Starbucks to Pay $2.7B to Kraft
The independent arbitrator in the dispute between Kraft Foods and Starbucks Coffee Company ruled that Starbucks must pay more than $2.7 billion in total cash compensation for its unilateral termination of the companies' coffee contract. The award includes compensation for the fair market value of the agreement, a premium for improper termination and interest.
In October 2012, Mondelez International spun off Kraft Foods Group, its North American grocery operations, as an independent company. Based on the Separation and Distribution Agreement between the companies, Kraft Foods Group will direct the net proceeds from the award to Mondelez International.
"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," says Gerd Pleuhs, executive vice president Legal Affairs & General Counsel of Mondelez International. "We're glad to put this issue behind us. We can now fully focus on growing our global snacks business."
In a press release issued on Nov. 12, 2013, Troy Alstead, chief financial officer and group president, Global Business Services, Starbucks, issued a statement regarding the conclusion.
“We are pleased the arbitration has ended; however, we strongly disagree with the arbitrator’s conclusion and that Kraft is entitled to $2.23 billion in damages plus $527 million in prejudgment interest and attorneys’ fees. 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. 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. We have adequate liquidity both in the form of cash on hand and available borrowing capacity to fund the payment, which will be booked as a charge to our fiscal 2013 operating expenses,” said Alstead. “I would add that taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders. The results over the past two and a half years clearly demonstrate that Starbucks at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft in 2011. We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly under the direct model.”
Alstead continued, “Ending our agreement with Kraft also gave us the flexibility to aggressively expand our growth in the premium single serve segment with Starbucks Coffee K-CUP Packs and Verismo. With single serve as the fastest growing category within at-home coffee, this represents a strategic opportunity for Starbucks that will continue to contribute meaningful growth for many years.”
Kraft first began marketing Starbucks roast and ground coffee in 1998. In November 2010, Starbucks announced its intention to unilaterally terminate the agreement that provided Kraft with the exclusive rights for the sales, marketing and distribution of Starbucks roast and ground coffee in grocery and other retail outlets. Later that month, Kraft initiated arbitration proceedings to challenge the improper termination of the companies' contract.
Kraft said that it intends use the net proceeds from the arbitration award, after federal and state taxes of approximately 37 percent and certain other expenses, to repurchase Mondelez International Class A Common Stock, subject to final approval by the Board of Directors and actual receipt of the proceeds. This authorization would be in addition to the company's current $6 billion share repurchase program.
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In October 2012, Mondelez International spun off Kraft Foods Group, its North American grocery operations, as an independent company. Based on the Separation and Distribution Agreement between the companies, Kraft Foods Group will direct the net proceeds from the award to Mondelez International.
"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," says Gerd Pleuhs, executive vice president Legal Affairs & General Counsel of Mondelez International. "We're glad to put this issue behind us. We can now fully focus on growing our global snacks business."
In a press release issued on Nov. 12, 2013, Troy Alstead, chief financial officer and group president, Global Business Services, Starbucks, issued a statement regarding the conclusion.
“We are pleased the arbitration has ended; however, we strongly disagree with the arbitrator’s conclusion and that Kraft is entitled to $2.23 billion in damages plus $527 million in prejudgment interest and attorneys’ fees. 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. 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. We have adequate liquidity both in the form of cash on hand and available borrowing capacity to fund the payment, which will be booked as a charge to our fiscal 2013 operating expenses,” said Alstead. “I would add that taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders. The results over the past two and a half years clearly demonstrate that Starbucks at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft in 2011. We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly under the direct model.”
Alstead continued, “Ending our agreement with Kraft also gave us the flexibility to aggressively expand our growth in the premium single serve segment with Starbucks Coffee K-CUP Packs and Verismo. With single serve as the fastest growing category within at-home coffee, this represents a strategic opportunity for Starbucks that will continue to contribute meaningful growth for many years.”
Kraft first began marketing Starbucks roast and ground coffee in 1998. In November 2010, Starbucks announced its intention to unilaterally terminate the agreement that provided Kraft with the exclusive rights for the sales, marketing and distribution of Starbucks roast and ground coffee in grocery and other retail outlets. Later that month, Kraft initiated arbitration proceedings to challenge the improper termination of the companies' contract.
Kraft said that it intends use the net proceeds from the arbitration award, after federal and state taxes of approximately 37 percent and certain other expenses, to repurchase Mondelez International Class A Common Stock, subject to final approval by the Board of Directors and actual receipt of the proceeds. This authorization would be in addition to the company's current $6 billion share repurchase program.
Related Articles:
P&G, Kraft, Starbucks Talk Driving Innovation
Kraft Brands Dominate Facebook in Global Markets
Kraft and Starbucks Build Single-Serve Coffee Category