Starbucks the Benevolent?
What would compel a massive company to start helping its employees pay rent and attend college?
Last month, Starbucks started giving full-time employees in China monthly housing allowances. The benefit, which will cover about half of the average worker’s housing costs, according to the company, is just Starbucks’s latest welfare-policy roll-out. This year, the company will start giving U.K. employees interest-free loans to help pay the exorbitant up-front apartment-rental fees common in many cities there. Meanwhile, in the United States, Starbucks has started paying for employees to attend college, a program that began in 2014. About 5,000 have enrolled so far, and some 200 will have graduated by this summer.
Increasingly it seems as if Starbucks is operating a sort of retail commonwealth (global population: 300,000). Working there typically means making low wages and having to smile when customers order no-whip, extra-foam lattes with one and a half packets of Splenda. But in a growing number of places, Starbucks will do a little something special to make up for that.
What the company provides depends on workers’ location. In many of its regions, using surveys, focus groups, and other forms of employee feedback, Starbucks diagnoses the biggest pain points for its young workers. Then the company designs a micro-solution of some kind, ameliorating the problem for some but not all employees. In America, workers’ most pressing needs have been health coverage (which Starbucks started offering in 1988 to full- and part-time employees) and, more recently, college tuition. In Britain and China, the greatest day-to-day pressures come from housing costs in cities.
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But why exactly has the company been doing this? Since when do executives at publicly traded companies worry about low-skilled workers’ holistic well-being? In speeches worldwide, Starbucks CEO Howard Schultz has been using the word “humanity” almost as often as “coffee,” and he insists it is in the company’s business interests to do right by its workers. When he announced the college initiative in America, Schultz explained that he was trying to build a “company with a conscience.” In China, as he told more than 1,300 employees and their family members in January, “We will do everything we can to continue to build a great and enduring company that you and your parents can be proud of.”
Some, though, accuse Starbucks of scoring cheap PR points with token gestures. If Schultz really wants to do the right thing, why not just double baristas’ wages? “I’d honestly rather have them cancel the college program, and I’d give up my stock options, for a few more dollars per hour,” wrote a self-identified Starbucks employee in a comment on Reddit last year. “At the end of the day, that’s what really ends up mattering the most.”
So far, both narratives appear to ring true. Starbucks is indeed doing well by doing good; it’s not a hoax. The business case for these perks is compelling. But the cynics are also right; these good deeds, unusual as they are, remain fairly modest. They will make Starbucks the company stronger and healthier, but they will not transform the economic opportunities of most baristas worldwide.
China, for example, now has one of the world’s highest levels of income inequality, according to a recent report from Peking University—higher even than the U.S. The average Starbucks employee in China is a single 25-year-old who has recently moved to one of the 70 cities in which the company operates. Unlike their American counterparts, most Chinese Starbucks workers already have a college degree. They don’t need tuition money; they need an apartment.
Starbucks employees in China spend 20 to 50 percent of their paycheck on rental costs, according to the company’s internal estimates. Almost three-quarters are migrant workers who have come to the cities for jobs and are struggling to start lives away from their families. Many are marginalized, legally and socially, living a life apart from the more affluent, permanent residents to whom they serve coffee.
Under Chinese law, companies like Starbucks must contribute to a benefits system, known as the housing provident fund, that should, in theory, help employees afford apartments. But many cities do not allow withdrawals to be put toward rental costs. The money is meant to be used for purchasing a place, something the average barista in Shanghai has no hope of affording.
In the past, large companies, including Foxconn, which manufactures iPhones for Apple, have lured migrant workers by paying for employee dormitories. In the case of Starbucks, the company cannot house workers centrally because its stores are spread out all over China. Besides, the overcrowded, degrading conditions of some dormitories have led to worker protests and even riots, making them increasingly unattractive to image-conscious employers.
So, considering the alternatives, the housing allowance is a relatively simple way for the company to help its workers. “We want to help our young partners to better take care of themselves, settle in more easily, while they pursue their personal and professional dreams within Starbucks,” Belinda Wong, the president of Starbucks China, wrote in a letter to employees announcing the benefit earlier this month.
In Britain, meanwhile, property is more expensive than almost anywhere else in the world, outside of Monaco. Like their Chinese counterparts, the average Starbucks worker cannot possibly afford to buy an apartment. But in the U.K., even renting a room is a stretch, because urban renters must often pay an agent hundreds of pounds—on top of outrageous deposits demanded by landlords. That means people may need to pony up about £2,000 ($2,882) up front, according to Generation Rent, a U.K. organization that is helping to implement the program. “The rental sector is completely unregulated,” explains Betsy Dillner, the group’s director. “The government, especially in London, is not doing enough to keep housing prices under control.”
So this year, Starbucks will offer U.K. employees interest-free loans for up to a month’s pay, giving employees a year to pay off the debt. “With over half of our partners being under 25 years old,” Kris Engskov, the president of Starbucks Europe, Middle East, and Africa, said last year, “rent affordability especially is an issue that affects them.”
These policies elegantly serve the interests of Starbucks the company. First, they encourage young people to work there—and to stay for a while. As the service sector continues to grow in China, Starbucks has to find ways to attract talent away from competitors. More importantly, Starbucks wants to keep the talent it has.
In 2014, Starbucks CEO Schultz told The Wall Street Journal that the company was turning over nearly 100 percent of its baristas each year. (By contrast, his competitors had a 350 percent turnover, Schultz said.) Each newly hired Starbucks barista receives 24 hours of training and then requires weeks of on-the-job practice to get to a high level of productivity. (Starbucks is now making some of its greatest profits at its drive-through locations, which depend on highly efficient workers to churn out a freshly made, customized drink every 45 seconds—roughly the amount of time that can pass before drivers waiting in line to become enraged.) This means that Starbucks is spending hundreds of millions of dollars a year on replacing its employees. If the company could reduce its turnover by even a few percentage points, the savings would run into the millions and could easily offset the costs of helping students pay for college courses or housing. Indeed, since the college program began, Starbucks’s retention rate has improved and is now well under 100 percent, according to a company spokesperson (though it is hard to say for sure if the change is due to the college benefit).
Secondly, the benefits make Starbucks’s customers feel good. This is central to Starbucks’s business model, as Schultz readily admitted when I interviewed him last year for an Atlantic story on the company’s college program. “There’s real evidence that consumers have so many choices, and they are making hard choices based not only on convenience and price but on values.” Not long afterwards, he made the point more bluntly to Fast Company: “This is not altruistic; this is business. Values are a big part of both the balance sheet and the income statements of Starbucks.”
But why not just pay people more money? That way, workers could pay for college or apartments themselves, without interference from the invisible hand of Schultz, and customers could feel just as righteous about their coffee habits. And indeed, Starbucks has recently raised wages in the U.S. and the U.K., like other service-sector companies from McDonald’s to Walmart. In China, the housing allowances will be the equivalent of a pay raise, showing up as more money in eligible workers’ paychecks (exact amounts will vary depending on location). But why not just raise wages even more—for all workers—in lieu of perks for some workers?
One reason is that it would be much more expensive for Starbucks. As lovely as the benefits sound, most Starbucks employees will not actually enjoy them. In China, the housing allowance is only for full-time employees at company-owned stores (or just 9,300 workers out of a total of 30,000 employees in China). And even full-time workers have to be at the company for six months before qualifying for the benefit. That means that only about a quarter of Starbucks’s workers in China will receive the allowance for the foreseeable future.
In the U.S., the college benefit is open to anyone who works at least 20 hours a week in a company-owned store. (Military veterans who work at Starbucks can now enroll a spouse or a child as well.) And so far, according to the company, nearly 90 percent of enrolled workers are re-upping for the next semester—an impressive retention rate for an online university. But less than 5 percent of the U.S. workforce has taken advantage of this benefit so far. Some baristas told me that they didn’t have time for college, given their work and family obligations, while others were already attending other schools and did not want to switch to Arizona State University online, Starbucks’s partner in the program.
But for the workers who do use these benefits, the effect is more long-lasting than a wage increase might be—at least for the company. The schemes nudge employees to commit to a longer time horizon than they might otherwise consider. Baristas won’t reap the full value of a college degree or a housing loan unless they stick around for a while. (Workers don’t have to stay at Starbucks once they earn a degree, but in order to be reimbursed for tuition they do have to stay while they’re taking classes.) In the U.K., Starbucks’s 4,500 employees will only qualify for the housing loan after they’ve been with the company for a year.
The uncomfortable truth is that Starbucks currently depends upon the haves and the have-nots. The haves are their customers, and the have-nots are their workers. Like many companies and quite a few countries, Starbucks needs both groups to be satisfied—or at least apathetic—in order to thrive. To its credit, the company has repeatedly listened to its workers and tried to help, even when doing so was very expensive (as in the case of health coverage for its U.S. workers).
In the end, of course, none of Starbucks’s policies will alter the larger structural problems afflicting low-skilled workers around the world. “Ultimately the government needs to act by building more homes and giving renters more protection,” says Dan Wilson Craw at Generation Rent in the U.K. In each case, Starbucks is applying a Band-Aid to a gaping wound created by the failures of governance and capitalism. And while it’s a more useful and better-targeted Band-Aid than what most other companies have so far bothered to contribute, it is still a Band-Aid.
In fact, the company’s benefit plans are beginning to reveal the weaknesses of the most powerful governments around the world, like a heat map of inequality—from Beijing to Boston. “Starbucks is responding to something that the [Chinese] government has been unable to solve,” says Mary Gallagher, the director of the Lieberthal-Rogel Center for Chinese Studies at the University of Michigan. “But I don’t think Starbucks is going to solve it either. Something larger is going to have to happen.”
Capitalist benevolence like this has been seen before, and it’s worth remembering. In the early 1900s, railroad and mining companies built entire towns, complete with churches and schools, for their workers in the U.S.—a phase sometimes described as “corporate paternalism.” But then the Great Depression came, and some companies started doubling the cost of food in the company grocery stores or shutting down the towns altogether. It was up to the federal government to eventually create structural changes to smooth out the inevitable spikes and potholes of capitalism (hence the New Deal). Until governments can manage to do that—in China, the U.S., and the U.K.—workers will have to collect their Band-Aids where they can and hope the bandages last longer than the average business cycle.