To inspire and nurture the human spirit - one person, one cup and one neighbourhood at a time."
- Starbucks' mission statement
In this case study we will examine Starbucks' business practices, some of which have been controversial. These include tax avoidance, allegations of irresponsible marketing, issues surrounding worker and human rights.
Before we discuss these ethical questions, let's summarise the history of the company.
Introduction to Starbucks
The first Starbucks was opened in Seattle in 1971 . The name was inspired by a character in the American novel Moby Dick. Starbuck was the first mate on the ship Pequod.
The company was owned by three US businessmen: Gordon Bowker, Zev Siegl, and Jerry Baldwin.
Starbucks combines the excitement of a rich coffee tradition with the feeling of connection among its customers. Its goal has always been to nourish the human spirit. In many cases, Starbucks is designed to be a home from home; a place people can go to recharge and spend time with friends and colleagues.
Today Starbucks is the world's largest coffee chain with over 33,833 stores in 80 countries. In the US, Starbucks owns 15,444 stores. Due to its monopoly, Starbucks control much of the coffee market. It plans to completely dominate the industry by eliminating competition.
Starbucks code of ethics
"Starbucks ethics & compliance supports our mission and values and helps protect our culture and our reputation by fostering a culture that is committed to ethical leadership and conducting business with integrity by providing resources that help partners make ethical decisions at work."
- starbucks.com
Corporate social responsibility (CSR) is a set of practices businesses undertake in order to contribute to society in a positive way.
Below is an overview of Starbucks' code of conduct (see Figure 1 below).
Coffee: Starbucks believes in the importance of sourcing the finest coffee beans and doing its part to improve the lives of its coffee farmers.
Partners: Starbucks believes that everyone is capable of being themselves, and that's why they aim to treat people with dignity and respect.
Customers: Starbucks' goal is to connect with customers and lift their spirits. It's about more than just making a great coffee!
Store: a sense of belonging is what makes Starbucks cafes special. It's a place where people can come to escape and just be with their friends.
Neighbourhood: each Starbucks store is part of a community. They take their responsibility to be a good neighbour seriously. They want to be part of the community in each locations.
Shareholders: Starbucks knows that its success is due to the things that they deliver in each of these key areas.
Starbucks ethics and compliance
Starbucks' Business Ethics and Compliance programme helps promote ethical behaviour at the company. It helps preserve its reputation and culture. Starbucks takes great pride in its efforts to promote ethical behaviour. Through the programme, the company receives regular reports detailing its efforts to conduct business in a way that is ethical and sustainable.
The job of the programme is to support the company's mission and values by helping employees make ethical decisions and to ensure that all employees are following the rules and regulations.
The company's mission is to create a culture that encourages and values its employees. Starbucks is committed to ensuring that its operations comply fully with the laws, regulations, and standards in the countries where it operates. To ensure that its operations are following the law, Starbucks regularly audits and reviews its policies and procedures. The company's Audit and Compliance Committee is responsible for overseeing the financial reporting and accounting processes. The company believes that managing an ethical organisation is a vital part of its success.
The Standard of Business Conduct is also used to communicate the expectations of the company's employees. It is consistent with Starbucks' core values.
Starbucks places emphasis on three key aspects for their employees:
Figure 2 summarises some of the criticism Starbucks has received.
Market strategy
Some of the market strategies Starbucks uses to maintain its dominant position in the market have been called anti-competitive by critics.
Starbucks used its financial strength to acquire prime locations by buying out the leases of its competitors.
Critics argue that this is unfair because competitors are not able to afford the higher price for prime locations.
Employee disputes
In 2005, Starbucks settled an employment lawsuit with eight workers at its Kent, Washington, roasting plant. The employees said they were retaliated against for supporting the union.
In November 2005, about 2,000 Starbucks workers in New Zealand went on strike. The group wanted the company to improve its youth rates and provide secure hours.
In 2008, a California court ordered Starbucks to pay over $100 million back in tips to baristas. The company had illegally distributed tips from the tip pool for baristas to its shift supervisors. Jou Chau, a barista, brought a lawsuit against Starbucks in 2003-2004 for this practice, saying that Starbucks should pay supervisors higher salaries rather than taking money from the tip pool. Tips should be for those who work on the minimum wage.
Fairtrade
In October 2006, the British NGO, Oxfam, accused Starbucks of harming coffee farmers in Ethiopia by not honouring its fair trade agreements. According to Oxfam, Starbucks was harming the country's coffee farmers by not allowing them to register their products with the Ethiopian government. Starbucks responded by stating that Oxfam's claims were misleading.
An analysis conducted by supply-chain risk management firm SFK Inc. revealed that:
the demand for Starbucks' coffee exceeded supply,
Starbucks did not purchase fair trade coffee when it was available,
Starbucks charged higher than market value prices for Ethiopian coffee.
The firm also criticised the Fairtrade movement saying that it tends to make matters worse instead of better. SFK also suggested that the coffee farmers directly sell their products to Starbucks. The company would then establish a local subsidiary that would manage the relationship between the farmers and Starbucks.
In 2007, Starbucks and the Ethiopian government signed an agreement that recognised the importance of the country's speciality coffee types. The partnership allowed the farmers to earn more from the company's coffee brands.
Tax avoidance
Tax avoidance is when businesses try to find legal loopholes to reduce the amount of taxes they pay. Tax evasion is when a business/person simply doesn’t pay taxes or doesn’t pay the correct amount on purpose.
One primary mechanism used by many US companies to reduce their tax burden is by housing intellectual property units in tax havens, and then charging their subsidiaries royalties for using them.
Intellectual property is an intangible asset legally owned and protected by a business or individual. Other people can't use these assets without the owner's content.
Tax havens are countries or regions that allow foreign individuals and businesses to pay a lower tax rate than they should.
Here's an example of how Starbucks avoids UK taxes:
Income tax is charged on a company's profit. To reduce the amount paid in tax, the company needs to lower its profits. This can be achieved by either cutting down on the revenue or increasing the costs (Profit = Revenue - Costs). It's unlikely any company will shrink its revenue, so the only alternative is to bring up the costs.
One of the methods employed by Starbucks to increase costs (and thus reduce income tax) is to charge a royalty fee for branches abroad that make use of its intellectual property such as brand image, logo, or processes.
In the UK and other European countries, the royalty fee is around 6% of total sales. Since these royalty payments are counted as costs, Starbucks UK Headquarters can deduct them from the profit, which reduces the amount of income tax paid.
As for the US, the royalty earnings from abroad are taxable by law. However, it's not clear if these fees were ever sent back to the United States to be taxed. Starbucks might have kept them in one of its branches in tax havens such as Switzerlandd, where the royalty earning tax rate for foreign businesses is rather low at 2%. In the US, the corporate tax is as high as 39%.
Conclusion
While there is no clear dividing line, probably most people would think these methods are unethical.
There are 3 fundamental reasons for this.
Firstly, the purpose of tax is to allow governments to provide services for the population. By avoiding tax, companies are depriving communities of funding. Companies adopting tax avoidance practices, albeit legally, might be seen as socially irresponsible. The practice appears to be at odds with the Starbucks' policy of being a good neighbour.
The second reason is the lack of a level playing field. Locally owned businesses cannot use the same methods, giving an unfair advantage to large international corporations.
The third factor is the lack of transparency. Starbucks rarely, if ever, declares a taxable profit to the UK tax authorities. For example, in 2012, the company reported no profit in the UK and thus paid no income tax despite making a lucrative income of £1.2 billion.
In conclusion, given the aggressive tax stance, aggressive marketing strategy, some poor working conditions, and a weak position on fair trade, many would conclude that Starbucks falls short when it comes to ethical practices.
Starbucks Ethical Issues - Key takeaways
The original Starbucks was opened in 1971 in Seattle.
Starbucks combines the excitement of a rich coffee tradition with the feeling of connection among its customers. Its goal has always been to nourish the human spirit.
Starbucks is the world's largest coffee retailer with over 20,000 stores in 65 countries.
Starbucks Business Ethics and Compliance programmes help promote ethical behaviour at the company. It helps preserve its reputation and culture.
Starbucks emphasises three areas:
1. A commitment to global human rights commitments, which is built into their business model.
2. Equal employment opportunities, a top priority for the company.
3. Supporting healthcare reform and providing affordable coverage for partners of employees.
With an aggressive tax stance, an aggressive marketing strategy, some poor employee conditions, and a weak position on fair trade, many would conclude Starbucks did fall short when it comes to ethical practices.
Sources
1. "Starbucks stores: U.S. and international", Statista, 2021.
2. "Ethics & Compliance", Starbucks, 2022.
3. Anna Canning, "Starbucks has a Slave Labor Problem", Fair World Project, 2019.
4. "Starbucks Tips Baristas $100 Million", Forbes, 2008.
5. Tsegaye Tadesse, "Oxfam says Starbucks blocks Ethiopian coffee", Reuters, 2007.
6. Tom Bergin, "SPECIAL REPORT - How Starbucks avoids UK taxes", Reuters, 2012.
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