Starbucks to pay Kraft $2.76 bn in damages to settle coffee dispute

US coffee retailer Starbucks Corporation yesterday agreed to pay $2.76 billion in damages and other costs to Kraft Foods to settle a dispute over bagged-coffee.

An independent US arbitrator ordered Starbucks to pay $2.23 billion in damages and $527 million in interest and attorneys' fees.

The Seattle-based 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.

Mondelez, then known as Kraft Foods, and Starbucks entered into a deal in 1998 under which Kraft would sell bags of Starbucks branded coffee to food retailers until March 2014.

Accusing Kraft of breaking the terms of their deal, the US coffee chain offered Kraft $750 million and terminated the agreement in 2010.

Starbucks felt the deal was curbing its revenues since it could generate more sales from grocery stores with new offerings such as Via, its single-serve coffee product.

Kraft rejected the $750 million offer and sought ''fair market value'' of the business plus as much as 35 per cent of that value.

Since signing the deal in 1998, Starbucks' retail-grocery coffee business grew from $50 million to $500 million annually.

But, after Starbucks terminated the agreement, Starbucks said its sales growth at grocery stores fell and its market share plunged from 33 per cent in 2005 to about 25 per cent 2010 in premium coffee sales.

''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.'' Starbucks said in a statement.

''Ending our agreement with Kraft also gave us the flexibility to aggressively expand our growth in the premium single serve segment with Starbucks Coffee K-CUP Packs and Verismo,'' it added.

Starbucks said that its premium single serve offerings grew by $3.2 billion in revenue since taking the business back from Kraft and 47 per cent in profitability in the past two years.

Kraft, which was spun off to Mondelez International last year, said, "We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation."