucks just throwing good money after bad by opening so many outlets in the UK and just lying bluffing to their investors? Or is this an aggressive tax avoidance strategy?

Reuters asked Starbucks' CFO Alstead which version was accurate and he said: "The UK is very troubled, unfortunately. Historically it has performed a little bit better than it does now."

When presented with Reuters' findings, tax-avoidance-hating Michael Meacher MP said Starbucks' practice "is certainly profoundly against the interests of the countries where they operate and is extremely unfair ... they are trying to play the taxman, game him. It is disgraceful."

In case you are interested in how they are managing this, Reuters have uncovered a three pronged attack. The UK subsidiary has to pay ‘licence fees’ for the use of their brand, to a Swiss company, where the tax rate on this kind of payment could be as low as 2%. It also has to buy  coffee beans from a group company, which might also happen to be in Switzerland, where the tax rate could be as low as 5%. Finally, the UK business also has to pay £1m a year in interest payments to group companies who have lent it money. Again, purely for comparison purposes, the rate McDonalds charges inter-group lending  at or below LIBOR, KFC charges LIBOR + 2% and Starbucks LIBOR + 4%.

If you want the full ins and outs, and serious shaking it all about, you can read the full report on the Reuters website.

* completely made-up figure

TOPICS:   Tax   Supermarket

21 comments

  • Kevin
    So the point is that it's not 'Starbucks' it's a UK entity that doesn't have the benefits of being a multinational company and all the economies of scale that entails. So more like franchises then? Which often don't do well. 'with comparatively stupid rich consumers who don’t mind paying several pounds for a cup of coffee that costs about 7.6p to make' Even with a made up number, that is how most business works, you charge more than it costs to make. Funny that isn't it.
  • Nick O.
    @ Kevin Great point... except both McDonalds and BK (mentioned in the article) also use a franchise model and ended-up paying a lot more UK tax that $tar*ucks. Don't choke on your Decaf Mocha Latte when you next bother reading an article or engaging your brain before commenting... dick-cheese!
  • Zeddy
    I much prefer mellow birds.
  • Colin
    got to love these shit stories, how about you do one on how much tax Dry Tinder Ltd and the other maze of companies hukd hides behind, pay to the uk?
  • Another B.
    So why hasn't somebody started a company in switzerland to allow all the small businesses such as builders in this country to make a loss. Its strange how easily this govt lets a foreign firm rape this country. Long live Jimmy Carr :)
  • Mustapha S.
    Hate the game, not the player. Not doing anything illegal.
  • Chewbacca
    @Colin I dare you to post the WHOS for hukd, I DARE you. See what the BW cretins do then.
  • Chewbacca
    and, by WHOS, I of course meant WHOIS. goddamn immigrants.
  • bawbag
    I expected a better analysis of the transfer pricing and thin cap policies that Starbucks employ. Do you know if there are any Total Returns Swaps or other derivatives that could be used to farm the profits out of the UK to low tax jurisdictions? What are the arms length prices that they should be using for finance, licensing of intellectual property, and coffee beans and do you have 3rd party comparables that can be used in the analysis in order to establish what the true profits are of the UK entities? Can it be argued that any of these Swiss (or other) entities have a Permanent Establishment in the UK and that HMRC should be taxing them or any of their dependant agents?
  • kv
    any chance of the pic of JB that came with that Colin?
  • shiftynifty
    bawbag...fuck off....
  • Chewbacca
    Um, I meant the whois for http://www.hotukdeals.com .... In any case, whatever happened to maple syrup media? Just another front? Hukd is seriously didgy these days.
  • Chewbacca
    wow, comments getting moderated for mentioning h u k d. In any case, someone's getting pretty prissy about maple syrup media. Shenanigans?
  • Sicknote
    Starbucks is not profitable in the UK. Apparently.... ......they charge more than £1.10 for a coffee and it doesn't come in a brown glass mug
  • colins m.
    come to mummy for bitty baba coly wolly
  • shiftynifty
    Awww...bitty....I miss that
  • Spencer
    would this be a good time to mention foxes... or bumming of said foxes... thing is... Starbucks are using loopholes in the system. I'm sure most of us would pay less of our money in tax if given the chance.
  • shiftynifty
    Mugs of coffee served to mugs
  • foxes
    Starbucks are not a charity so I don't see why they should hand over their hard-earned cash to our Government to squander. If other companies are foolish enough to be registered here and pay UK tax when there are perfectly good alternatives then that's their lookout.
  • Dogturd A.
    You wouldn't find this type of shenanigans going on at Downton fucking Abbey.
  • Gabriella C.
    Starbucks is profitable very profitable but the way the UK government allows them to operate here is the problem. They allow companies like Starbucks UK to avoid legally paying tax. Boycott Starbucks, Vodafone and any of the Arcadia Group shops that don't legally pay UK corporate taxation - Arcadia being BHS, TopShop, DP, Burtons et al.

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