Starbucks Case Study

Name: Ng Jing Lun

UOG ID: 000807805

BUSI 1311 Intro to Business Functions Case Study

1.0 Introduction Starbucks Corporation is a worldwide roaster, marketer and retailer of specialty coffee. It head office based at Seattle, Washington, United States. The first store was opened in Seattle‟s Pike Place Market by three students of University of San Francisco, Jerry Baldwin, Zev Siegi and Gordon Bowker. Starbucks Corporation was established in 1985, and from a single store, Starbucks had developed to become the world second-largest restaurant or café chain globally after McDonald‟s McDonald‟ s in 2012. It current chairman and CEO is Howard Schultz. Starbucks Corporation is now operating approximately 10,194 company-operated stores and 9,573 licensed stores in more than 60 countries worldwide, and 735 stores in the United Kingdom. It main products include coffee, handcrafted beverages, merchandise and fresh food like sandwiches and salads. Subsidiaries of this highly successful company in the United Kingdom had encountered a tax scandal in the year of 2012. 2.0 Comparison of the contributions contrib utions of the th e key business functions fu nctions to the t he organisational changes 2.1 Finance As reported in BBC news at 16 th October 2012, Starbucks paid just £8.6 million of UK tax in last 14 years. This report added, “Starbucks had made over £3 billion in UK sales since 1998 but had paid less than 1% in corporation tax”. ( Gompertz, 2012). With huge amount of sales, it definitely impossible for a corporation paid just amount of tax which less than 1%. In the conflict of business ethics and corporate objectives, the American company had implemented “transfer pricing” method through buying coffee beans from a Swiss subsidiary, to minimize its tax bills in the UK. Besides, it transferred some of the money to a sister company in the Netherlands in the form of royalty payments, and also paid high interest for borrowing money for other parts of the business. (Peston, 2012). Starbucks in the UK reported made of loss of £52 million, £34 million and £33 million in the years of 2009 to 2011 respectively. However, the CFO Alstead told investors that Starbucks were profitable. After this tax scandal had been exposed to the public, due to the trust between the company and its customers and the society, and also pressure from those anti-tax avoidance protesters, the company had decided to 1

Name: Ng Jing Lun

UOG ID: 000807805


pay the corporation and would not claim for deduction. The company had paid £10 million of corporate tax in 2013 by two installments, and planned to pay £10 million in 2014. This is the strategy of the company to recover the trust between company and customers, to avoid boycott from its customers and also gaining back trust and confidence from the shareholders and investors. 2.2 Marketing In term of marketing, before the tax scandal been known by the public, Starbucks did not aggressively market the company and its products to boost sales. Factors that the company relied on to drive the sales were the image and reputation of the company or brand itself. I hardly can see advertisement from Starbucks. The company were still able to achieve presentable sales because of the loyalty of customers toward the brand. The exposure of this tax scandal had more or less influence its reputation. In order to gain back the confidence of customers, the company had worked on its marketing strategy. One of the examples is Starbucks had improved its membership privilege, from using a member card, and now customers can buy a cup of coffee, check and top-up the balance using an Android application, called Mobile Pay. (UK Starbucks Website, 2013). 2.3 Operations Starbucks Corporation is developing and expanding rapidly worldwide. Apart from company-owned stores, franchise stores are the main factor that contributed to the rapid expansion of this specialty coffee brand around the world. Before 2013, Starbucks operates its own stores and via licenses in UK. After that, the company had opened its first franchised store in South of England in end of 2012. This had opened up an opportunity for local people to be able to contribute their knowledge in operating a Starbucks store. Franchising helps Starbucks to get into a market easily for example small town in the UK, as the local people have knowledge in terms of local culture and certain behaviour. 2.4 Human Resources Human resources are valuable capital for a company. “In July 2012, Starbucks‟ employees have been asked to sign revised employment terms, which include the addition of a contributory pension scheme, the removal of paid lunch breaks, and 2

Name: Ng Jing Lun

UOG ID: 000807805


changes to sick leave and maternity benefits.” (Paterson, 2012). Around 7,500 staffs were affected under these changes. In overall, the changes were tend to benefits Starbucks employees more, one of the changes was the introduction of a contributory pension scheme, where staffs can contribute 1 to 3 percent of their salary depending on their positions. This can be considered as one of the benefits offered by the company to protect the retirement of Starbucks‟ staffs. Relate it back to the tax scandal, what was done by Starbucks would definitely recover the sense of belonging of the staffs and keep them in the company. 3.0 Key Stakeholders of the Company “Stakeholders refer to any group or individual who can affect or is affected by the achievement of an organization‟s purpose.” (Freeman,1984). In this case of Starbucks, the key stakeholders include the government, investors, customers and the society. I have plotted each of them accordingly on the Power-Interest Grid. (Refer to Appendix 1.1) The government considered as the party with high power and low interest. Government has the power to adopt regulation and laws, and also issuing license and permits for company. The interest of government is low in this case because it did not have the evidence to prove the wrongdoing by Starbucks, at the same time it is due to there are a lot more companies that generate more revenue than Starbucks Corporation. Next, investors are party with high power and interest. They invested in the company, thus they have power to make decision, at the same time concern on company performance and operation. Customers, own low power and interest in this case. The tax scandal did not really affect the purchasing of the products by customers, and they did not have the power to influence any party in this case. Lastly is the society with low power but high interest. Due to the UK is a welfare state, tax collection are important for social welfare. People are concern on government income, because the government use the income, for tax especially to spend for social welfare benefits.

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Name: Ng Jing Lun

UOG ID: 000807805


4.0 Key Issues in Managing Stakeholders 4.1 Government Government considered as the key stakeholder in this case because government raises revenues through taxes, in welfare state like United Kingdom especially. (Lawrence & Weber, 2011). The corporate tax rate in UK depends on how much profit the company makes and may change in 1 st April each year. For the tax rate refer to Appendix 1.2. Starbucks Corporation in the UK did not pay tax from the year 2009 to 2012, as it was achieving profit for the few years. The UK government was unable to take any legal actions due to lack of evidence. 4.2 Investors / Shareholders Investors or shareholders are the individuals who invested money into the company. In this case they were reported that Starbucks Corporation was profitable. Thus it is impossible to say that they were not aware of the taxavoidance activity. They were considered as main in this tax scandal because they were noticed by the CFO Alstead that company was actually profitable, while it was reported to the government that it was making loses. 4.3 Customers Tax-avoidance of Starbucks Corporation did not bring direct effects to its customers. However, customers are also part of the society. Some customers had also joined the protest that happened in 2012. There is a possibility where the customers will boycott the brand to show their anger on the scandal. Thus, the company had introduced few promotions to calm the customers down and recover the reputation. 4.4 Society United Kingdom is known as a welfare state which means it is a system whereby the state undertakes to protect the health and well-being of its citizens. Again, people concern on tax collection because the amount of money are to be used for social welfare purposes. Thus, people will protest if there are corporates which refuse to pay taxes, to protect the social benefits for the society.

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Name: Ng Jing Lun

UOG ID: 000807805


5.0 SWOT Analysis Analysis of Strengths, Weaknesses, Opportunities and Threats (SWOT) of Starbucks Corporation can refer to Appendix 1.3. In brief, its core strength is clear positioning and image in market as the largest coffeehouse chain worldwide, while its main weakness is high price that cannot be afforded by customers who in the range of middle and low income, mostly in developing nations. Main opportunity that can be explored by Starbucks Corporation is expand to emerging economies with large population like China. Lastly, its threats include existence of competition and trademark infringement. 6.0 Assessment of its Prospects for the Future Starbucks CEO, Howard Schultz once revealed in an interview in September 2013, The company plans to introduce some new design concepts, including a modern, modular drive-through made from reconfigured shipping containers. Now, Starbucks has more than 19,000 stores around the world. “Thousands more are planned in Latin America and Asia combined.” (Wolfe, 2013). In my opinion, build up a group of loyal customers and form a positive corporate reputation are ways that can benefits the company for long term. The company need to work hard to gain back the confidence from public. Besides, the top management have to spread the message or warning to all the Starbucks subsidiaries for not repeating the fraud. Countries in Asia like China, are definitely the region that can be targeted as main target to expand the business, as the living style of Asian are upgrading and people have learn how to enjoy life with a cup of specialty coffee. 7.0 Conclusion From the perspective of society, tax-avoidance seems to be unethical, especially in the welfare state like the UK, where the government is replying on tax income to support the community welfare. In contrast, from the perspective of corporate, it is difficult to obtain profit, although with the high sales, thus avoid from the payment of tax seems reasonable. In this conflict, what I would say is the rules had been set, thus it is the responsibility of the corporate to fulfil its obligation, towards the country and the society. Tax scandal like what they had in Starbucks in UK should not exist in either one of the countries. Achieve profit in ethical manner and

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Name: Ng Jing Lun

UOG ID: 000807805


concern on interest of each stakeholders, is the only way to become a real successful corporate.

References List Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Marshfield, MA: Pitman. Gompertz, S. „Starbucks 'paid just £8.6m UK tax in 14 years‟. BBC News. (Reported on 16 October 2012). Viewed: 2 nd April 2014. Available at: http://www.bbc.com/news/business-19967397 Lawrence, A. T. and Weber, J. (2011). „The Corporation and Its Stakeholders‟. Business and Society: Stakeholders, Ethics and Public Policy. 13th Edition. McGraw-Hill. Paterson, J. (2012). „Starbucks makes changes to staff benefits‟. Employment Benefits.

Viewed:

3rd

April

2014.

Available

at:

http://www.employeebenefits.co.uk/benefits/total-reward/starbucks-makeschanges-to-staff-benefits/100660.article Peston, R. „Starbucks 'planning changes to tax policy‟. BBC News. (Reported on 3 December

2012).

Viewed

2 nd

at

April

2014.

Available

at:

http://www.bbc.com/news/business-20580980 UK Starbucks Official Website. (2013). „Starbucks Android App‟. Viewed: 2 nd April 2014. Available at: http://www.starbucks.co.uk Wolfe, A. (2013). „Howard Schultz: What Next, Starbucks?‟. The Wall Street Journal.

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Name: Ng Jing Lun

UOG ID: 000807805


Appendices

Appendix 1.1: The Power-Interest Grid.

Appendix 1.2: Corporate tax rate in the UK from 2011-2014.

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Name: Ng Jing Lun

UOG ID: 000807805

Strengths


Weaknesses

1. Largest coffeehouse chain

1. Products pricing which cannot be

worldwide, with firm foundation of

afforded by customers at middle

around 20,000 stores and also own

and low range of incomes,

approximately 40 years of

especially those who stay in

experience in coffee industry.

developing nations.

2. Strong market position and global

2. Prices of coffee beans will

brand recognition. Although there

influence company‟s performance.

are more and more coffee shops

This increase of raw materials to

established worldwide, Starbucks

make coffee will definitely affect the

still grow well because it is offering

profit of the company.

specialty coffee with special flavour

3. The clash of coffee culture between

and high quality.

United States or certain European

3. Good relationship with loyal

countries with the Eastern

customers, and try all the time to

countries like countries in Asia.

attract potential customers.

Starbucks will have to conduct

Launched membership card and

study and research properly before

offer privileges for loyal customers

conducting its international

from time to time.

expansion strategy.

4. Innovative. Starbucks keeps

4. Overdependence in the United

launching variety of new products,

States market. Although Starbucks

including coffees, teas and fresh

Corporation owns stores in around

foods. The company launched type

60 countries worldwide, the U.S

and flavour of products regarding

market is still its core market. Thus,

the culture of particular country, to

the changes in U.S. economy bring

suit the consumers‟ preferences.

huge impact on the performance of Starbucks Corporation.

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Name: Ng Jing Lun

UOG ID: 000807805


Opportunities

Threats

1. Increase product offering. Starbucks

1. Increased competition. More and

can expand its product mix in order

more coffee shops established

to target and satisfy more

worldwide and they are challenging

consumers.

the Starbucks Corporation as the

2. Extend supplier range. This is

world-leading coffee shops chain.

significant for the operation of

Besides, many cafes and theme

Starbucks Corporation, for not to

restaurants are serving specialty

rely on limited suppliers to avoid the

coffee with good quality as well.

shortage of raw materials during

2. Saturated markets in the developed

bad weather.

economies. In order to solve this

3. Expansion into emerging markets.

problem, the company will need to

Starbucks can explore new

keep exploring new market and

emerging market and not to too rely

accumulate more loyal customers,

on U.S. market. The company can

to ensure the stable growth of the

entered into new market by joint

business.

venture and through offering

3. Trademark infringements. There is

franchise.

possibility where people can come

4. The Starbucks mobile application in

out with similar of Starbucks

Android market should be launched

products. This issue had to be

in worldwide as fast as possible,

concerned seriously by the

especially those developing

management of the company to

countries, because the users of

maintain the uniqueness of

smartphones and tablets in those

Starbucks products.

countries are increasing rapidly.

4. Rises in the costs of coffee and dairy products. There is significant increase in price of coffee beans globally, and Starbucks cannot control it. A good cost-saving strategy has to be set to maintain the profit growth of the company.

Appendix 1.3: SWOT analysis of Starbucks Corporation.

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Starbucks Case Study

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