Tags: starbucks | kraft | pay | 2.75 billion | dispute
Image: Starbucks-Kraft Dispute Ends, Coffee Giant to Pay $2.75 Billion

Starbucks-Kraft Dispute Ends, Coffee Giant to Pay $2.75 Billion

Wednesday, 13 Nov 2013 02:05 PM

By Ken Mandel

A nearly three-year contract dispute between Starbucks and Kraft ended Tuesday when an arbitrator rendered a $2.75 billion judgment against the coffee maker.

Starbucks had been fighting against Kraft over the grocery store distribution of its products, which led the Seattle-based coffee chain to pull out of a long-term agreement.

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Kraft began selling packaged Starbucks ground and whole beans in grocery stores in 2008, but Starbucks terminated the pact in 2011 and awarded the business to Acosta Inc. The deal was initially set to expire in March 2014, according to Reuters.

Starbucks accused Kraft of numerous breaches of contract, including mismanaging the brand.

Kraft fought back, and asked for adequate payment for the lost revenue, which was $500 million in 2010, according to a statement from Mondelez International Inc., which had spun off Kraft Foods as an independent company in October 2012, but will receive all proceeds from the dispute.

According to The New York Times, Kraft refused a $750 million offer in August 2010 to end the deal, which led to the legal battle.

"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," Gerd Pleuhs, general counsel for Mondelez said in the statement. "We're glad to put this issue behind us. We can now fully focus on growing our global snacks business."

Starbucks shares dipped in trading, while Mondelez rose. Mondelez said it plans to buy back its Class A shares with the proceeds, pending board approval.

While Starbucks was pleased with the conclusion, the company disagreed with the binding decision.

"We strongly disagree with the arbitrator's conclusion and that Kraft is entitled to $2.23 billion in damages plus $527 million in prejudgment interest and attorneys' fees," Starbucks said in a statement. "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."

Starbucks said that it will pay for the judgment with cash on hand and available borrowing capacity. The company will take a charge to its fiscal 2013 operating expenses.

The number of coffee products Starbucks sells through grocery outlets has increased over the past two years, due to sales of "K cups" and products like Starbucks Discoveries, drinks sold in the dairy section. Profit on those products grew 47 percent over that period, partly because the company had ended its agreement with Kraft, according to the New York Times.

"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," Starbucks said in a statement.

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