Kraft Fights Starbucks Retail Withdrawal

Kraft Foods Inc. has initiated an arbitration proceeding to challenge Starbucks Coffee Co’s attempt to end the agreement under which Kraft has built its Starbucks retail grocery coffee business.

Meanwhile, Starbucks said it’s exercising its right to withdraw from the deal, for which it alleges Kraft is not holding up its end.

The strategic partnership between Kraft and Starbucks dates back to 1998, when Starbucks retail grocery coffee business was generating less than $50 million in annual revenues. Since then, Kraft said it has grown the business to $500 million “through its considerable expertise and resources.”

Kraft said the companies agreed to a straightforward basis under which Starbucks could take over the business in order to pursue a different arrangement. Under the agreement, Kraft said, there needs to be sufficient time for Kraft to execute an orderly transition and Starbucks must compensate Kraft for the fair market value of the business plus a premium of up to 35 percent of that value.

“Starbucks unilaterally and unjustifiably declared in public statements the agreement’s termination, needlessly risking confusion among customers about the agreement's status,” said Marc Firestone, Kraft EVP and general counsel. “In effect, Starbucks is trying to walk away from a 12-year strategic partnership, from which it has greatly benefited, without abiding by contractual conditions. Kraft reasonably expected Starbucks to honor the contract.”

But Starbucks said its actions to terminate its distribution arrangement with Kraft are consistent with the terms of the agreement between the companies, the initial term of which was set to expire in 2014 unless sooner terminated per the agreement, as well as Starbucks commitment to provide its grocery channel customers with the highest quality of service.

“The agreement included a number of provisions intended to ensure that Kraft would actively protect and promote the Starbucks Coffee and Seattle’s Best Coffee brands, building on Starbucks position as the leading super-premium coffee brand,” Starbucks stated in a press release. “Kraft did not meet its responsibilities under these aspects of the agreement. Starbucks raised these issues with Kraft, but there was never any improvement in Kraft’s performance.

“Kraft’s failure to meet its responsibilities resulted in the erosion of brand equity and experience at grocery that Starbucks customers have come to expect through their experience in Starbucks stores. In light of Kraft’s failure to cure its breaches of the agreement, Starbucks has exercised its right to end the relationship.”

Starbucks expects to assume direct responsibility for its packaged coffee business beginning on March 1, 2011.

With annual revenues of $48 billion, Kraft Foods is the world’s second largest food company, with a brand portfolio that includes Oreo, Nabisco and LU biscuits; Milka and Cadbury chocolates; Trident gum; Jacobs and Maxwell House coffees; Philadelphia cream cheeses; Kraft cheeses, dinners and dressings; and Oscar Mayer meats.

Founded in 1971, Starbucks Corp. operates retail stores and produces a wide range of branded consumer products globally, including ready-to-drink beverages, packaged coffees and premium ice creams.