Starbucks ordered to pay Kraft $2.76 billion in damages for pulling out early from a distribution deal

Starbucks to Pay $2.76 Billion to Settle Grocery Dispute

Starbucks Corp. (SBUX) said it would pay Mondelez International Inc. (MDLZ) $2.76 billion to settle a dispute over the coffee-shop chain’s bagged coffee business. The payment, ordered by an arbitrator, consists of $2.23 billion in damages and $527 million in interest and attorneys’ fees, Seattle-based Starbucks said today in a statement. The company said it has adequate cash and borrowing capacity to fund the payment and will book it as a charge to its fiscal 2013 operating expenses.The arbitrator’s ruling may settle a dispute between the two companies that began in 2010, when Starbucks offered $750 million to terminate an agreement through which Mondelez, then known as Kraft Foods Inc., distributed its coffee to food retailers. Kraft rejected the offer. Starbucks said today that it disagreed with the arbitrator’s conclusion and said Kraft didn’t deliver on its responsibility to the brand.

“They are paying more than I expected,” Nick Setyan, an analyst at Wedbush Securities in Los Angeles, said today in an e-mail. He had expected Starbucks to pay as much as $2 billion and rates the shares as outperform, equivalent of a buy recommendation. “Having said that, it’s great to have it behind us now.”

Mondelez said today in a statement that it would use the proceeds from the award to buy back stock.

While Kraft Foods Group Inc., which was spun off from Mondelez in October 2012, remained the named party in the dispute, it agreed to direct any recovery to Mondelez and said the arbitration’s outcome won’t have a material financial impact on it.

Starbucks fell 1.2 percent to $79.61 at 7:01 p.m. in New York. Deerfield, Illinois-based Mondelez rose 3.5 percent to $33.58.

To contact the reporter on this story: Kevin Orland in Chicago at korland@bloomberg.net

Starbucks ordered to pay Kraft $2.23 billion

Bruce Horovitz, USA TODAY6:09 p.m. EST November 12, 2013

An arbitrator has decided that Starbucks must pay Kraft Foods $2.23 million in damages for pulling out early from a distribution deal.

STORY HIGHLIGHTS

Starbucks says it disagrees with the arbitrator’s decision

Coffee chain to host conference call to discuss the outcome

The decision is a big win for Kraft Foods

Starbucks owes Kraft Foods big-time.

An arbitrator on Tuesday concluded that Starbucks must pay Kraft Foods Group $2.23 million in damages plus $527 million in prejudgment interest and attorney’s fees, following the coffee giant’s early termination of a bagged coffee grocery deal between Starbucks and Kraft Foods.

The rift began in March 2011, when Starbucks prematurely scrapped a contract with Kraft that permitted Kraft to sell bagged Starbucks coffee in grocery stores. That contract began in 1998.

Both sides finger-pointed. Starbucks said that Kraft mismanaged the brand and had breached the contract. But Kraft denied the Starbucks charges and demanded that Starbucks pay Kraft a fair value for the business. For Kraft, the business brought in annual revenues of about $500 million.

“We strongly disagree with the arbitrator’s conclusion,” said Troy Alstead, Starbucks chief financial officer, in a statement. “We believe Kraft did not deliver on its responsibilities to our brand under the agreement.”

He said that Starbucks will host a conference call to discuss the outcome of the arbitration on Wednesday.

“Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders,” Alstead said in the statement. “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.”