Kraft and Starbucks spar over distribution deal

Kraft Foods Inc. said it would challenge Starbucks Corp.'s attempt to end a retail grocery coffee-distribution agreement between the two companies and has initiated an arbitration proceeding.

To end the deal Starbucks must compensate Northfield-based Kraft for the “fair market value” of the business, plus possibly a premium of as much as 35 percent of that value, Kraft said today in a statement.

On November 4, Starbucks Chief Executive Officer Howard Schultz said he planned to terminate the distribution agreement, which began in 1998. During the past year, the world's largest coffee chain has sought to generate more of its revenue from grocery stores. It introduced Via, its single-serve coffee product, in U.S. locations in May through a separate distribution agreement with Jacksonville, Florida-based Acosta Sales & Marketing Co.

“It is curious that they are now trying to get this business back for free,” Mike Mitchell, a Kraft spokesman, said in a telephone interview.

Since the companies began working with each other, Starbucks' retail-grocery coffee business has grown from $50 million to $500 million in annual revenue, Kraft said.

“Kraft reasonably expected Starbucks to honor the contract,” Kraft General Counsel Marc Firestone said in the statement. The contract “remains in effect indefinitely,” the Kraft statement said.

Starbucks said Kraft didn't meet its responsibilities to “protect and promote” its brands, which include Seattle's Best coffee. The coffee company said its actions were “consistent with the terms of the agreement,” which was set to expire in 2014. It “strongly disagrees” that the agreement is perpetual, Starbucks said.

Kraft fell 41 cents to $29.89 at 10:21 a.m. in New York Stock Exchange composite trading. Starbucks, which is based in Seattle, dropped 83 cents, or 2.7 percent, to $30.31 on the Nasdaq Stock Market.