Tags: food | coffee | starbucks | kraft

Kraft, Starbucks Tangle Over Distribution Deal

Sunday, 16 Jan 2011 03:35 PM

Kraft Foods Inc., the world’s second-largest food company, said it faces “irreparable harm” if Starbucks Corp. is allowed to terminate an agreement that allows it to distribute Starbucks products to grocery stores.

With the agreement, Kraft built a business worth $500 million a year, it said in a filing yesterday in federal court in White Plains, New York. Kraft asked the court to reject Starbucks’ arguments that it won’t suffer irreparable harm if the agreement is ended by March 1, as Starbucks seeks to do. Starbucks responded the same day that Kraft breached the contract, causing a loss of $100 million in potential sales.

“Rather than deny Kraft’s motion based on myths about the nature of irreparable harm, the court should contrast the consequences of denying Kraft’s motion with the consequences of granting it,” Northfield, Illinois-based Kraft said. “That contrast reveals that the court faces a straightforward choice between allowing irremediable harm and preventing it.”

Kraft sued in December for an order to prevent Starbucks from ending the agreement before the companies resolved their dispute. Seattle-based Starbucks, the world’s largest coffee- shop operator, plans to buy companies to build up its grocery business, Chief Executive Officer Howard Schultz said Dec. 1.

Starbucks representatives didn’t return a call seeking comment after regular business hours yesterday. Michael Mitchell, a spokesman for Kraft, didn’t immediately return an e-mail message today seeking comment.

Commercial Dispute

Starbucks said Dec. 23 that there would be no irreparable harm to Kraft “given that this is fundamentally a commercial dispute that can be resolved through the arbitration procedures the parties agreed to in their contract.”

In a court filing of its own late yesterday, Starbucks reaffirmed its opposition to the injunction and denied it had given up its right to end the contract, which the company claims Kraft breached under several provisions.

“The distribution relationship between Starbucks and Kraft is ending because Kraft’s performance as a distributor of Starbucks products has been unacceptably poor -- falling below the standard of commercially reasonable efforts that the parties’ agreement requires,” wrote Joseph Hall, a lawyer for Starbucks with Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLCC in Washington. “Kraft has refused, despite Starbucks’ repeated and urgent efforts, to honor its obligation to include Starbucks as a full partner in the sales and marketing effort for Starbucks products in the consumer packaged goods channel.”

Falling Sales Growth

While noting that sales rose for two years following its initial 1998 agreement with Kraft, Starbucks said in its court filing that the growth rate began to fall shortly thereafter. Moves by Kraft to raise prices and cut promotional spending in what Starbucks characterized as an increasingly competitive premium coffee market contributed to the decline, according to the filing.

Starbucks claimed its share of premium coffee sales in the consumer packaged goods, or CPG, channel fell from almost one- third in 2005 to slightly more than one-quarter by 2009. In its complaint, Starbucks alleged that, had CPG sales been maintained at its peak, revenue would currently be $100 million higher.

“Kraft has allowed itself to be beaten by Starbucks’ competitors,” Hall wrote in the filing. “As the premium coffee segment has grown and customers have increasingly moved away from mass market brands to super-premium coffee, Starbucks has actually lost market share.”

The case is Kraft Foods Global Inc. v. Starbucks Corp., 10- cv-09085, U.S. District Court, Southern District of New York (White Plains).

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Kraft Foods Inc., the world s second-largest food company, said it faces irreparable harm if Starbucks Corp. is allowed to terminate an agreement that allows it to distribute Starbucks products to grocery stores. With the agreement, Kraft built a business worth $500...
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