Implication of Brexit on Starbucks

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Implication of Brexit on Starbucks

Introduction

In this essay I will be discussing the implications and uncertainty of Brexit on Starbucks. Analysing two Brexit scenarios, I will investigate how Brexit will impact Starbucks in regard to the important factors: Workforce, Labour Migration, Market Access and Trade.

Brexit is an abbreviation of Britain exiting the EU Membership, “an economic and political union with 28 countries which allows free movement of goods, capital, services and people between member states” [GOV.UK. 2019]. Being a part of the European Union has its privileges and obligations. For example, frictionless trading within EU, however payment must be paid to the EU budget, which is gathered from tax payers. In 2016 the UK Government’s net contribution to the EU was £9 billion, with a rebate of £5 billion [ONS. 2017].

Despite this, the impact of the referendum and the subsequent political turmoil surrounding the exit arrangements has had consequences on the economy. PwC’s study calculated “that GDP at constant prices would be 2¼ percent permanently lower as a consequence of a Brexit” [IW Report, 2016]. If GDP continues to decrease and consumer spending is at a halt, the Bank of England may resort to lending, given the liquidity shortage. The result of the referendum was a majority vote in favour of the United Kingdom withdrawing from the European Union [BBC, 2016]. At the time of writing this essay, the UK has not formally withdrawn from the European Union.

Brexit Risks and Starbucks

Starbucks is an American founded coffee company. Starbucks has become one of the largest food chain in the world [Forbes, 2018]. Having over 30,000 locations worldwide [Loxel Geomatics, 2019], it is a multi-national corporation (MNC) which has many interested and involved parties in its global production network. With over 2500 stores in Europe, UK with 982 stores [Statista, 2018] and a total revenue of £372m [QSR. 2018] shows the importance of trading within borders for MNCs, e.g. easy market access throughout Europe and UK.

Brexit poses a number of issues for Starbucks, in terms of its financial arrangements, supply chain, but also in terms of its retail operations in the UK.

MNCs are dependent on complex supply chain arrangements. The first stage includes farming. Starbucks sources Arabica coffee from three key regions outside of the EU: Latin America, Africa and Asia-Pacific [Starbucks, 2019]. Imports from outside the EU that are not covered under the ‘equivalence agreements’ must apply for approval from Defra and regulate with other compulsory processes and paperwork, including the ‘Trade Tariff’. Starbucks’ global production networks benefits from the single market and Brexit uncertainty is putting MNCs under pressure as they do not know what to prepare for.

MNCs naturally have many stakeholders. I will identify key stakeholders (e.g. employees, stock/shareholders, customers and suppliers) and discuss the impact they have on Starbucks [Porter, M. 1996], heightening the affects proposed by Brexit uncertainty. Farmers depend on Starbucks’ supply demand for wages. Slow demand or decreased price negotiations is a risk for Starbucks as suppliers can protest and boycott Starbucks for another company. Shareholders invest money on MNCs by purchasing a share of their company. Shareholders hold a lot of power and will boycott Starbucks if they do not receive good dividends, leading to stagnation of the company.

Employees are interested in stable employment, receive fair pay and work in safe conditions. With the current economic situation, Starbucks cannot predict to what extent they can hire as MNCs have to cut costs through redundancy in response to lower sales revenue. This will lead to public relation issues because UK unemployment rate will be burdened upon MNCs.

Lastly, customers want good value for money, including fair trade, social corporate responsibility and quality of the final product. Brexit uncertainty will encourage consumers to look for a cheaper alternative because of lower availability of surplus capital, proposing a threat to Starbucks as their market status and power could reduce.

Different types of scenarios will determine the level of pitfalls/challenges faced by MNCs. I will discuss further into what the outcome will look like for Starbucks with two types of scenarios.

Types of Brexit and the future consequences imposed by the scenarios

Hard Brexit

A possible option or default option in an absence of consensus is the ‘Hard Brexit’ otherwise known as ‘No-deal Brexit’. This “could involve the UK refusing to compromise on issues like the free movement of people even if meant leaving the single market” [BBC, 2019]. Having cut all ties with the EU Membership would enable Britain to make agreements and negotiate with anyone (Europe and other nations).

Concepts such as the Neoliberal and Protectionist Project fall under this category. Strongly influencing the U.S and Britain, Neoliberalism ideology and policy is characterised by the value of free market competition. This type of Brexit is supported by politicians such as, Boris Johnson, Jacob Rees-Mogg and John Baron. The ideology focuses on sustained economic growth which means to have human progress, free market to achieve optimum efficiency, minimal state intervention in economic and social aspects and commitment to the freedom of trade and capital.

Currently, “as a member of the Customs Union, the UK is not allowed to negotiate other bilateral trade deals – which is why Liam Fox has argued that it needs to leave” [Thornton, D. 2016]. Following regulations of the Customs Union could be holding back Britain from gaining trade arrangements from other nations. Leaving the single market would also result in a protectionist Brexit. As George Osbourne argues, “leaving the EU is the biggest act of protectionism” [Stone, J. 2017]. With the government wanting to impose immigration controls between the UK and European Union, it demonstrates the act of protectionism of Britain’s domestic industries from foreign investments/competition allowing the economy to grow by increasing local jobs and increase the country’s wealth leading to a better balance of trade. This creates tension between political parties as the ‘Hard Brexit’ could be two very different possibilities.

While the idea of free market trade opens up opportunities to trade with other nations, without the single market, stricter tariff and barriers is to be put in action, especially for agriculture. This makes the ability to trade in large market areas difficult. For Starbucks, supplies will be more expensive to import due to the policies, set out by the World Trade Organisation (WTO) [BBC, 2019]. UK will fall under the WTOs principles of the trading system; long and complex agreements covering a wide range of activities.

One of the many regulations known as MFN outlines countries must trade without discrimination, designed to secure fair conditions of trade. This implies tariffs on agricultural commodities will be high, making market access across borders more difficult for MNCs. For example, commodities such as, “dairy products ‘may become luxuries’ after UK leaves EU” because Britain depends on dairy-surplus countries in the EU for milk (i.e. Germany, Belgium, and Denmark etc.) [O’Carroll, L. 2018].

In regard to Starbucks’ retail operations, day to day activities in all subsidiaries in the UK are likely to face challenges. Shortage on a key ingredient (e.g. milk) will lead to a limited quantity of coffee with milk and reduction of their daily capital. Financial rearrangements between partners may result as a response to Brexit’s uncertainty making stakeholders unhappy. For example, EU milk suppliers receiving a lower supply demand in addition to higher regulatory trading tariffs.

MNC’s (e.g. Starbucks), being in an oligopolistic economy are able to exercise their power over smaller businesses by coalition building. This allowed trading and market access advantageous to a handful of corporations as they can benefit from trading aspects such as, economies of scale, favouritism etc. but with the ‘Hard Brexit’ scenario MNCs cannot exploit the single market rules because of the stricter WTO legislations.

Moreover, transportation across the EU borders will be restrictive causing Starbucks to invest more time (e.g. bureaucracy and training) and money to adjust to post-Brexit border tariffs. Receiving roasted coffee from Amsterdam, the retail operation will face a negative impact if there are delays in stock. With new and different processes, by the time the coffee has reached each EU subsidiaries, the UK will see a rise in coffee inflation. For the past couple of years, the cost of coffee has risen and the Brexit poses a further inflation, a risk for Starbucks and its consumers [Consumer Price Index. 2000]. “Household incomes are around £1,500 a year lower today than forecasts made before the referendum vote” [Hughes, K. 2019]. Amid Brexit caution, consumer spending has slowed down as people are looking for ways to save with lower disposable income. Coffee is an easy way to save costs implying a big risk of loss.

This demonstrates Brexit will affect Starbucks’ global production networks resulting growth rate to decelerate.

Also, dissatisfaction of customers could lead to a decrease in sales revenue as customers have the power to boycott under whelming brands [Porter, M. 2009]. Movement of supply will impact all MNCs as it is not uncommon to get resources from EU countries which may not be strongly available in the UK. For example, tomatoes from Spain are likely to increase by 10% if a ‘no-deal’ Brexit takes place, according to BBC News [Browning. 2019]. Suppliers cannot keep absorbing the prices as they “have to trade in a different way as tariffs will be applied, new inspections and this means we add new processes to current situations”. Financial arrangements must be reconsidered by MNCs as they cannot benefit from the single market negotiations in a ‘Hard Brexit’ scenario.

Another issue from stricter rules in travelling across borders may outcome in fewer people driving on motorways, this consequently will impact Starbucks in petrol/service stations [Motorway Services Online. 2019] as it is a popular phenomenon to drink coffee during a break when on a long journey to reduce tiredness. Franchises losing customers implies a decline in Starbucks’ performance.

Furthermore, being a franchise means the legal framework could be disrupted if the ‘Hard Brexit’ was to take place. Leaning towards a protectionist project, Starbucks’ could mirror developing countries [Abell. 2010], seeking to regulate entry into their domestic market that escape the restraints placed upon direct foreign investment. This law is contrary to free trade as new legislation could hinder the operation of Starbucks’ stores, encouraging MNCs to look for loopholes for cheaper trades and agreements. Searching for loopholes could affect the workforce, specifically, labour migrants.

Labour migration policies will be adjusted on a ‘Hard Brexit’ basis. Protectionist policies on immigrants moving to the UK for work purposes will be implemented, which will impact many large companies. New policies suggest labour migrants will be allowed in the UK if they are skilled labourers, earning £30,000 [BBC, 2018]. This is highly defective for Starbucks as baristas and general employees do not obtain such skills nor do they earn so much. Cheap legal labour can no longer be an option for MNCs, leading to redundancy or lower wages for UK workers. The limitation of immigration could lead to companies engaging more in illegal activities, for example, hiring undocumented workers or money laundering [GOV.UK. 2019].

British politicians have been letting Russia hide its dirty money for a long time, according to Bullogh. Over the past decade it has been identified, Russia has seven times more money flowed in indirectly than directly [Bullogh. 2018] This enabled flows of liquid capital “pour in and out of the City of London every day, from every corner of the globe”. The ordure churned out by Russian crooks and kleptocrats is thus, thanks to the skilled attentions of the tax havens’ best brains, indistinguishable from ordinary investment”. Many could question the movement of Starbucks’ headquarters movement from Amsterdam to London relating this concern as a key city for dirty money is London [The Economist. 2018] [Jenkins. 2018].

MNCs have the power to hide money laundering due to their ties with politicians and the facade of a legitimate global business strategy, with the help of easy access in EU (refer back to Russia example). However, this will be monitored more closely as public concerns have raised from cautious lending from the bank [Binham. 2018] as well as stricter rules directed by the WTO. Though WTO proposes a free market trade, the documented and undocumented ties between EU will receive a hit thus disabling MNCs to engage in money laundering.

Though MNCs earn a larger amount of profit in comparison to SMEs they are known to search for loopholes to increase profit, moral or not. As well as money laundering another example of MNCs exercising their power as capitalists is via tax payment. Many MNCs like Starbucks are involved in tax avoidance/evasion.

According to Financial Times, “Starbucks European unit paid 2.8% UK tax”. “The coffee chain, which has in the past faced vocal criticism of its tax affairs in Britain, has revealed that its largest European operation paid $5.9m of tax in the UK on profits of $213m”. Due to the complicated structure and payments between subsidiaries it makes it difficult to assess whether MNCs pay the sufficient amount of tax in accordance to their earnings. However, Marxists would argue the rule creator had purposely left a hole (politicians) to advantage the ruling class and maintain their capitalist position. Supported by Gowland she argues public reporting for all companies is required so it is clear if they are paying their dues. Britain should not wait after Brexit for stricter legislation implementation allowing MNCs to enjoy avoiding tax payment.

Starbucks’ have already received backlash from the public but have not taken any serious action to amend this issue and a ‘Hard Brexit’ could mean paying the right amount of tax. In conjunction to other Brexit risks, this will strongly affect Starbucks’ revenue as well as public image. Consumers will have deeper rooted reason to boycott Starbucks aside from cutting expenditure on non-necessary goods/service as a response to possible inflation.

This will reduce the ability of MNCs to ‘play the game’ and use the single market in their favour. WTO outlines fairer distribution and equality in terms of trading which will reflect on Starbucks’ profit, whom as capitalists have greater power and create an ideology of how their growth is based on meritocracy.

My concluding comment on this scenario would be, the ‘Hard Brexit’ will have more negative impacts than positive ones to Starbucks. This is because the WTO regulation and different trade legislation indicates that capitalists will be challenged on exercising their MNC power, making them compete on a fairer standard. This could ultimately lead to a decrease in sales revenue and profit, resulting in weak market power, MNC and politician coalition building and business strategy.

I will now discuss how a ‘Soft Brexit’ could impact Starbucks’. Though it is a more favoured option for many MNCs it still impacts Starbucks because of newer and different ways of operating.

Soft Brexit

The second possible option is the ‘Soft Brexit’. Jacob Rees-Mogg states on his Brexit Lecture, quoting Hyundai’s 2002 advert describes “gloomy” or widely known otherwise as ‘Soft Brexit’ is “to stick like glue” to the EU [BBC, 2019]. Contrasting to the ‘Hard Brexit’, ‘Soft Brexit’ is not to have full withdrawal from the EU Membership but to arrange a new trade/custom agreement to avoid Most Favoured Nation tariffs, allowing the UK to still freely move goods, services and people within the single market. UK will want to keep a close relationship in most aspects soft including the laws such as GDPR 2018.

Concepts such as the Status Quo and Green new Deal Project fall under this category. Status Quo Brexit would mirror the Canada Plus project- can trade goods with the EU with minimal tariffs but confronts more regulatory barriers to trade. Canada is not subject to EU law or institutions and does not pay the EU any money as a part of the trade agreement and are free to do trade deals with any other country [Robertson, S. 2018].

Opting for a Canada-style deal between the UK and the EU would be a step backwards as the UK will not benefit from the single market and customs union as it is now. “Britain’s service industry… accounts for almost 80% of the economy” [Cadman, E. 2016]. Canada plus trade arrangements mainly deal with goods, which will be a pitfall for Starbucks as their distribution and delivery system is a service, a part of their global production network. The absence of smooth trading leads to an increase of new red tape, costs and delays.

For example, if the supply of coffee bean prices were to stay the same throughout the supply chain, there will still be extra costs to the whole process because of the extra customs check at borders between Switzerland, Netherlands and UK. Starbucks buys coffee beans for the UK through a Lausanne, Switzerland-based firm, Starbucks Coffee Trading Co. Before the beans reach the UK they are roasted at a subsidiary which is based in Amsterdam.

However, compared to a ‘no deal’ Brexit this a better option because it gives more certainty, which MNCs prefer. Moreover, CETA thus far has been running positively according to most companies, therefore statistics and sentiments show Canada style Brexit maybe more good than harm [Government of Canada. 2019]. On the contrary, it could be said by the political left party that ‘Soft Brexit’ is a façade to maintain power in capitalism with putting up a face of fair competition (free market) but politicians will still hold ties allowing MNCs to engage in money-making activities such as, money laundering.

Moving onto the Green New Deal, it’s an environmental option which proposes transforming the UK into a green economy with high state intervention on infrastructures, decarbonisation etc. However, capital will be raised from tax payers. Presented by Thomas Piketty this “includes huge levies on multinationals, millionaires and carbon emissions to generate funds to tackle the most urgent issues of the day, including poverty, migration, climate change and the EU’s so-called democratic deficit” [Rankin, J. 2018].

Starbucks clearly being a MNC, it indicates they must contribute towards to turning the economy green via tax payment. Ironically, as a global brand, Starbucks pays a small amount of tax in correlation to their sales [Marriage, M. 2018]. Having been successful in avoiding tax, the GND suggests Starbucks may not continue benefitting from tax avoidance, as this Brexit will pressure MNCs to contribute in making the environment better. This option could mean lesser profit retention because the EU is slowly trying to make MNCs like Starbucks and Apple pay their fair share of tax.

MNCs may not favour the aspect of sufficient tax payment involved with Brexit but the ‘Soft Brexit’ but will reassure them with better certainty as it allows them to plan growth, investments etc. by staying in the customs union.

Conclusion

To summarise it is not certain whether the UK will withdraw from the European Union, and if so how? There are still debates on what type of Brexit to opt for. This has resulted in delays and multiple votes in the House of Commons, to which there has been no consensus as of yet. Brexit’s major affect is the increase of uncertainty, such as, exchange rate fluctuations, financial market instability, depreciation of GBP, inflation etc. The shock could lead to a recession, with reduced disposable income it will disrupt the fluidity of capital and economic growth.

Families precautionary savings [PwC. 2019] implies Starbucks will face a bigger challenge leaving EU with a no deal because there will be an increased struggle of control between the headquarters and subsidiaries, leading to a loss in profit. Large companies have unstable strategies to cope with new economic geography as well as being unsure on what to prepare for, hence the pressure of Brexit on MNCs. For example, German Electronics retailer, Media Saturn, is facing challenges and is underperforming despite the established status.

Starbucks’ financial arrangements, supply chain and retail operations will be affected by many factors including: labour migration, workforce, market access/trade, taxation, and WTO legislation etc. from both scenarios of Brexit. However, it is likely MNCs prefer a ‘Soft Brexit’ as it is more promising in terms of certainty allowing them to strategize and operate closely with the EU.