Kraft Foods Challenges Starbucks Attempt to Terminate Strategic Partnership

Kraft and Starbucks entered into a contract that remains in effect indefinitely, subject to certain limitations and protections. Notably, the companies agreed to a straightforward basis under which Starbucks could take over the business in order to pursue a different arrangement.

30 Nov 2010 --- Kraft Foods Inc. has announced that it initiated an arbitration proceeding to challenge Starbucks Coffee Company's attempt to end the agreement under which Kraft Foods has successfully built Starbucks retail grocery coffee business.

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 has grown the business to approximately $500 million in annual revenues through its considerable expertise and resources. Over the years, Starbucks has recognized and acknowledged Kraft's role in building Starbucks presence in grocery stores, Kraft claimed.

Kraft and Starbucks entered into a contract that remains in effect indefinitely, subject to certain limitations and protections. Notably, 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, 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, under most circumstances, a premium of up to 35 percent of that value, a Kraft statement claimed.

"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, Executive Vice President, Corporate and Legal Affairs 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. We are confident in our position and look forward to presenting the facts before the arbitrator."

Kraft said it is continuing to conduct business under the terms of its contractual arrangements with Starbucks.

Starbucks Coffee Company responded in a statement that it strongly disagrees with Kraft's recent characterizations that have appeared in the media of the terms of the agreement between the two companies, including assertions that the agreement is perpetual in nature. “Starbucks 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. It also required Kraft to work closely with Starbucks, to maintain Starbucks involvement in significant marketing decisions and customer contacts. This was critical to the success of the relationship, given Starbucks market-leading position in the super-premium coffee business. 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 notes that there are binding dispute resolution procedures under the agreement, and any action by either party to contest the dissolution of the agreement must be brought under those provisions. Starbucks expects to assume direct responsibility for its packaged coffee business beginning on March 1, 2011,” the company statement read.

In taking this action, Starbucks is mindful of its commitments to the grocery channel customers who carry its packaged coffee products. Starbucks is disappointed that Kraft is not living up to its obligation to ensure an orderly transition, however Starbucks is committed to ensuring that its grocery customers experience a seamless transition and that this move benefits both their customers and Starbucks.