Starbucks is not profitable in the UK. Apparently.
It 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