Why local economies don’t need a Starbucks

Corporations with vertically integrated supply chains are elephants who trample local economies. This article is about creating more resilient local economies through sensible policy-making.

7 min readFeb 27, 2019

This is part of a series of articles I’m writing about the Public Sector in the UK. My interest is improving how the public and private sector interact, to create a better society. This article focuses on a frustration I have with large corporates avoiding tax, but also being welcomed into local regions. This kills the ability of local business to compete and retain value in local economies.

The Elephant in the Room

We are addicted to the services that an Apple, Google, Amazon, Starbucks, Tesco provide. I’m currently using Google Chrome to type this article on an Apple MacBook I bought from Amazon by a bookcase from IKEA, holding snacks from Tesco.

These huge, vertically integrated corporations dominate our lives. They benefit us in convenience, service quality and integration. But what do we sacrifice by consuming from them?

One prominent acute problem is moving their tax payments to “more efficient” locations. It seems to me, that this is especially damaging to regional economies, who are subservient to tax regulations of a larger body. How does a local authority, in the UK, stop a corporation paying its tax in the Isle of Man?

These corporations are the Elephants trampling regional economies. They are not behaving illegally, elephants are just elephants, but we do need to protect smaller animals from getting squashed.

How the Elephant Grows

Here’s an overly simplified model for how this works. A corporation:

“Invests” in the local economy to develop a branch, sometimes in partnership with local authorities to reduce risk
Creates jobs, generally at low wages, sometimes with subsidies to train and pay these employees, to further reduce risk
Provides a service to the local population, based on an established supply chain with well-modeled profit margins based on established metrics
If the margin is not met, the branch shuts down and withdraws with a minimal loss
If the margin is met, the branch team is incentivised to maximise the margin extracted from the region (bonuses are disproportionate to the value extracted)
The margin that creates profit is not recognised as such, but instead is spent on “services” from other parts of the corporation located in low-tax regions e.g. licensing the use of the brand from a corporation based in Ireland
As profit is removed from the region, no tax is paid, whilst in the low-tax region profits are high
Earnings after tax are circulated to shareholders, or held in the business

Crucially, this is all legal. But creates an imbalance in the value for the stakeholders. The region either ends up with a branch that extracts a margin without paying tax, or a branch that closes as it is inefficient. Lose, lose. The corporation may have had a subsidised opportunity to open a branch, with a low tax way to extract profit, or not. Win, small lose.

The Anatomy of an Elephant

To my mind, regional leaders need to be smarter in how they develop their economies, both through procurement policy and more general economic support policy. Whilst it is impossible for every region to own a whole, vertically integrated supply chain, it is possible to separate the concerns within the supply chain to optimise for something other than “low-tax profit”, as the corporations do.

Supply chains work well when at each stage, there is a “value add” step, that provides an opportunity for the stakeholders to capture profit.

You could think of these supply chains as Commodity > Processing > Service:

Commodity — is based on available resource, not important to own on a regional basis, as this is likely to be attached to a macroeconomic/geopolitical/geospatial constraint e.g. you can’t create oil in China, or 1 billion people in Saudi Arabia
Processing — is driven by intellectual property, or skills, where a commodity arrives and is leveraged to create a more consumable/valuable product, regions should be shaping their medium-term policy to develop these capabilities e.g. training computer scientists, investing in manufacturing research
Service — delivering the granular value, based on the needs of the consumer to pay for the rest of the supply chain; Regional economies have huge potential to shape this step

In a simple example of a coffee shop, you could say:

The farmer grows coffee > Roaster prepares it to be drunk > Shop provides the drink

An example in a digital service could be:

Infrastructure provides secure services > Platform provides the functions > App is managed to engage the users

Hunting the Elephant

Vertically integrated supply chains are efficient in their ability to extract maximum value from these steps, but when they are controlled by a single entity, they can be abused.

To disrupt this, regions should think about their interventions in several ways:

Fix the tax system — this is the clearest/hardest solution as it requires global co-operation and harmonizing regulation, let’s pretend it’s impossible for regions to affect short-term
Prioritise local services — that is, services with a HQ in your region, that isn’t part of a larger group, where the majority of their operation pays tax in your region, not for every contract, but where practical
Not one supplier —in procurement, regions should actively protect against monopolies, especially within long-term purchasing of things such as infrastructure, this is complex but can be achieved with smarter policy
Tax in Procurement rules — instead of just limiting procurement to the turnover of a business, also limit large turnover with proportionally low taxes, leveraging tax payments as a function of your procurement framework
Loosely coupled systems — procuring based on agreed, transposable standards (particularly in data, but almost any system) allows fairer marketplaces, this should be at the heart of procurement policy IMHO
Separation of concerns — building on loose couplings, procurement should look to efficiently split services across providers, or contracts, with clear standards, so change does not mean ripping up an entire system
Don’t subsidies jobs — subsidies are often based on bad metrics like “jobs”, without a measure of the value of a job i.e. is it minimum wage; If you have to subsidise, give it to the individual to enable skills and increase their value, not an employer to boost profit
Don’t subsidise FDI — Foreign Direct Investment (FDI) often canibalises local ecosystems growth, FDI has to be balanced against where the profit goes; If you have to subsidise, support R&D, where IP is anchored in your region
Enable regional supply chains —regional companies are not going to own a whole supply chain; Instead, you could partner with the Elephants to enable local delivery, just don’t let them own the whole system
Inter-region partnerships — encourage cross-border trade and specialisms on a more strategic basis, instead of competing to all specialise in one thing, find ways to enable each other’s value-add and tax revenue
Provide space for service clusters — larger suppliers can afford economies of scale, for example, big car-parks, providing infrastructure for regional suppliers and group buying opportunities is a cost paid back in tax revenue
Minimum pricing — vertically integrated supply chains can afford to ‘price gouge’ to kill off/dissuade competition, pricing guides can be used to level the playing field and create longer-term value for consumers (this is a longer-term strategy)
Communicate Indie Value— support the messaging of regional suppliers, to ensure that they are seen as a high-value option, having a ‘corporate badge’ often opens doors smaller suppliers struggle with

How This Could Look

Running this through the ‘utopian-filter’ you get…

Region creates a town centre hub with parking and space for a drive-through coffee shop
Local suppliers with existing brands are invited to tender for the location, with priority given to operations wholly owned and managed in the region
As part of the deal, the company agrees to trade to a set of standards that include living wage and investment in employees
The region acts as a broker for the winning tender to engage with larger organisations who can enable it to scale rapidly
The region partners with other regions to form a cluster and invest in a coffee roastery, that supplies more coffee shops and further breaks up the supply chain
Starbucks, Costa and other chains still operate in the region, but on a more level playing field

I’m not sure if all these ideas are practical. But, given the challenge faced by regional economies to encourage sustainable growth, I think they are at least interesting. I’d love to engage with anyone working in this space, also happy to receive feedback on the ideas. Feel free to comment!