Starbucks to pay Kraft nearly $2.8 B for breach of contract

November 12, 2013

According to the Chicago Tribune, an arbitrator on Nov. 12 ordered Starbucks to pay Kraft’s former parent Mondelez International $2.23 billion in damages plus $527 million in prejudgment interest and attorneys’ fees after the coffee chain’s early termination of a grocery deal. Kraft began selling bags of Starbucks coffee in grocery stores beginning in September 1998. Starbucks prematurely ended the contract in March 2011 and gave the business to privately held Acosta Inc.

Starbucks accused Kraft of multiple material breaches of contract, including mismanaging the brand. Kraft denied any breach and said that if Starbucks wanted out, it must pay Kraft fair value for the business, which brought in $500 million a year in revenue.

The deal’s initial term was set to expire in March 2014. The agreement was to renew automatically for successive 10-year terms unless sooner terminated per the agreement. Based on the rules of binding arbitration, Starbucks cannot appeal.

Starbucks said in a statement that it strongly disagrees with the arbitrator’s 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 Troy Alstead, Chief Financial Officer and Group President, Global Business Services at Starbucks.

Chicago Tribune article

Starbucks statement