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Dispute with Kraft costs Starbucks $2.7 billion

By Bruce Horovitz

An arbitrator has decided that Starbucks owes $2.7 billion in damages for pulling out early from a distribution deal with Kraft Foods.

Starbucks owes Kraft Foods big-time.

An arbitrator on Tuesday concluded that Starbucks must pay $2.23 billion in damages plus $527 million in prejudgment interest and attorney’s fees, following the coffee giant’s early termination of a bagged coffee grocery deal between Starbucks and Kraft Foods. The award will go to Mondelez International, which spun off Kraft Foods in 2012.

The rift began in March 2011, when Starbucks prematurely scrapped a contract with Kraft that permitted Kraft to sell bagged Starbucks coffee in grocery stores.  That contract began in 1998.

Both sides finger-pointed.  Starbucks said that Kraft mismanaged the brand and had breached the contract.  But Kraft denied the Starbucks charges and demanded that Starbucks pay Kraft a fair value for the business.  For Kraft, the business brought in annual revenues of about $500 million.

“We strongly disagree with the arbitrator’s conclusion,” said Troy Alstead, Starbucks chief financial officer, in a statement. “We believe Kraft did not deliver on its responsibilities to our brand under the agreement.”

He said that Starbucks will host a conference call to discuss the outcome of the arbitration on Wednesday.

“Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders,” Alstead said in the statement. “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.”

Mondelez shares were up 2.3% to $33.19 in afternoon trading Wednesday. Starbucks was up 0.5% to $81.11.




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