Impact of Starbucks Tax Evasion Scandal on Reputation and Sales

This report examines the impact of Starbucks tax evasion scandal on the reputation and sales of the company. It discusses the consequences faced by the organization, decline in sales, and the relationship with employees, customers, and society. Recommendations are provided to rebuild the brand image and regain public trust.

STARBUCKS CASE
STUDY

EXECUTIVE SUMMARY
Ethics can be referred to as the values and beliefs of a person or company in association
with organisational conduct. This report stresses upon the case study of Starbucks in UK which
was involved in evasion of taxes by reporting losses for the initial 15 years. This report is divided
into three sections. The first section gains an insight into the impact of company’s tax evasion on
revenues of the organisation. The second piece explores the loss of customer base as a
consequence of company’s scandal. The third part gains knowledge of the ways in which public
relation or media coverage has taken a role post the entity’s unethical conduct. In this relation, it
is recommended to enterprise to publicly sign a bond declaring avoidance of unethical practices
with a view to enhance their name and stake in global market place.

INTRODUCTION
Ethics can be regarded as the moral philosophies and/or beliefs of an individual or group
associated with determining what is right or wrong. Business ethics is considered to that field of
ethics that is concerned with the in-depth examination of business practices, policies, structure
and corporate governance to ensure that organisation does not get involved in any malpractices
such as tax evasion, bribery, black marketing, hoarding etc. It is essential for an entity to adopt
ethical code of conduct and practices, which do not harm to community or environment, with a
view to ensure its sustainability in market for a long term. In the recent decades, practices
concerned with conservation of environment and sustainable development have gained
significance.
The present report is based on Starbucks which is one of the leading coffee company as
well as coffee house chain having its headquarters in Seattle, Washington. This report tends to
stress upon the practices and code of conduct adopted by organisation within the confines of
United Kingdom during the course of time. Starbucks within UK evaded the taxes to be paid by
company in its initial 15 years by showing losses of organisation in its financial reporting and
concealing its report irrespective of the large scale of revenues earned by entity. This was done
with the prime objective of concealing the profits so as to evade taxes.
The global reputation of a business organisation is highly crucial to ensure its long term
business growth and sustainability. The loyalty as well as trust derived from customers owing to
the favourable reputation of business organisation possesses a direct and significant impact on
the bottom line of a company.This report will gain knowledge of the impact of Starbucks scandal
upon the long term corporate image and stake of company.
Similar incidents have also taken place with Amazon and Google which were found to be
guilty of tax evasion. Such incidents significantly cause damage to the reputation and position of
enterprise across the global market place. For an entity to become a market leader, it is
significant that it possesses a favourable brand image such that people can easily develop loyalty
and trust in the company and consequently, purchase the products produced by them. This report
will explore main impacts of the Starbucks UK tax evading conduct upon the different aspects
and global reputation of company.
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ANALYSIS
As an outcome of Starbucks tax evasion activity, there were many types of severe
consequences that have been faced by organisations. These consequences lead company towards
facing negative impact on their organisation reputation in all over the world. Mentioned below
there are some major points which is discussed below:
“A loss maker with fat margins”
The tax authorities of UK and the U.S internal revenue service confidential report
presented before media showcased that Starbucks evade high taxes even after holding large
profitability base. It has been evaluated that over the last three years, company present their
report with no profit along with any head income tax. In addition with this in the year 2007,
Starbucks September financial report showed their losses on its 10th consecutive annual year then
Peter Bociean who then holds the position of chief financial information showed the report in
which it was mentioned that company already enjoyed high operating profit margin rate which
estimated range was 15% which is equivalent to 50 million pounds. This statement of losses
presented by Starbucks continue to be showcased by company in the consecutive year of 2008,
2009, 2010 and 2011 in which they presented an annual loss of 26 million pound loss 52 million
pound loss 34 million pound loss and 33 million pound loss in the same consecutive years. By
seeing this, high authorities of UK such as Her Majesty’s Revenue & Customs (HMRC), ask
company to present confidential reports of financial system in which they decline to comment.
This made company to face a severe deduction in their intellectual property fees if the coffee
firm did not show their actual charges.
“Starbucks tax evasion lead to decline in sales”
Starbucks is one of the leading coffee shop company operate their business activities with
having its headquartered in UK. Most of the people by hearing company name think of
machetoes, latté and tax dodging. This giant coffee shop industry faced protest and general
animosity and chords from the public of Britain and overall UK. As per the report, it was
emerged in the year 2012 in that report Starbucks was convicted in paying little to the taxes in
the UK province despite holding hundred of stores within the country. This tax dodging can BE
said as aggressive tax planning that was done by company. After this report company falls under
a great pressure and promised to pay appropriate tax to the government with an estimation of 8
million dollars along with another 16.8 million in the consecutive years 2013 and 2014. By doing
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this Starbucks promised to build customer relationships. In addition to this, company take
another effective move to secure relations along with this company also made promises that it
will pay higher taxes in the UK provinces. Individuals within UK by seeing this report started
boycotting Starbucks. In an interview of Starbucks speech at London Chamber of Commerce and
industries a question has been asked to Chris Engskov who holds a position of managing director
in Starbucks Coffee UK. The question that has been asked company management director
include the reason behind Starbucks did not paid taxes in UK. In return to the answer Chris said
Company pay appropriate range of tax in the province of UK, but it is also true that company fail
to pay a meaningful amount which is related to corporation tax that has been paid by profit of a
company. Later he said that company further committed to pay require amount of high taxes and
move towards effectively retaining their public trust by acting responsibility and listening to the
government.
“Starbucks and its relationship with their employees’ customer and the wider society”
Starbucks is a multinational coffee shop industry effectively engage in the process of
selling their products in different companies in order to gain high advantages. Just after the
report of tax Evasion Company effectively reforms the current tax system within UK specifically
related to corporation tax. Company make formative promise is to pay require amount of taxes as
per by the law. Along with this, day in order to earn trust of their customers company listened to
their customers issue and their expectations. As per the view of company, most important Assets
of Starbucks that has been built by company are trust with their employees, customer, society
and media in which they operate their functions. The report which has been released by UK
Parliament public account committee states that multinational corporations like Google, Amazon
and Starbucks put themselves in a major fire storm which leads them towards criticism in order
to not pay minimal tax rate within the UK region. This allocation which is related to tax evasion
leads Starbucks into a serious crisis that affected their relationship with public. Serious outrage
on social media played out that explodes negative corporate ethics that has been followed by
Starbucks. This lead towards creating bad reputation in media coverage related to the tax
evasion. Starbucks after facing criticism on tax evasion become poster child in corporate tax
avoidance in the year 2012 as they are accused of taking advantage of artificial corporate
structure in order to shift their profit out of the region of UK in the lower tax jurisdictions. After
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facing serious outcomes Starbucks effectively plans and promise to pay fair taxes as per the
calculated percentage of government. Along with this, in order to make formative relationships
with their customers Starbucks tend to become more responsible towards Corporate Social
Responsibility in which they promises to meet legal mandated standards in order to save
environment society and community in best effective way.
CONCLUSION
On the basis of above mentioned report, it can be said that the tax evading conduct of
Starbucks had a severe impact upon the reputation of company. Also, it can be assessed that the
unethical code of conduct when became public lead to loss of sales and profits for the enterprise.
Further, it has been observed that the company lost a large quantum of loyal customer base
owing to the tax evasion done by entity within United Kingdom. In addition to this, the negative
publicity of entity that took place by way of media coverage also impacted on the overall
performance of organisation. Besides this it is concluded that corporation is required to
undertake measures to effectively deal with the damage caused to goodwill and position of
enterprise.
RECOMMENDATIONS
The tax evasion scandal had a damaging impact on the global reputation of company. The
main cause behind this was the corporate culture of corporation. It is highly suggested that
business should carry out definite moral and ethical programmes in order to equip the employees
with decisions related to what is right and what is wrong in relation to operations. Furthermore,
to deal with the loss to overall global brand image and position in marketplace, business concern
can consider the aforementioned possible solutions. These are, namely, joining an independent
verification agency and/or setting up a public bond to pull through the losses made to the brand
position and name within market place. Starbucks UK should put into practice as many processes
possible to deal with the multifaceted situations that corporation landed in as a consequence of
this unethical code of conduct and practice. Over the course of time, Starbucks UK has
developed into an international brand name and thus, possesses a high position in market place
that has been challenged post the public revelation of the unethical code of conduct of company.
It is easier to speed up effectiveness programs and potentially save the entity from losses. Even
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though the organisation possesses its own internal team for calculating the taxes and then
preparing the financial statements yet the company can now consider teaming up with other
independent verification agencies to regain the trust and belief of consumers along with
improving its reputation in market. Company can also consider posting a bond that assures the
public that the similar situation would not take place in future again. This would lead to building
up the lost image of company and regaining the credibility of public and also the government.
The bond would need a huge finance to be made so that customers can be assured that company
truly regrets about evading the taxes and significantly misleading the public as well as law.
Starbucks UK is a big name in coffee (food & beverage) industry and enterprise can consider the
option of collecting funds from own sources for the bond.
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