News

Starbucks, Kraft: Breaking up is hard to do

December 6, 2010

In the he said, she said dialogue between Starbucks Corp. and Kraft, the Seattle-based coffee giant has expressed distaste over Kraft's attempt to delay the dissolution of its roughly $500 million distribution agreement with Starbucks.

Starbucks Corp. has issued a statement expressing disappointment over Kraft's pursuit of a preliminary injunction -- "a course that will ultimately prove harmful to customers," it stated.

Starbucks ended the deal in an effort to assume responsibility for the sales and distribution of its packaged coffee products as of March 2011.

"We have both the capabilities and experience to make this a seamless transition for our customers. Kraft's self-serving and blatantly disruptive actions risk creating unnecessary confusion for our shared customers, and in turn their consumers," Starbucks said in the statement. "Starbucks will vigorously oppose any action on Kraft's part that would prevent Starbucks from rightfully assuming full control of our brand and business, and looks forward to presenting our case through the pending arbitration process."

On Monday, 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 is proceeding with flagrant indifference to the terms of the contract and customary business practices," said Marc Firestone, Kraft's executive VP, Corporate and Legal Affairs and General Counsel. "Instead of executing its rights under the contract to buy back the business, Starbucks has chosen a remarkably aggressive strategy that publicly disparages our achievements, interferes with our customer relations and threatens to harm Kraft."

Kraft Foods has grown the annual revenues of its Starbucks CPG partnership tenfold, from a base of approximately $50 million in 1998 to approximately $500 million today. Year-to-date in 2010, U.S. net revenues for coffee have grown by approximately 8 percent, driven by volume growth and market share gains. As recently as April of this year, Starbucks praised Kraft's role in building a "highly profitable" CPG business, citing Kraft's "world-class" capabilities in manufacturing, research and development, marketing and distribution.

According to a story in the New York Times, Starbucks offered Kraft $750 million in August to terminate the partnership, but Kraft declined.

According to the story:

Under the contract, Starbucks can walk away if it pays Kraft fair market value for the business, plus a premium of as much as 35 percent, Kraft said in its legal papers. Analysts have estimated that fair market value alone could be well over $1 billion.

Kraft, maker of the well-known Maxwell House brand of coffee, is the largest food manufacturer in the country, with $48 billion in annual revenue. The Starbucks deal involves about $128 million in yearly profits split evenly between the partners, according to an estimate by Credit Suisse.

The agreement between Kraft and Starbucks renews automatically in 10-year succession and has no expiration date.

* Photo by bored-now