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Starbucks, Kraft wrestle over distribution contract

Kraft Foods Inc. continues to challenge Starbucks' attempt to break its 12-year distribution agreement for bagged coffee in grocery stores.

Kraft said Monday that it had initiated an arbitration proceeding, marking the latest in an ongoing dispute between the company and Starbucks over the agreement, which the coffeehouse brand has said would end next March.

The original agreement was set to expire in 2014, unless terminated sooner per the agreement, Starbucks said. The Seattle-based coffeehouse giant has contended that Kraft has not met its responsibilities in actively protecting and promoting the Starbucks Coffee and Seattle’s Best Coffee brands.

In a statement Monday, Kraft maintained that the contract, which began in 1998, “remains in effect indefinitely.”

Kraft said the agreement included a “straightforward basis” under which Starbucks could take over the business to pursue a different arrangement. However, Kraft said Starbucks must allow time for an orderly transition, and compensate the global food company for “the fair market value” of the business, plus a premium of up to 35 percent of that value.

Since 1998, the Starbucks’ retail coffee business has grown from generating about $50 million annually to about $500 million today, Kraft said. Analysts have speculated that the consumer packaged good business for Starbucks and sister brand Seattle’s Best Coffee could be valued at more than $1.5 billion.

“Starbucks unilaterally and unjustifiably declared in public statements the agreement’s termination, needlessly risking confusion among customers about the agreement’s status,” said Marc Firestone, Kraft's executive vice president of corporate and legal affairs and general counsel. “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.”

Starbucks officials on Monday said the company disagrees with Kraft’s characterizations of the agreement, particularly the assertion that it is “perpetual in nature.”

Starbucks said Kraft has not met its contractual obligations because it failed to include the coffeehouse company in significant marketing decisions and customer contacts.

“This was critical to the success of the relationship,” Starbucks said in a statement. “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.”

Starbucks said it exercised its rights to terminate the agreement because “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 reporting record fourth quarter and full year results earlier this month, Starbucks chief executive and president Howard Schultz said the company would continue to build its consumer packaged goods business following the successful introduction of the brand’s new VIA Ready Brew Instant coffee, which alone generated global sales of $135 million in its first year.

Contact Lisa Jennings at [email protected].

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