Kraft To Receive $2.8 Billion Pay Day From Starbucks

By Sam Lewis

Arbitrator awards food manufacturer damages, attorney fees, and interest after premature termination of business deal.

Back in March of 2011, Starbucks decided to end its 13-year-old relationship with Kraft. The coffee-giant was unhappy with the product Kraft was selling in Starbucks’ name in grocery aisles, calling the coffee “unacceptably poor.” The contract between the two would have carried over another year, to March of 2012, and automatically renewed for another 10 years if neither party had agreed to terminate.

The two companies found themselves in court, with the final ruling coming Tuesday, Nov 12. An arbitrator on the case has found that Starbucks must pay the food manufacturer $2.8 billion for unilaterally deciding to prematurely end its deal with Kraft. The payment will include $2.23 billion in damages along with $527 million in attorney’s fees and pre-judgment interest. Receiving the awarded amount will be Mondelez International, which now heads Kraft’s grocery business after it spun off from the company in 2012.

“We are pleased the arbitration has ended,” says Starbucks CFO Tony Alstead. He also made it clear that Starbucks is not happy with the verdict, believing the coffee chain’s actions were justified. “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.” Mondelez International is singing a different tune, claiming it helped Starbucks grow its grocery segment from a $50 million endeavor in 1998 to ten times that in 2010. “We’re pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation,” says General Counsel Gerd Pleuh.

Starbucks says it has enough available cash on hand and borrowing capacity to pay the court ordered fine. The company plans to account the payment as a charge to its operating expenditures of 2013. Mondelez International plans to invest the awarded money into buy back stock. Meanwhile, Kraft has moved on from its split from Starbucks, forming an alliance with McDonald’s. The new duo plans to sell McCafe products in the grocery aisles of select markets early in 2014.

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