Monday, November 5, 2012

The Starbucks Story

Starbucks made a decision about six years finally establish itself in Germany.  They knew that it was a tough situation, and that it might take a decade to really say it was fully established.  At the start of 2012....they had roughly 150 Starbucks in operation.  It was fewer than planned, but it's been a tough market.

This got out that they cleared 117 million Euro in 2011, and their final tax bill for the German government....was zero.  Reason?  Losses of significance: roughly 5.3 million Euro.

It's a fair amount of loss.  Most business operations would ask tough questions....look for a new profit strategy....dump a manager or two to emphasis change....and look for new places to expand out into.

The German response to the profit and tax situation?  Well....this gets to be interesting.  They can't understand how the tax bill can be zero.  Starbucks is totally prepared for some tax audit guys to walk in.  The general feeling is that high rental cost and high personnel cost (healthcare, pay, retirement, etc)....make Germany a very tough market to operate Starbucks.

So I'll offer some observations here.  Starbucks isn't the cheap place where you go for plain coffee.  Starbucks sells high-quality coffee....typically in a location that high volumes of people will be walking through or hanging out.  German real estate people aren't stupid....they know the volume locations and charge a fair amount of money.  Starbucks pays it....which typically, few other German coffee shops would be that stupid.

Do Germans pay upscale prices for coffee?  Well....that's another story.  You have observe Germans for reach a conclusion that they demand absolutely great coffee.  They don't want the cheap stuff.  They will go an extra block to find a bakery that sells not only the right pastry or rolls, but the right coffee, and pull out an extra bit of cash for that four-star coffee.  Starbucks fits easily into this market.

The Germans might be terribly upset about a company making limited profit and not paying any taxes.....but here's the thing.  The German government made the stupid tax rules.  Starbucks hasn't hired some dimwit to do all the corporate taxes in Germany.  They likely went by the rules established, and the audit guys will sit there for weeks....finding few if any mistakes.  At the end....the audit will close with no change, and the political folks will just shake their heads.

What ought to infuriate Germans in general....a company has made a serious attempt to establish itself....spent millions....and over six years....barely shows any profit at all.  A normal German company would give up because you can't beat the system.  If you were making a hundred Euro a day, and then declaring five Euro in losses each'd want to focus on some other model or question how you could make it long-term.

Starbucks simply stays focused.  We'll pay your high health insurance rates.  We will pay higher than average wages.  We will pay higher than average rental costs.  Eventually, we will have a significant number of Germans addicted to Starbucks and determined to stop by each day.  It may take another decade to establish Starbucks-addiction is part of German society, but it will come one day.

For the German tax guys....they have to be hoping other companies don't pick up this attitude....because you can't afford to have a bunch of companies in Germany paying no national taxes.  It'd destroy the current system.  Meanwhile, if you are are in the middle of Wiesbaden....near Kirchgasse might want to stop in and have some pretty decent coffee.  Thank the guy for running a unprofitable enterprise, and have a long sip of pretty decent coffee.

No comments: