The ethics of the coffee shops
The ethics of the coffee shop chains have been under the spotlight of late, with Starbucks and Caffè Nero both being publicly shamed over their tax avoidance. Yet they are not the only coffee chains with murky tax affairs.
Josie Wexler compares the ethical performance of the big high street coffee chains.
Maybe we have all become hooked on Frappuccino lattes, or maybe we’re just desperate for somewhere to get out of the cold. Either way, recession or no recession, the UK coffee shop market is booming. It has grown continually for 15 years and increased in size by more than 10% in 2014 alone.
The independent sector has grown slightly, but it is the big branded chains like Costa and Starbucks that have really exploded in number. Ten years ago the branded market was about half the size of the independent sector. Today it is very similar to it in size.
In this guide we look at these big chains, especially focusing on their tax affairs, and the ethical sourcing claims that they make – or don’t make – about their coffee. We also look into the recent discussion that has taken place around ethical certification schemes for coffee, including Fairtrade.
See our detailed company profile of Starbucks.
Nearly all the coffee shops score very badly on environmental reporting. Few of them were able to provide much material on their environmental policies, and when they did, it was poor, without meaningful targets.
Only Soho Coffee Company got awarded our best rating in this category because it is a small company that we felt had an implicit environmental policy, if not an explicit one.
All of the coffee shops sell products likely to contain palm oil such as biscuits and cakes. Yet not a single one had an effective palm oil procurement policy, and so they all lost half a mark on Climate Change, Habitats & Resources, and Human Rights. The other marks lost in the human rights category were lost because of operations in oppressive regimes.
A few of the companies were awarded Product Sustainability marks on the basis that all of their coffee was Fairtrade, Organic or Rainforest Alliance certified.
The shaming of Starbucks
In 2012 Starbucks’ chief financial officer told the Parliamentary Public Accounts Committee that Starbucks made no money in the UK. That was why it paid almost no tax, he said – it simply made no profit. It kept operating over 700 coffee shops year after year in the hope that one day, one happy day, it would start to make some money from it. But somehow, that day never came.
The committee was not impressed. The chair, Margaret Hodge, pointed out that Starbucks’ failure to turn a profit in the UK might have something to do with its buying things at extortionate prices from other Starbucks divisions in tax havens like Amsterdam and Switzerland, so that they could make the profit on its behalf.
She said that it was immoral, even if it wasn’t illegal, and urged people to boycott the company. Meanwhile UK Uncut had already long been picketing Starbucks’ branches and attempting to turn them into helpful things like women’s refuges, crèches and libraries. After a drop in sales, Starbucks backed down a bit and offered to pay a token ‘voluntary donation’ of £20 million over two years.
Starbucks isn’t the only coffee shop chain that’s attracted attention for avoiding tax. In 2014 it was widely publicised that Caffè Nero wasn’t paying anything much either.
In 2012 UK Uncut protesters transformed Starbucks into refuges, crèches and homeless shelters to highlight the link between the company’s tax avoidance and the impact of public spending cuts on women. © UK Uncut
See our detailed company profile of Starbucks.
Starbucks boycott and the rise of Costa
The Starbucks boycott over tax avoidance was not an organised affair, yet plenty of evidence emerged about how effective it was. This makes it a very useful case for those studying ethical consumption campaigns, where direct evidence of impact is often difficult to come by.
It also served as a wake-up call for tax avoiders, demonstrating that the simple profit-seeking mathematics that had driven the avoidance in the first place was perhaps not that clever after all. Suddenly, high-street tax avoiders were looking vulnerable.
The Guardian reported a 2012 YouGov poll11 which asked: “If there were a Costa Coffee, a Starbucks and a Caffè Nero next door to each other, which one would be your first choice to visit?”
The results are shown below:
- Costa - 39.4% now - 31.8% before tax row
- Starbucks - 15.4% now - 22.7% before tax row
- Caffee Nero - 12.1% now - 12.3% before tax row
Costa Coffee’s sales were reported to have risen by 7.1% in the three months immediately following the revelations and campaigning around Starbucks’ tax position.
Andy Harrison, chief executive of Costa’s owner Whitbread, told the Financial Times, “It is difficult to define the impact of [the Starbucks tax issues] into the figures, but we remain the UK taxman’s favourite coffee shop … Starbucks has taken a bit of a knock.”
All this makes UK coffee shops a particularly interesting place for discussions about tax. It has also been incredibly helpful in explaining the benefits of the Fair Tax Mark. Thanks guys.
Ethical Consumer’s ranking on tax avoidance
We make a simple check of companies’ subsidiaries to see if they operate in tax havens. If they do then they receive a ranking, and a mark in the Anti-Social Finance column on our table.
Caffè Ritazza, Pret A Manger, Harris & Hoole and Puccino’s are all owned, or partially owned, by companies which lose marks in our Anti-Social Finance ranking.
Costa Coffee has benefited from the Starbucks boycott. As newspapers have noted, in a single year its parent company Whitbread pays twice the amount of UK tax that Starbucks managed in the fourteen years before its ‘voluntary donation’. It receives our best rating for likely use of tax avoidance strategies.
Coffee Republic, Coffee#1, Esquires, Love Coffee, Muffin Break, Soho Coffee Company and AMT Coffee also all score best under our tax ranking system. AMT even boasts about its tax affairs on its counter, with a sign saying “100% taxes paid”.
Costa takes over the world
Starbucks is big in the US, but Costa is the unequivocal king of the coffee shop brands in the UK, with 1840 coffee shops. Starbucks and Caffè Nero tail some way behind it, with 731 and 548 respectively, and all the other chains are a mere trickle by comparison.
Costa is not only dominating the high street, it is rapidly expanding its reach into public sector organisations. Local papers around the country have been exclaiming in outrage as hospital tea shops run by volunteers from The Women’s Royal Voluntary Service have been shut down and replaced with Costa Coffee bars. It has opened outlets in a number of schools, mostly aimed at sixth formers.
It even produces teachers’ resources called Costa for schools which suggest that children make pretend documentaries describing how coffee drinking is “a good excuse to have a chat and a break” and talking about how much the Rainforest Alliance (the supply chain certification scheme Costa use – more on that below) has helped coffee farmers.
Costa’s endless expansion has sparked some resistance. There was a successful ‘No To Costa’ campaign in Totnes in 2012. There were also battles against Costa opening Branches in Bakewell and Launceston, although they both failed.
Starbucks does not have much of a reputation for ethical behaviour. Besides its notorious tax affairs, it has been embroiled in a long stream of scandals over how it treats its workers. It has a long history of union busting in the US,18 and in 2012 it received court sanctions four times for violation of trade union rights in Chile.19 In 2013 it circulated new contractual terms to its UK workers, removing their paid 30-minute lunch break and paid sick leave for the first day of sickness.
It had also decided to cease giving new mothers hampers, and even to cease giving its staff birthday cards, and congratulations cards after their first four years of service.
If times were so hard that Starbucks wasn’t even able to afford birthday cards for its staff, you have to wonder why, in the same year, it had the money to boost its CEO’s pay by 80%. In 2014 its CEO was paid over $20 million. Troy Alstead, the man who gave the cringe-worthy interview before the Public Accounts Committee, was paid $6 million.
Starbucks doesn’t do very well on environmental or animal welfare measures either. It was one of 30 companies whose policies on palm oil were evaluated by the Union of Concerned Scientists in 2015, and it was judged to have little commitment in the area. A major 2015 report on animal welfare, ‘The Business Benchmark on Farm Animal Welfare’, ranked Starbucks in its second lowest category and had not moved from the previous year.
Starbucks has now been the subject of a UK boycott for several years over its flagrant tax avoidance. In America, singer Neil Young has called on his fans to boycott Starbucks because it is a member of a large food industry group called the Grocery Manufacturers Association (GMA) who are suing the US state of Vermont over its GMO labelling law. However, contrary to some reports, Starbucks is not itself involved with the litigation.
But even if is not directly involved in the Vermont case, Starbucks certainly does have all sorts of political entanglements. It is one of an elite group of corporations which has a representative on the advisory committee guiding the US negotiations on the Transatlantic Trade and Investment Partnership (TTIP), although because the negotiations are so secret, it is difficult to know what it is doing in there.
The company also gives large sums of money to US political candidates: most to Democratic candidates, but also some to Republicans. Betting on both teams rather suggests it is not being wholly driven by ideological commitments.
For more on Starbucks see our company profile page.
Costa is owned by Whitbread, whose main business is hotels and restaurants: it owns Premier Inn, Beefeater Grill and Brewers Fayre, and as a result also makes an appearance in the Restaurant product guide in this issue. Costa has been making up an increasingly large portion of Whitbread’s business, and now accounts for 38%.
Whitbread’s supply chain and environmental policies are better than some of the other chains, but they aren’t much to get excited about either. The company has a Corporate Social Responsibility report in which it discusses sourcing policies for palm oil, timber, cotton, sugar and meat, as well as the need to use more renewable energy.
That sounds promising, but the policies are pretty weak – especially the palm oil policy which is more or less just expressing a desire to improve in the future. Its supply chain policy does contain clauses on living wages and working hours limits, rather than just the usual basic level prohibitions on forced labour, child labour and discrimination, but overall they received our middle mark for environmental reporting, and worst for supply chain management.
The Business Benchmark on Farm Animal Welfare report rated Whitbread in its worst category, meaning that they felt that animal welfare did not appear to be on its business agenda at all.28
The company has four directors who are paid more than £1 million each.
Caffè Nero is now well known as a tax avoider. It is owned by a company called Saratoga Ltd, which is registered in the Isle of Man.
The company doesn’t have a lot to say about ethics. It provides a vague statement on its website to the effect that most of its coffee beans are bought through identifiable and traceable sources, apart from some of them which aren’t. It has a short environment section that is mostly about recycling. It thus received worst marks in both our environmental reporting and our supply chain management categories.
Harris & Hoole has been the focus of much media attention as it poses as a cutesy independent coffee shop, when in fact it is part owned by Tesco. Exactly how much Tesco owns seems to be a closely guarded secret, but our best estimate is 48%.
Harris & Hoole provides no information on any ethical, environmental or supply chain policies. The only public mention of them is a statement on its website saying that its coffee is directly traded by Union Hand Roasted. The company does not appear to have a palm oil policy, although it sells a number of products likely to contain palm oil, including cakes, biscuits and sandwiches.
Caffè Ritazza mainly has bars in train stations and airports. They are owned by a company called SSP, who own the bulk of the brands that you find in train stations. They own Upper Crust, Millie’s Cookies, Camden Food Co, Whistlestop, Pumpkin, The Pasty Shop, Delice De France, Beer House, Breadbox, Food Village, Mi Casa Burrito, Nam-Po and Yam Yam.
It is hard not to feel that there is something a bit funny about it; after all, we are being given the illusion of many different companies competing with each other for our custom, when in fact there is a single company presenting us with many faces. Indeed, many of the other outlets in train stations – the ones that are not actually owned by SSP – are operated by them as franchises.
SSP is in turn half owned by a private equity firm called EQT IV. EQT IV is headquartered in Guernsey, which is a tax haven, and also has a number of subsidiaries which look likely to be used for tax avoidance purposes located in Jersey, Luxembourg and Switzerland.
SSP’s Executive Director was paid over £4 million in 2014.
Our best buy Soho Coffee Company is a small privately owned coffee chain, and the only one we looked at whose coffee, tea and hot chocolate is all Fairtrade. Its tea and coffee is also organic, as is its milk and flour.
In 2012 Soho received an award from Compassion in World Farming for its commitment to using free range eggs in its products.34 It does sell factory farmed meat, but also has vegetarian options, and a few vegan ones.
We couldn’t obtain much detail about any of Soho’s other environmental and supply chain policies, but as it was small and compared to its competitors provided a social and environmental alternative in this market, we gave it a best rating for its supply chain and environmental policies.
As a small, UK based chain, Soho has no subsidiaries in tax havens or oppressive regimes.
Fairtrade and its discontents
Fairtrade has faced a lot of criticisms recently, one of the most major being its failure to ensure that workers get paid decent wages. We covered this in our product guide to tea in the context of big estates, which is where tea is largely grown.
Unlike tea, most coffee is produced by smallholders, and so it would be easy to assume that the wage issue isn’t relevant here. But most smallholders also employ some workers, and these workers tend to be the worst paid of all.13 This is partly because their employers are poor themselves, and partly because it is very hard for anyone to police what happens on thousands of tiny farms.
Problematically, Fairtrade standards do not regulate wages if a smallholder employs less than a “significant number” of workers,14 which is generally interpreted to mean twenty.15 If they employ fewer than twenty workers, they aren’t even required to pay them the legal minimum wage.16 The Fairtrade Foundation are currently researching around this issue, and it has to be hoped that they will find ways to properly address it, together with the wider issue of wages in general. In the meantime, it has to be accepted that many employees on Fairtrade smallholder farms may not be earning much.
Rainforest Alliance’s ethical criteria do specify that all workers must be paid the legal minimum wage, whoever employs them, so they could be seen as doing a bit better on this issue. However, for a product to be certified by the Rainforest Alliance, only 30% of it has to have been produced in line with these criteria. So the bulk of the workers producing a Rainforest Alliance certified product may have no protection either.
Despite this issue with employees’ wages, it is important to remember that what Fairtrade does do is provide a floor price and a price premium for producers in poor countries, providing some security and protecting them from the worst brutalities of market fluctuations. And that is a big deal. The price crashes that have taken place in the coffee market over the last 30 years have devastated coffee farming communities all over the globe – employers and employees both.
The Fairtrade price and the ‘New York’ (non-Fairtrade) price of coffee can be seen on the graph above. It is when the New York price takes a nosedive that the Fairtrade safety net can be seen to really matter.
There are a few newer models on the block that are worth a mention, as they have been publicising themselves as preferable to Fairtrade. One of these is the ‘direct trade’ model used by Union Hand Roasted, who supply Harris & Hoole. Direct trade isn’t really a certification scheme; there are no ethical criteria that get verified by third parties. The concept is simply based on dealing with independent farmers directly, and paying top prices for top quality products. They boast that they pay more than Fairtrade.
There may be some advantages to this model. Certainly, dealing directly with farmers cuts out unscrupulous middle men. However, direct traders’ claims about pricing can be a bit misleading. Growing connoisseur quality coffee incurs extra costs for producers. They may be paid more for it, but it isn’t clear how much better off they end up. Thus direct trade cannot be viewed as giving the same kind of price support as Fairtrade’s price premiums provide.
Another alternative model is the ‘value added’ model, which addresses a frequent criticism of Fairtrade: that it does not focus sufficiently on producer countries taking responsibility for processing. Finished products command much higher prices than raw agricultural produce, and being able to get that ‘value added’ may be one of the most critical factors in enabling producers to escape from poverty.
‘Proudly Made in Africa’ is a new label which is focused on this issue, and certifies products as having been produced entirely in the countries where the original crops were grown. It has certified coffee brands like Solino and Out of Africa.
However, such coffee is unfortunately not yet widely available in the UK, and none of the coffee chains we looked at use it. This is a model to watch for in the future. However, there may be problems to deal with in this area if your unique selling point is the great taste of your coffee. Roasted coffee is a perishable product – it goes stale. Although there may be ways around it, it is often claimed that for really optimum taste you generally need to roast the coffee close to where it is going to be consumed.
The story of coffee and the birth of Fairtrade
Coffee is often said to be the second most globally traded commodity. This is actually wrong, but it is a garbled version of the correct statistic, which is that coffee is the second most traded commodity produced by developing countries. And many developing countries depend heavily on it. Burundi gets three fifths of its export earnings from coffee; Honduras gets a quarter, Nicaragua a fifth.36
Growing coffee is a risky business, particularly if you’re poor. Coffee beans grow on trees, and trees are not hasty plants. Coffee trees take about five years after planting before they start yielding up many beans, and then they go on steadily pumping them out for another 40 years. Yet most of the work is required right at the beginning, getting the trees established, after which it’s not a lot of effort to keep on harvesting them.
This means that a farmer who sees a potential income in coffee may invest in some trees, only to find that lots of others had the exact same thought, the market is being swamped, the price has collapsed and they cannot make their money back.
This and other features of the coffee market have traditionally led to coffee prices being wildly volatile.
The International Coffee Agreement
Coffee price volatility caused coffee producers to beg for some kind of regulation, and in the period after the second world war, the plea fell on receptive ears. The USA saw helping to regulate the coffee market as necessary in their fight against communism in South America. Cuba was a coffee producer, and Castro’s revolution had drawn support from the countryside.
President Kennedy said in 1962: “We are attempting to get an agreement on coffee because if we don’t get an agreement on coffee we’re going to find an increasingly dangerous situation in the coffee producing countries, and one which would threaten...the security of the entire hemisphere.” New York senator Jacob Javits described the resulting International Coffee Agreement as making a “great contribution” to “the anti-Communist struggle”.
The Agreement worked on quotas, regulating the amount of coffee that each country could sell. That kept prices stable and high – about twice as high as they would have been otherwise.
The price crash and the birth of Fairtrade
In 1989 when the USA no longer had any political interest in the International Coffee Agreement, it withdrew its support and the Agreement collapsed. In the following years, the price of coffee dropped precipitously, and the proportion of the total income from the coffee value chain retained by producing countries fell from 20% to 13%.
One of the countries thrown into economic chaos was Rwanda, a country dependent on coffee production. Although it is hard to be sure, some analysts have suggested that this might have been one among many factors that led to Rwanda’s decent into a genocidal bloodbath shortly afterwards.
The Fairtrade concept grew out of the distress caused by low coffee prices in this period. Coffee was the first Fairtrade product, arriving in UK shops in 1994. The primary idea was to ensure that coffee producers received a reasonable and stable price for their coffee. This is why a minimum floor price has always been an essential part of the Fairtrade concept.
Meanwhile the standard coffee market price rose again, but then in 2001 it fell almost overnight to a record low level, in an episode known as the coffee crisis. The International Monetary Fund had encouraged Vietnam to go into coffee farming, on the back of its belief that a poor country aiming to develop should focus on exporting primary commodities such as agricultural goods. And Vietnam had flooded the world market with a vast amount of excess coffee.
Millions of coffee farmers throughout the world were plunged into poverty. In desperation, Oxfam called for the burning of fifteen million bags of coffee in the hope of raising the price. Farmers were already burning it for fuel as the price was so low it wasn’t worth selling it.
Coffee prices have since recovered. But while they have never fallen back to 2001 levels, the price volatility has never stopped, and nowadays climate change is adding more unpredictable weather into the story. Because Brazil dominates the world’s production, the coffee price is largely determined by the Brazilian weather. Since 2014 the price has been high, as Brazil has had a drought which killed off a lot of its crop. A few years ago the weather in Brazil was fine, and coffee price was low.42 There is no sign that coffee prices are going to get more stable in the future.
1 Big Hospitality, Bright future for coffee shops, www.bighospitality.co.uk, 08 Dec 2014
2 The Growth of the UK coffee market, 1999-2010 and beyond, printed in Glynn Davis, January 21, 2011, Coffee shop market still wide awake and hyper-active, BBC 6 May 2014
3 Starbucks, Amazon and Google accused of being ‘immoral’, The Telegraph 12 Nov 2012
4 Caffè Nero accused over tax affairs in viral letter, BBC 6 May 2014
5 Whitbread’s 2014 Annual Return
6 www.Hoovers.com, accessed Feb 2015
7 Mintel Group Ltd, Dec 2014, Coffee Shops
8 E.g. St Albans Hospital replaces volunteer tea bar with Costa Coffee chain, The Herts Advertiser 27 Jan 2011; Sorrow over volunteers’ shop loss at GWH, Swindon Advertiser 14 Jan 2013, accessed 10/3/2015
9 The Guardian 28 Oct 2012, How Totnes won fight to keep Costa out of town
10 Bakewell’s anti-Costa campaign is dropped, Derbyshire Times, 13 Mar 2015; New Costa coffee shop to go ahead at Launceston despite objections Cornish Guardian, 20 Aug 2014
11 Costa breaks through £1bn sales mark as tax anger leaves Starbucks suffering Simon Bowers Guardian Tuesday 30 April 2013
12 Costa Coffee attracts nearly 4m customers a week. Guardian Dec 11th 2012
13 Cramer et al, 2014, Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda
14 Fairtrade International, 2005, Fairtrade Standard for Small Producer Organizations, Current version: 01.05.2011_v1.2
15 Domestic Fairtrade Association, 2014, The Bottom line: Simple Comparative Analysis
16 Fairtrade International, 2005, op cit
17 African Centre for Economic Transformation, 2014, The Coffee Value-Addition Opportunity in Africa
18 Judge Finds Starbucks Guilty of Extensive Union-Busting, Starbucks Workers Union 12/23/2008
19 Union Strike in Chile, IWW, Nov 2013
20 Starbucks to slash paid lunch breaks and sick leave, The Guardian, 3 Dec 2012
21 Starbucks boosts Schultz’s pay 80%, The Seattle Times, Jan 2013
22 Union of Concerned Scientists, 2015, Palm Oil Scorecard: Ranking America’s Biggest Brands on Their Commitment to Deforestation-Free Palm Oil
23 Nicky Amos and Dr Rory Sullivan, 2015, The Business Benchmark on Farm Animal Welfare 2015 Report
24 Neil Young calls on fans to boycott Starbucks, The Guardian 17 Nov 2014
25 Snopes, 17 Nov 2014, Coffee Collusion
26 The Insider List, Sojourners, 06-29-2012
27 Open Secrets, www.opensecrets.org/, accessed 20/3/2015
28 Nicky Amos and Dr Rory Sullivan, op cit
29 Whitbread Group’s 2014 Annual Report
30 Caffè Nero’s 2014 Annual Accounts
31 Harris and Hoole’s 2014 Annual Accounts; Tesco’s 2014 Financial Statement
32 The Telegraph, 12 Jan 2013
33 SSP Group Ltd Annual Report and Accounts 2014
34 The good eggs at SOHO, 27th September 2012, Soho Coffee Company website
35 Talbot, 2004, Grounds for Agreement: The Political Economy of the Coffee Commodity Chain
36 Domestic Fairtrade Association, The Bottom line: Simple Comparative Analysis
37 Richard Bilder, 1963, The International Coffee Agreement, A Case History in Negotiation
38 Igami, 2012, Oligopoly in International Commodity Markets: the Case of Coffee Beans
39 Talbot, 1997, ‘Where Does Your Coffee Dollar Go? Studies in Comparative International Development 32(1): 56–91
40 Kamola, 2007, The Global Coffee Economy and the Production of Genocide in Rwanda, Third World Quarterly, Vol. 28, No. 3, pp 571 – 592
41 The history and importance of coffee, Fairtrade Foundation
42 The Real Price of Coffee, Bonaverde, Sep 23 2014