Starbucks' Case of Tax Avoidance

Starbucks is a world-famous public coffee company that was founded in Washington, America in 1971. There are over 28,000 stores present on a global platform. They serve beverages such as coffee, tea, smoothies and sandwiches as well as baked goods of the highest quality. They have over 200,000 employees and their revenue generation for the year 2017 amounted to a total of $22.3 billion. However, Starbucks has experienced many controversies over the past years and this created many issues with regard to its public image and reputation (Davies, 2016). This assignment will analyse various points revolving around Starbucks' company, management and reputation in the hospitality industry, such as revenues, share price, shareholders, customers and public relations. It will provide recommendations and suggestions for rectifying issues that they have faced so that they can rebuild their image in public.

ANALYSIS

Revenues

Revenues are the total income that an organisation makes from running business activities and operations. The case study of Starbucks facing many issues regarding their avoidance of paying taxes, even after generating high amounts of revenues over the past years, shows that there were high levels of ethical misconduct in the organisation. It was observed that, during the past 14 years, Starbucks communicated to investors that they were a profitable company, so that there would be high rates of investments (Lindebaum, Geddes and Gabriel, 2017). Even after generating a revenue of £1.2 billion, they only paid tax worth £8.6 million, which is very little as compared to other companies that generate similar revenues. Their financial reports depicted losses throughout the years, even though shareholders were provided with high amounts of dividends. This adversely affected their reputation in the public leading to a 5-point drop in their reputation rating falling from average to weak after this incident. Starbucks has a long history of avoiding taxes, regardless of charging high rates to their customers. Recently, the organisation earned a total of £162 million, but paid tax worth £4.5 million (Fury as Starbucks pays just £4.5m tax on £162m profits, 2018). This shows that there is still a lack of transparency and ethics in the management of Starbucks. The owners have defended themselves by saying that earning money in the UK is very difficult, hence the avoidance of proper tax payments. Therefore, analysis of revenues show that this organisation has generated earnings worth £3 billion, but has not been sincere in paying taxes for the past 14-16 years. Moreover, management has tried to cover up their profits and instead, depicted losses in their balance sheets, but at the same time, they have been successfully providing dividends worth millions to their investors.

Share price

Share price refers to the price at which one share can be bought by investors. The share price of Starbucks has been increasing for a long period of time. Even after the controversies of tax avoidance, there has not been much decline in their market price. In April of 2012, the organisation's share price was approximately $31, but after the issues with the government regarding taxes, it declined to $20, a fall of $10 which caused severe losses of investments in the company. These prices continued to vary in the same range for almost a year and this shows that Starbucks destroyed their reputation in the share market due to negligence of tax payments (Moghaddam, Akhavan and Mehralian, 2015). This analysis of share prices depicts that this organisation performed business activities in an unethical manner. Even though there were several issues regarding this matter, Starbucks has managed to maintain a good share price even today, due to its large portion of customers and high-quality products. There are still many individuals that are interested in buying shares of the company, due to high rates of return. This shows that a lack of ethics in management and negligence of tax payments did not affect the share prices of Starbucks (Moorhead and et.al., 2016). There was minimum damage done to their reputation in the share market and they did not have to make many changes to fix it.

Shareholders

Shareholders are those individuals that are part owners of an organisation. Shareholders of Starbucks consist of a board of directors and investors that have bought shares of the organisation. They are given dividends when profits have been ascertained for year-end. These individuals were told that Starbucks earns a significant amount of profits and that their share of dividends would be high (Lashley, 2016). This increased the number of shareholders in the company and people started investing in it due to good returns. When the issue of tax avoidance was found out, there was a fall in shareholders as well as their value. People were no longer interested in making investments in an organisation that does not pay the required taxes as it may cause issues for them as well. The shareholders too, got confused when they received their profits, but when they analysed the financial reports, it was found that the company depicted losses. However, there were many investors who sincerely paid their taxes, hence there were no issues for them. They kept their shares in the company as they believed in its growth. There were some shareholders who felt betrayed that they were not provided with details regarding Starbucks and their overall performance (Tan, 2017). There was a lack of transparency within the organisation, which caused some of them to lose trust. Therefore, the analysis of shareholders of this company shows that they had mixed feelings about their investments, but a majority of them stayed in the organisation instead of leaving it, due to the high amount of profits that were generated and paid to them.

Customers

Customers are those individuals who purchase products and services from a certain organisation. Customers of Starbucks are considered to be extremely loyal towards to them, regardless of any issues or controversies that have arisen in the past. This is due to the products and services that are offered by the company. They have created a place where in people get a variety of options to choose from and there is always something available for everyone. However, there were some downfalls after the tax issues, where in customers stopped visiting coffee shops leading to a decline in sales and revenue generation (Valentine and Godkin, 2016). They felt cheated as they were paying taxes for the government and their money was instead being distributed as profits to shareholders. Analysing the behaviour of their customers shows that there was moderate damage done to their reputation among clients. The services and products that Starbucks offers are unique which makes people attracted to them regardless of situations. Their customer base consists of high-class individuals who are not much bothered about controversies and only purchase to satisfy their needs. Organisations tried to reduce prices and provide attractive offers so that they regain lost customers and cover up losses that they have faced. Therefore, customers were not adversely impacted by the tax avoidance of Starbucks and the company was able to retain them (L'Etang and et.al., 2015). It is still one of the most famous coffee shops and its sales have helped them to earn high profits.

Public relations

Public relations or media coverage refers to an organisation's method of communicating with the public so that they are able to maintain a relationship with them by creating a good image that is favourable for them. The tax avoidance case of 2012 created a negative reputation for Starbucks as they had not been paying the required taxes in the past years. Their statements towards the public and tax officials were completely different. There was extreme ethical misconduct as improper information was provided in the financial records of the organisation (Macnamara, 2014). The management of Starbucks is responsible for damaging their own image and they were unable to maintain good public relations. However, they initiated customer services through which direct contact could be made between consumers and managers of districts. This allowed them to improve their reputation as well as build stronger relationships with existing customers. This helped to decrease the criticisms that they had been receiving. Owners also made statements to the public saying that these practices were unethical and unfair, causing a huge disgrace to Starbucks. They tried to maintain as much transparency as they could so that they could build the trust of shareholders and customers. Although tax avoidance through manipulation of financial records is not illegal, the management of an organisation has promised the government that they will pay the required amount, to cover up the remaining payment (Starbucks left with 'no choice' over tax avoidance issue, 2012). They have also planned to create a new board of executives so that proper plans for business activities can be made and risks of future tax problems can be reduced.

CONCLUSION

This assignment concludes that Starbucks' case of tax avoidance shows the ethical misconduct that has been followed in an organisation. These behaviours have led to damage to the reputation and public image of the company. Analysis of revenues, share price, shareholders, customers and public relations show that there has been both a positive as well as negative impact towards Starbucks. After the news of this incident, there was a decrease in profits and sales, with less number of customers showing up to purchase their products. Moreover, share prices declined by $10, hitting its lowest after several years. On the other hand, they were able to fix damages that had been created, by maintaining a healthy relationship with the public through social media and responsibilities towards their environment. Overall, they have successfully rectified the problems that had been created by them with the help of certain recommendations and strategies that their management has implemented.

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RECOMMENDATIONS

The case of Starbucks and tax avoidance damaged their organisation image to a great extent. In order to ensure that they stay successful in the hospitality industry, there are some suggestions that can be used by the company, so that they can rebuild their reputation (Tunley and et.al., 2018). Some recommendations include the following:

Embrace criticism

Starbucks can embrace the criticism and feedback that they get from customers and understand what people are trying to tell them so that they can plan changes and create a better reputation. They will be able to fix the damages that have been caused due to tax avoidance and hampering of financial information (Lindebaum, Geddes and Gabriel, 2017). Overall, analysing the statements of critics will help them in effectively repairing their image and increasing their sales once again.

Interact with public

Starbucks can interact with the public as they have strong public relations management. They will be able to convince people that they have taken courses of action to change how they run business activities and ensure that taxes paid by customers will be given as per taxation policies (Moorhead and et.al., 2016). They will not use those earnings for profits and dividends as well as allow management to understand concerns of shareholders regarding taxation policies.

Maintain transparency

Maintaining transparency can help Starbucks rebuild their image, as giving the right information to shareholders and the public, will help create trust and build strong relationships. This will aid in retaining customers as well as shareholders, which will eventually lead to an increase in profitability and sales (Valentine and Godkin, 2016). Providing open and true financial records can help Starbucks in effectively fixing the damages that have been created due to their tax avoidance.

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