Blog: Dean BestKraft's coffee spat with Starbucks takes sour turn

Dean Best | 29 November 2010

Kraft Foods' dispute with coffee-chain empire Starbucks has turned sour.

The US food giant said today (29 November) that it is seeking arbitration against Starbucks' move to end a distribution deal between the two companies.

Since 1998, Kraft has been distributing Starbucks' packaged coffee to US grocery stores. However, in October, Starbucks told Kraft it wanted to end the deal and, earlier this month, it went public with its intentions.

When Starbucks issued its first public confirmation that it wanted to terminate the agreement, Kraft published its own statement, reminding its partner and, no doubt informing its own investors, that an end to the deal would bring a financial penalty to the coffee chain.

"Kraft Foods' agreement with Starbucks regarding the sale of packaged coffee in grocery stores and other channels is perpetual," Kraft said, back on 4 November. "Importantly, if Starbucks decides to exit its relationship with Kraft Foods, the agreement requires Starbucks to pay Kraft Foods the fair market value of the business plus, in certain instances, a premium."

Starbucks hit back within hours on the same day. The company said it was "unfortunate" that Kraft's statement had, the coffee chain claimed, "mischaracterised the nature of our agreement between the two companies".

"It has been, and continues to be, our intention to keep these conversations private," Starbucks said.

Fast-forward to today and Kraft's announcement that it is seeking arbitration. Starbucks, Kraft said, was selling less than $50m of coffee a year to US retail stores in 1998. Now, the business, the Cadbury owner claimed, had grown to around $500m through Kraft's "considerable expertise and resources".

"Kraft and Starbucks entered into a contract that remains in effect indefinitely, subject to certain limitations and protections," the company said today. "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% of that value."

Marc Firestone, Kraft's executive vice president for corporate and legal affairs, added: "Starbucks unilaterally and unjustifiably declared in public statements the agreement's termination, needlessly risking confusion among customers about the agreement's status.

"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."

Not to be outdone, Starbucks issued a response. It said its move to end the distribution deal was "consistent" with the terms of its agreement with Kraft - and then attacked the US food manufacturer's handling of its packaged coffee brands.

 

"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," Starbucks said.

"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."

 


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