A coffee clash between Kraft, Starbucks

Thursday, 9 December 2010 00:35 -     - {{hitsCtrl.values.hits}}

A billion-dollar brouhaha between Starbucks and Kraft over supermarket coffee sales is turning into the venti latte of corporate divorces - with a double shot of espresso and extra foam. 

  Kraft took the fight to court, asking a federal judge in Manhattan to stop Starbucks from breaking the 12-year partnership under which Kraft distributes Starbucks' packaged coffees, including whole beans and ground coffee, to grocery stores and other retailers .

The war of words has been escalating for days, as the two sides traded charges and countercharges. Kraft claims that Starbucks unilaterally decided to end their agreement, and Starbucks says that Kraft failed to aggressively promote its brands, which include Seattle's Best Coffee, in stores.

The bitterness has also spilled into the fastgrowing market for single-serve coffee machines , with Kraft accusing Starbucks of undermining sales of its Tassimo coffee system ahead of the peak holiday season.

Starbucks offered Kraft $750 million in August to terminate the partnership, according to the court filing, but Kraft declined. Under the contract, Starbucks can walk away if it pays Kraft fair market value for the business, plus a premium of as much as 35 percent, Kraft said in its legal papers.

Analysts have estimated that fair market value alone could be well over $1 billion. Robert Moskow, a senior analyst for Credit Suisse , said a breakup was inevitable - the only question was how big the settlement would be.

"Kraft knows the thing is over," he said. "They're going to go to arbitration and try to get as much value out of it as they can, and the way to do that is to get your lawyers out there and say Starbucks violated the agreement."

Kraft, maker of the well-known Maxwell House brand of coffee, is the largest food manufacturer in the country, with $48 billion in annual revenue. The Starbucks deal involves about $128 million in yearly profits split evenly between the partners, according to an estimate by Credit Suisse. As a result, Moskow said, executives at Kraft were not likely to lose much sleep over the loss of the deal.

But supermarket sales are an important area for expansion for Starbucks, whose onceexponential growth in signature coffeehouses has slowed in recent years.

The company has already had unexpected success this year with its new instant coffee line, VIA. Starbucks said it managed its own relationships with retailers for VIA sales, in coordination with a national distributor, Acosta. The company now wants to use those relationships to peddle ground coffee and beans directly, cutting out Kraft as a middleman.

At an investor conference in New York City last week, the chief executive of Starbucks, Howard Schultz, said the company would aggressively look to push sales of its products in grocery stores, including whole beans, ground coffee and VIA. He said the company was confident it could get out of the deal.

In a news release on Monday, Starbucks dismissed the Kraft court filing as a delay tactic. "Starbucks has repeatedly said that we have terminated our agreement with Kraft and we continue to look forward to assuming full responsibility for the sales and distribution of our packaged coffee products," the company said.

Starbucks, which is based in Seattle, said it planned to take over distribution of its supermarket packaged coffee sales.

Kraft said in a statement that Starbucks was "proceeding with flagrant indifference to the terms of the contract." It asked the court to stop Starbucks from taking steps to terminate the agreement on its own and to bar Starbucks from communicating with retailers about a change in the coffee distribution deal.