Starbucks ordered to pay Kraft Foods $2.7 billion

by Keith Nunes
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DEERFIELD, ILL. — Kraft Foods has prevailed in a coffee distribution dispute with Seattle-based Starbucks Coffee Co. On Nov. 12, an arbitrator ordered Starbucks to pay Kraft Foods $2.7 billion to settle a dispute related to Starbucks improperly ending a coffee distribution agreement with Kraft Foods in 2010.

The arbitration proceedings began before Kraft Foods Inc. was split into two companies — Kraft Foods Group and Mondelēz International. Under an agreement between Kraft Foods Group and Mondelēz, the proceeds of the arbitration award will go to Mondelēz.

“We’re pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation,” said Gerd Pleuhs, executive vice-president of legal affairs and general counsel of Mondelēz International. “We’re glad to put this issue behind us.  We can now fully focus on growing our global snacks business.”

Kraft Foods Inc. first began marketing Starbucks roast and ground coffee in 1998 and, according to Kraft Foods, built the business from $50 million in sales to $500 million in 2010. In November 2010, Starbucks announced its intention to unilaterally terminate the agreement that provided Kraft with the exclusive rights for the sales, marketing and distribution of Starbucks roast and ground coffee in grocery and other retail outlets. Later that month, Kraft initiated arbitration proceedings to challenge the improper termination of the companies’ contract.

“We believe Kraft did not deliver on its responsibilities to our brand under the agreement, the performance of the business suffered as a result, and that we had a right to terminate the agreement without payment to Kraft,” said Troy Alstead, chief financial officer and group president for Starbucks. “While we disagree Kraft is entitled to damages, the amount awarded reflects the value of our at-home coffee business and the continued global growth opportunity that lies ahead for Starbucks. We have adequate liquidity both in the form of cash on hand and available borrowing capacity to fund the payment, which will be booked as a charge to our fiscal 2013 operating expenses.

“I would add that taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders. The results over the past two and a half years clearly demonstrate that Starbucks at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft in 2011. We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly under the direct model.

“Ending our agreement with Kraft also gave us the flexibility to aggressively expand our growth in the premium single-serve segment with Starbucks Coffee K-Cup Packs and Verismo. With single-serve as the fastest growing category within at-home coffee, this represents a strategic opportunity for Starbucks that will continue to contribute meaningful growth for many years.”

Mondelēz International said it will add the proceeds from the award, after taxes, to a share repurchase program it is currently undertaking.
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