News

Starbucks isn't sorry for ending relationship with Kraft

November 13, 2013

Starbucks must pay Kraft Foods $2.75 billion over a 3-year disagreement the companies had over distribution of Starbucks packaged coffee in grocery stores, according to a company press release. An arbitrator ordered the payment Tuesday against the coffee giant for ending its long-term relationship with Kraft three years ago over Kraft’s objections.

“We are pleased the arbitration has ended; however, 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,” Troy Alstead, chief financial officer and group president, Global Business Services, said in the release. “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.”

Alstead also said that while the company disagrees that Kraft is entitled to damages, the amount awarded reflects the value of the chain’s 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,” he said.

Despite the ruling, Alstead maintains that Starbucks made the right call regarding the business relationship with Kraft.

“I would add that taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders,” he said. “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.”

Together, packaged coffee and Starbucks premium single serve offerings are the cornerstone of the Channel Development segment of Starbucks' business, which cumulatively grew by $3.2 billion in revenue since taking the business back from Kraft and 47 percent in profitability in the past two years, Alstead said.

Laslty, Starbucks will change its Q4 fiscal 2013 operating numbers to show a $2.115 billion operating loss due to the Kraft payment, according to the company release.

Read more about coffee concepts.