Starbucks Ordered to Pay $2.7 Billion in Dispute with Kraft

Mondelez Will Get the Money

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Starbucks has lost big in its dispute with Kraft over how its packaged coffee was marketed in grocery stores.

An independent arbitrator ruled Tuesday that the coffee giant must pay $2.7 billion in cash for "improper termination" of a distribution deal that ended two years ago amid finger pointing by the two corporate giants, according to a statement from Mondelez International. Mondelez was formed when Kraft Foods split into two companies in October 2012 and will get the cash award as a result of its separation agreement from Kraft Foods Group.

"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," Gerd Pleuhs, exec VP for legal affairs and general counsel of Mondelez International, said in the statement.

Kraft began marketing Starbucks coffee at grocery stores in 1998. Starbucks began seeking out of the deal in 2010, alleging that Kraft failed to effectively market its brands. Kraft disagreed, saying that Starbucks held the partnership back by "unreasonably denying" Kraft the opportunity to sell new products introduced at its cafes to grocery customers.

Troy Alstead, Starbucks' chief financial officer and group president for global business services, said in a statement Tuesday that that the company was "pleased the arbitration has ended." But he added: "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," Mr. Alstead added.

Starbucks assumed control of its grocery coffee business after the Kraft deal collapsed. "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," Mr. Alstead said.

Morningstar analyst Erin Lash called the arbitrator's decision "a sizable win for Mondelez."

Mondelez said it plans to use the post-tax proceeds from the ruling to repurchase Mondelez common stock. Ms. Lash said in an email that it was notable that Mondelez will use the money for stock because "in terms of priorities for cash, shares repurchases fall below reinvesting in the business and acquisitions." She added: "And so we think this could reflect an attempt to return additional cash to shareholders and keep activist investors (like Nelson Peltz who has been critical of its inability to generate the level of profitability of its packaged food peers) at bay."

Kraft, meanwhile, has struck a new coffee distribution deal with McDonald's, which involves selling McCafe branded coffee in grocery stores. The effort is expected to begin soon in unspecified test markets.

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