Starbucks ordered to pay Kraft $2.7bn
Starbucks has been ordered to pay $2.7bn in compensation to Kraft Foods – a charge equal to the coffee chain’s entire net income since the start of 2012 – for terminating a deal to let the food group distribute its coffee. An arbitrator ruled that Starbucks had to pay $2.23bn in damages plus $527m in other fees following a dispute that began in 2010 when Starbucks vowed to pull out of the deal under which Kraft sold its packaged coffee to supermarkets. Kraft, which argued that Starbucks’ move was a breach of contract, said it would pass the payment from the company to Mondelez, the renamed business from which it split off in October 2012. Starbucks said it would restate its latest earnings – released last month – "probably within the next 24 hours" because it would book the compensation costs for its financial year to the end of September 2013. For the year to September, Starbucks had reported net income of $1.7bn. In the nine months to September 2012, its net income was $1bn. Starbucks shares fell 1.45 per cent to $79.45 in after-market trading after news of the ruling emerged. Asked if Starbucks would appeal, a spokesman said: "We’ve just received the decision and we’re still reviewing it." Since 1998, Kraft had exclusive rights to market and distribute Starbucks’ roast and ground coffee to supermarkets and other stores. Gerd Pleuhs, general counsel of Mondelez, said in a statement: "We’re pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation." Troy Alstead, Starbucks’ chief financial officer, said "we strongly disagree" with the arbitrator’s decision. When Starbucks said it planned to terminate the deal in November 2010 it complained that Kraft was not fulfilling its responsibilities and that the performance of its business had suffered as a result. Mr Alstead said that ending the deal was "the right decision for Starbucks, our brand and our shareholders" and that its "at home" coffee business was "significantly healthier [now] than it was before we assumed direct control from Kraft". Starbucks is relying on the expansion of its packaged coffee business – which had revenue of $1.4bn in the past 12 months – to offset slowing sales growth at its existing coffee shops. Mondelez said it would use the net proceeds from the arbitration to expand its $6bn share buyback programme, which it boosted by $4.8bn in August. The company has struggled since it was spun off from Kraft last year, failing to deliver the high growth executives had promised and making missteps in Russia and Brazil. Mondelez has also faced criticism from the likes of activist investor Nelson Peltz, who has attacked the company’s profit margins and urged PepsiCo to buy it.