The three years’ battle between Starbucks Company and Kraft Foods since March 2011 to January 2014 finally ended in a defeat in favor of the latter. This happened after an arbitrator made a decision that Starbucks should pay Kraft a total sum of $2.7 billion for having terminated a contract pre-maturely. This dispute was based on the agreement which the two entered back in 1998 for the distribution and marketing of Starbucks brand coffee in the United States grocery stores. This was to be done by the Kraft. However, misunderstandings became evident when Starbucks raised complaints, claiming Kraft was underperforming in the stocking as well as promotion of its products. This saw Starbucks move to terminate their agreement in the year 2010. The battle actually flared up in January 2010 when Mr. Howard Schultz, the CEO Starbucks, sent an email to Irene Rosenfeld, the then Kraft’s CEO and currently heading Mondelez, complaining about the improperly kept stores that actually stocked coffee. Other claims included the selling of outdated packages as well as insufficient space for the product in the shelves. The readily optimal action was to terminate the contract pre-maturely. Starbucks demonstrated a strong determination to go their way. In 2010 October, it declared its stand for the termination set for 1st March 2011. This challenged Kraft and a month later, they had no better option than to launch arbitration process . The terms of basically $750 million payoff to Kraft was not by any viable consideration justifiable. They thus sought to reject. This however, never stopped Starbucks from their determined move. They thus went ahead to withdraw, an action which saw Kraft change their approach on the matter and began arbitration proceedings.
An argument by Kraft lawyer was that Starbucks owed a total of $2.9 billion, inclusive of attorney fees. He said that the contract was able to bring to his client a sum of $500 per year, and its termination meant somebody had to part with much. In his ruling however, the arbitrator declared that Starbucks should pay damage cost of $2.23 billion for the termination of the agreement plus a prejudgment interest of $527 million including attorneys’ fees. This never silenced Starbucks Chief Financial Officer who expressed the company’s strong disagreement with that conclusion. In a statement, Troy Alstead, the Chief Financial Officer, expressed their strong belief on the fact that the responsibilities of Kraft as stipulated in the agreement was not delivered, thus putting the performance of the business at stake.
Having received total revenue of $14.9 billion for the financial year ended 29th September, 2013, the Starbucks Company reported a cash of $2.6 billion and its equivalent on the balance sheet.
In one of the regulatory filings, Starbucks indicated that its earnings for the financial year were reduced to $8.3 million after taking care of the litigation charges. Earlier on, it had reported its annual earnings at $1.72 billion, equivalent to $2.26 per share. The fourth quarter results later ran to a loss of $1.23ough billion despite having reported a profit of $481.1 million.
Kraft on the other hand split into two in October 2012 to form Kraft Foods Company and Mondelez International. The latter was declared entitled to the recoveries from their arbitration with the Starbucks. This was so defined by the terms of their restructuring. The proceeds were therefore planned for use by the Mendelez to settle taxes and expenses then purchase stock with whatever remains.
Kraft later secured a partnership with the packaged coffee business, the McDonalds Company. Starbucks was in the meanwhile allowed to resume the control of its business even as the arbitration process was on’ allowing them to sell K-cups in the Green Mountain Coffee Roasters Companies. One of their achievements in this was a total of over one billion of the k-cups sold. This made a Starbucks spokesman declare that they would not have made a similar achievement if they never stopped the deal with Kraft. The spokesman further mentioned a 62% rise in the sales of packaged coffee two years after contract termination. This for sure, shows and justifies their decision. He said that the indisputable progress made is worth their move.
In a statement, he said and I quote, “While we disagree Kraft is entitled to damages, the amount awarded reflects the value of our at-home coffee business and the continued global growth opportunity that lies ahead for Starbucks.”