Strategic Management and Competitive Advantage in Starbucks - Case Study Example

The Tax Issues Starbucks is facing with the UK Government     Table of Contents Introduction 3 SWOT Analysis 3 Range of Opinions 4 Critical Evaluation 5 Recommendations 7 Bibliography 8 Introduction The recent campaign to expose tax havens has claimed yet another victim, this time round being the Starbucks Cooperation. This follows its predecessors the Amazon and Google Corporate who also have had claims of tax evasion lodged against them. In January this year, Starbucks have been the epicenter of public backlash after it was revealed that they had been falling short of their tax mandate for the last three years. According to economic experts, Starbucks have been deploying witty tactics of accounting to minimize their tax contributions. Starbucks had paid a meager 8.6 million pounds in the last 14 years while they sold products to the tune of 440 million pounds in 2011 only in the UK. Their action of tax evasion stoked public protests whereby demonstrators brandishing ply cards flushing harsh words against Starbucks. Example of one held in a crowd huddled up in one of the entrances of a Starbuck coffee branch read “ 74% of 45 billion pounds benefit cuts taken from women’s income” while another screamed in bold “ Starbucks have not paid tax since 2009 (Mangold, 2010)”. The protesters seething with vent also threatened to switch allegiance to rival companies like Costa. These threats appeared to shake-up Starbuck who feared their customers were starting to decline and this compelled them to appease the population by volunteering to the British taxman 10 million pounds more tax than required by law for the years 2013-14. Since the start of the economic depression that ails most of the western world there has been deliberate action to conjure up ways to hoard up monies to revive the economy. One of ways to expand the exchequer is to invoke strict laws to close down on tax evaders and enact tougher punishments for offence (Gilbert, 2008, p. 67). This has been the main attribute as to the disclosure of how much cooperation tax Starbuck and other large corporate pay and prompting the revenue collectors up to their ante. SWOT Analysis A scrutiny at a SWOT analysis of Starbucks reveals its strengths, weaknesses, opportunities and threats. Starbucks Corporation serves restaurants and coffeehouses worldwide with its headquarters in the USA. Its revenue and profits for 2012 were $ 13.29 billion and $ 1.38 billion respectively (Barney, 2009). With its CEO Howard Schultz, Starbucks employs 149,000 employees. Some of its biggest competitors include MacDonald Corp., Costa Coffee, Caribou Coffee Company, Dunkin Brands Group, and Green Mountain Coffee Roasters among others. Starbuck is the no. 1 brand coffeehouse chain in the world, a premier roaster, marketer and retailer of specialty coffee. One of the strengths is its sound financial record in which profitability rose to 14% in 2013 and beating its closest competitor with 24.25% return on investment and 29.16% returns on equity. Another of its strength is the fact that it is the no. 1 brand in coffeehouse segment with its value at $4billion. Starbucks has the largest retail operations with around 20,000 coffeehouses in 60 countries in the world (Gilbert, 2008). Being among the first coffeehouses to be founded, its experience in making and accessing quality coffee is unmatched. Starbucks also offers it employees a wide range of benefits and pay rates higher than its rivals. The core weakness of Starbucks is the price of coffee beans in the world markets. They have no control over these prices and eventually impact on the price of their products. Coffee prices have been on the rise and have been hurting Starbuck (Mangold, 2010, p. 38). Product pricing is another weakness facing Starbuck with their prices higher than some of its competitors like Mc Café premium coffee whose coffee quality is better evaluated. Starbuck have been at the end of negative publicity with attacks on its poor efforts to become a greener company, tax evasion, and poor treatment of some suppliers. Its opportunities are highlighted as extension of supply networks especially into Asia so as to ease dependence on good and bad harvest from countries that produce the world’s coffee. They are also looking into expansion to emerging economies like China and India where they foresee great opportunities. Starbucks is engaged in seeking partnerships and franchises to sell its coffee, a way to increase its retail operations (Gilbert, 2008, p. 85). They are also keen on increasing their product offerings with expansion into wine and beer to reach a broader customer group. Range of Opinions A myriad of threats pose on Starbucks ranging from rising prices of coffee beans and dairy products to trademark infringement. Starbucks is helpless on coffee beans and dairy product prices which are beyond their control (Czinkota & Ronkainen, 2010). Starbucks has been engrossed in numerous cases of illegal use of its trademark which are costly and detrimental. Increased competition from local cafes and rival coffeehouses pose another threat notwithstanding the saturated markets of the developed economies with stifling competitors. Due to political, economic and environmental factors, Starbuck faces supply disruptions that incur costs to the firm. There exists a flurry of opinions about Starbuck from both positive to decrepitating comments. The pros of Starbucks as regarding the public opinion include its appraisal as offering great benefits for part time job while the cons being a must to fill all roles including cleaning the bathroom (former shift supervisor in New York). Another pros being that Starbuck offer great training while on the cons is that they are monotonous and offer abysmal base pay (former Barista in East Lansing, MI). Starbucks have loads of opportunities to grow but are excruciatingly slow in making decisions (current recruiter in Seattle, WA). Prior to the allegations of tax evasion, Starbucks have had to deal with a number of several other defamatory controversies, no wonder they portray negative publicity as a weakness in their SWOT analysis. One of them followed the discovery of a hidden camera in one of their washrooms by one of their customers in New York (Colbert King). A Mr. Yockey and his daughter were using one of the unisexual bathrooms in Starbucks when they noticed a digital camera in the sump under the sink (Mangold, 2010, p. 68). They reported the matter to the police and out grew a legal battle case against Starbuck, though later insufficient evidence favored Starbuck. Another was the US military viral emailed that wrongly accused Starbuck of halting its military supplies since it didn’t support the Iraq war. The email had been forwarded to tens of millions and damage was already incurred before Starbuck VP could make corrections. Starbuck had initially taken a stand for same sex marriage before an onslaught from the National Organization of Marriages in the US who received 22,000 signatures on a Starbuck boycott they’d proposed (Barney, 2009). Brandy Company had also proposed a boycott on Starbuck due to their gun policy that had not abolished the carrying of gun to their stores and cafes especially in US states that it was disallowed. Critical Evaluation The revelation of tax evasion in the UK in a special report by Reuters only adds up to the demises of Starbuck in their public image. According to Reuters, Starbuck had sales amounting to 1.2 billion pounds in the UK but reported no profits thus no paying income tax compared to Kentucky Fried chicken that posted 1.1 billion pounds of sales in the UK and paid 36 million pounds on income tax. Reuter’s claim that Starbuck have been regularly talking about the UK business being profitable yet reporting nil profit to the taxman (Gilbert, 2008). In scrutinizing group reports and transcripts of 46 conference calls with investors and analysts, contradictions are evident. In 2007 financial year, Starbucks financial accounts showed a tenth consecutive loss yet ironically then Chief Executive Officer Peter Bocian stated they had an operational profit of 15% equivalent to 50 million pound profit. For 2008, Starbuck indicated a loss of 26 million pounds in the UK in their accounts with their CEO Howard Schultz applauding themselves and also promoting Cliff Burrows to head US business. In 2009, 2010, and 2011 Starbucks claimed losses of 52, 34, and 33 million pounds respectively even though calls to investors termed UK business as profitable (Mangold, 2010, p. 82). There was outright contradiction on what the taxman and the investors were being communicated. When asked by Reuters to verify which information was right, CFO Alstead said, “The UK is very troubled, unfortunately. Historically, it has performed a little better than it does now.” Dodging the question on where the UK business was disappointing. Alstead indicated that royalties on intellectual properties was one of the factors at play, taking a leaf out of the book on how companies like Google and Amazon shielded billions from tax authorities (Gilbert, 2008). Starbucks were housing intellectual property in tax havens and charging fat royalties to their subsidiaries at a rate of 6% of total sales. These payments reduce taxable income. Revenue sent to Amsterdam- based Starbuck Coffee EMEA seemed to shrink once they arrived there in that revenue of 73 million Euros in 2011 had a meager 507,000 Euros declared as profits. Asked as to the reason Alstead pointed to staff and rent costs, a staff of only 97 employees. Revenue distributed amongst other Starbuck units was mainly redirected to Switzerland and little to the United States where the brand originated. Professor Michael McIntyre of Wayne State Law University said this could be attributed to the fact that the US taxes up to 39% of cooperate taxes compared to Switzerland that does at as low as 2% in disparity. The second factor at play in the contradiction is the allocation of funds in the UK to other subsidiaries in the supply chain which Alstead answers, “profits sit where the value is created.”Starbucks coffee beans pass trough Starbuck Coffee trading Co (Mangold, 2010). Swiss-based where they are roasted by a subsidiary in Amsterdam separate from European headquarters. Costs allocated on “transfer prices” for goods that pass between different group entities are shrouded. Expert states that “transfer prices” are a way of a company to lower its tax bill. Though clear is that the UK subsidiaries are making losses while those in Amsterdam-roasting operations- are making profit of 1.6 million Euros and 154 million Euros annual turnover (Czinkota & Ronkainen, 2010). Starbuck failed to tell how much its Dutch-based roaster subsidiary was paying for their coffee beans. Another way Starbuck evades paying its tax jurisdiction is through borrowing of money in inter- company loans. The borrower can set any interest paid against taxable income while the creditor does not tax interest. Accounts indicate that UKs Starbuck is entirely funded on debt and they paid 2 million pounds in interest last year. Starbuck most often cut its subsidiaries bad deals at Lisbor plus 4 percentage points (Cezary Podkul). Recommendations Asked on how the government would deal with Corporate like Starbuck on tax evasion, Mr. Borris Johnson, London’s Mayor said the government could “try to change the arrangements. If companies are going are going to show cooperate responsibility…..we shouldn’t sneer at them.” Chancellor George Osborne also added that government was directing more money to HM Revenue and Customs to curb tax avoidance that they were aiming at 9 billion pounds revenue yearly. Bibliography Barney, H. (2009) Strategic Management and Competitive Advantage, Concepts. Upper Saddle River, NJ: Prentice Hall. Czinkota, M. & Ronkainen, I. (2010) International marketing: 2010 custom edition. Mason, OH: Thomson/South-Western/Cengage. Mangold, C.(2010) Starbucks: Success strategy and expansion problems. Oxford Press, Bangkok. Gilbert, S. (2008) The Story of Starbucks. Oxford Press, Bangkok. Read More