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Starbucks accuses Kraft of ‘misleading media spin’

December 27, 2010

The feud between Starbucks Coffee Company and Kraft doesn’t appear to be moving toward a peaceful resolution.

In early December, Kraft asked a federal judge to stop Starbucks from breaking its 12-year partnership. Kraft claims Starbucks unilaterally ended the agreement while Starbucks asserts Kraft failed to aggressively market its product.

Kraft said in a statement the company is seeking the injunction to stop Starbucks from proceeding as if the agreement has been terminated, when, in fact, the contract is still in force. Starbucks offered Kraft $750 million in August to terminate the partnership, but Kraft declined.

The drama escalated late last week, as the two companies discussed the timeline and procedure of Kraft’s preliminary injunction motion with the U.S. District Court for the Southern District of New York.

Starbucks claims the motion is based on misleading and unmerited arguments.

"We are further concerned that Kraft’s actions are causing confusion for the retail customers that sell Starbucks products, creating unnecessary burdens and obstacles as we work to ensure a seamless transition for our mutual customers,” Starbucks said in a statement which reiterates a decidedly similar comment made by the company in early December.

During last week’s hearing, the court asked both companies to address the core issue of “irreparable harm” and the overall basis for whether a preliminary injunction is necessary since this is a matter already subject to arbitration between the parties.

Starbucks reply is due to the court on Jan. 6 and will include a declaration about why the company believes an injunction is necessary.

“There is 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,” read the preliminary Starbucks statement.

It continues:

“…The parties will proceed with the arbitration called for under the agreement. The core issue in arbitration will be Kraft’s poor performance and the materiality of that performance to business results. Importantly, if Starbucks demonstrates that Kraft did not live up to its obligations under the agreement, Starbucks would not owe Kraft any remuneration -- the value of the dissolution of the agreement would be zero.

Through arbitration, Starbucks intends to demonstrate Kraft’s consistent, poor performance and material breaches over a period of several years. The nature of Kraft’s obligations are outlined in the contract; the contract’s language demonstrates clearly that Kraft’s repeated failures to meet its obligations constituted material breaches and, in that regard, caused clear damage to Starbucks business.

Kraft has previously and publicly acknowledged that Starbucks has the right to terminate this contract. Given this, Starbucks will vigorously oppose any action on Kraft's part that seeks to delay this inevitability through unnecessary legal processes. Even as we pursue this transition, Starbucks is continuing to supply Kraft with appropriate supplies of our packaged coffee products so that our customers business does not suffer due to Kraft’s failings and that Starbucks is properly positioned to take over full control of our brand and business as of March 1, 2011.

The arbitration process will allow Starbucks to demonstrate the flagrant contradictions between Kraft’s private exchanges and its public filings, which have been exposed in email correspondence as reported by news media. Specifically, Kraft’s own senior executives have acknowledged Kraft’s neglect of the relationship over a long period of time and, while stating that the damage could be repaired, made no clear attempt to do so. At the same time, Kraft has claimed that it has grown Starbucks business when, in fact, any recent gains have been due directly to Starbucks ongoing innovation in the packaged coffee space and overall coffee market price increases.

This was preceded by several years in which Starbucks lost market share in the packaged coffee business due to Kraft’s unwillingness or inability to honor the contract between our companies.

Starbucks looks forward to the opportunity to have our side of the argument heard fairly and without Kraft's misleading media spin being applied to the facts of the case.”