Market Reports: Starbucks vs. Kraft In Contract Dispute
By Stephanie Robins on November 30, 2010, 11:50 am Posted in Finance News
Kraft (Fortune 500: KFT) has announced that it will begin arbitration proceedings against Starbucks (Fortune 500:SBUX) after the Seattle based coffee company attempted to end a contract under which Kraft supplies prepackaged coffee to grocery stores.
Strabuck’s To Terminate Contract With Kraft.
The agreement began in 1998, when Starbucks generated less than $50 million annually. Starbucks accuses Kraft of failing to work with it on developing market strategies, which led to an “the erosion of brand equity.” In a statement released on Monday, Starbucks said “Kraft did not meet its responsibilities, Starbucks raised these issues with Kraft, but there was never any improvement in Kraft’s performance.”
The Claims
Kraft says its grown the grocery coffee business to about $500 million annually. “It is curious that they are now trying to get this business back for free,” said Marc Firestone, Kraft Chief Attorney, “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 states termination of the distribution contract will force Starbucks to pay 35% over the value of the contract, which would amount to over $1.5 billion. This estimation is based on J.M. Smucker’s (NYSE:SJM) purchase of Folgers Coffee from Procter and Gamble (NYSE:PG) for $3.3 billion in 2008.
Kraft States Contract In Effect Indefinitely.
Maintaining that it’s contract with Starbucks remains in affect perpetually, Kraft says it does not dispute Starbuck’s right to take control of the coffee distribution, but that the contract calls for Kraft to receive adequate time to establish an orderly transition. Starbucks states publicly that it disagrees with Kraft, and that the contract was not perpetual. The Seattle based company stated that the contract was set to expire in 2014. Starbucks plans to take control of the business on March 1, 2011.
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