Kraft Foods Inc. said Monday it is starting an arbitration proceeding against Starbucks Corp.'s move to end its agreement with Kraft to distribute and promote its packaged coffee in stores.
Earlier this month, Starbucks said it would end its agreement with the foodmaker, which began in 1998. Sales at grocery stores and other retailers are increasingly important to Starbucks, primarily because of its Via brand.
During its most recent earnings report earlier this month, CEO Howard Schultz told investors the company plans to have more products available in stores in the future, after first introducing them in its cafes.
Starbucks says Kraft did not meet its responsibilities to work closely with Starbucks on marketing decisions and customer contacts. It said its decision to end the distribution agreement is consistent with terms of their contract, initially set to expire in 2014.
"Kraft's failure to meet its responsibilities resulted in the erosion of brand equity and experience at grocery (stores)," Starbucks said in statement. Starbucks, based in Seattle, now plans to take back the business on March 1, 2011.
But Kraft countered that Starbuck's packaged coffee business has grown from $50 million to $500 million in revenue during the partnership.
Kraft, based in Northfield, Illinois, says if Starbucks takes over the business, it needs to give Kraft time for a transition and must compensate Kraft for the fair market value of the business plus a premium of up to 35 percent.
"Starbucks is trying to walk away from a 12-year strategic partnership, from which it has greatly benefited, without abiding by contractual conditions," Kraft said in a statement.
R. W. Baird analyst David E. Tarantino said in a statement that Starbucks might have some difficulty proving its case due to the increase in revenue during the partnership. He estimated that if Starbucks is forced to pay Kraft to end the agreement, it might cost $1 billion or more.
"Starbucks seemingly wants to gain control of its packaged coffee business to capitalize on long-term growth opportunities within the consumer packaged goods channel," he wrote in a note to investors. "While taking control of its consumer packaged goods businesses could prove very (beneficial) to long-term earnings, the move is not without risks," because running a packaged goods business is so different than running a retail business, he said.
Starbucks is expected to give more details during a meeting with analysts Wednesday.