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Arbitrator Orders Starbucks to Pay $2.7 Billion to Kraft for Canceled Contract

Tuesday, November, 19, 2013


 

Starbucks has been ordered by an arbitrator to pay $2.2 billion in damages plus $527 million in attorneys’ fees to Kraft Foods Global Inc., the coffee giant’s former partner in distribution for its packaged coffees.  Now, after releasing its fourth-quarter earnings statement, Starbucks is reporting a $1.2 million net operating loss, which equals to a loss of approximately $1.64 per share.  Before the arbitrator’s ruling, Starbucks was reporting a 34% profit for the fourth quarter and was ending the best year for profits in the company’s history.

 

Howard Schultz, president and chief executive of Starbucks, has made it clear that he disagrees fully with the arbitrator’s decision.  However, due to the current trajectory of Starbucks’ consumer packaged goods distribution efforts, he made it clear that their business has benefitted tremendously with the separation from Kraft Foods Global Inc. as packaged goods distributor.  “It’s difficult when a decision like this goes against you,” he said.  “But it’s a one-time charge in a single moment of time.  We are moving forward and not in the least looking back.”

 

The dispute between the Seattle-based coffee giant and Kraft occurred over a 12-year distribution contract that Starbucks broke off from in 2011.  Starbucks insisted that their distribution efforts were not progressing to the extent they wanted; however, Kraft refused to end the contract without compensation for the business they would be losing in doing so. 

 

As Schultz stated, however, the decision to break away from Kraft turned out to be a good one for Starbucks, despite the arbitrator’s ruling.  According to Troy Alstead, the chief financial officer for Starbucks, the past two years has seen $3.2 billion in packaged goods earnings increase since the company’s distribution channel development process moved away from Kraft.