At the end, the sum was so large, Starbucks needs to restate its fourth quarter results. An arbitrator decided the company needs to pay Kraft $2.7 billion for a breach of contract involving instant coffee.
Needless to say, Seattle-based Starbucks Corp. wasn’t happy. “We strongly disagree with the arbitrator’s conclusion,” stated Starbucks CFO Troy Alstead.
Starbucks is required to pay $2.23 billion in damages and $527 million for interest and legal fees for prematurely ending its packaged coffee supply contract with Kraft in 2010. The amount will be paid to Mondelez International Inc., a subsidiary of Kraft created Oct. 2012.
Long Dispute
Kraft had an agreement to sell packaged Starbucks coffee signed in 1998, which was supposed to end in 2014, after which it would be automatically renewed for 10-year periods “indefinitely.”
Nov. 2010, Starbucks publicly stated the agreement had been terminated, and Kraft then sought arbitration.
Starbucks said Kraft had failed to meet its responsibilities and “resulted in the erosion of brand equity.” Kraft general counsel Marc Firestone had said the decision came out of nowhere and it was difficult to understand the “overt hostility and sudden change of view toward Kraft’s performance."
Starbucks then released emails dated back to the beginning of the year between respective CEOs Howard Schulz of Starbucks and Irene Rosenfeld (Kraft), showing the termination had been in discussion for months.
According to a Kraft spokeswoman, Starbucks had also tried to buy the packaged coffee business back from Kraft for $750 million. Since this did not work, Starbucks moved instant coffee in-house.
Starbucks Outlook
Starbucks hosted a call Wednesday morning, and while the company disagrees with the ruling, Alstead stated the sheer amount in damages is credit to the value of Starbucks’ packaged coffee.
“Absolutely nothing changes in how we plan to invest in the future,” Alstead, CFO and group president of global business services, said during the call.
“We will still have cash on our balance sheet,” he said, adding it did put some pressure on their interest expense however. Starbucks had about $2.6 billion in cash on hand when it reported results end of Oct.
“As difficult it might be to get beyond the sticker shock of this number” the packaged coffee is a channel Starbucks highly values and “something we will not stop,” said John Culver group president of Starbucks Coffee China and Asia Pacific, Channel Development, and Emerging Brands.
Alstead says since severing ties with Kraft, its own instant coffee business has grown 47 percent in profitability.
Culver reassured analysts having the packaged coffee segment in-house bodes well for aggressive growth. Single-serve is the fastest growing segment of at-home coffee, and Starbucks has “built a very strong innovation pipeline” that we should see starting the holiday season and into the second quarter, Culver said.
Details of the arbitrator’s decision were not made public.
“We’re glad to put this issue behind us. We can now fully focus on growing our global snacks business,” stated Gerd Pleuhs, Mondelez’s executive vice president of legal affairs.
