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.

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.

Table Highlights

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.

Tax dodging

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.

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 poll 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. 

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.[1]

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.

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. 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, which is generally interpreted to mean twenty. If they employ fewer than twenty workers, they aren’t even required to pay them the legal minimum wage. 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.

Direct trade

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.

Producer processing

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.

References 

1. Mintel Group Ltd, Dec 2014, Coffee Shops