Starbucks to End Kraft Distribution Deal

Disagreement over exit terms prompts clarification statements

SEATTLE & NORTHFIELD, Ill. -- Starbucks Corp. is ending its relationship with Kraft Foods Inc. for Kraft to distribute the company's coffee beans to the grocery channel.

Starbucks issued this statement: "Since, 1998, Starbucks packaged coffee has been distributed to grocery stores and other outlets by Kraft Foods. A month ago, Starbucks informed Kraft of its intention to end that distribution arrangement. The details and timing around any transition will be subject to further private dialogue. Starbucks intends to work closely with Kraft to ensure an orderly transition, [image-nocss] putting an emphasis on ensuring their mutual customers are well served. Starbucks intends to keep the discussions with Kraft private and will not be providing further details or comments at this time."

In response, Kraft issued a clarification regarding the agreement: "Kraft Foods' agreement with Starbucks regarding the sale of packaged coffee in grocery stores and other channels is perpetual. Importantly, if Starbucks decides to exit its relationship with Kraft Foods, the agreement requires Starbucks to pay Kraft Foods the fair market value of the business plus, in certain instances, a premium. Kraft Foods intends to keep the discussions with Starbucks private and will not be providing further details or comments at this time."

Starbucks then issued a response to Kraft's clarification: "We consider it unfortunate that Kraft has chosen to make public statements that we believe mischaracterize the nature of the agreement between our companies, including the term of the agreement. It has been, and continues to be, our intention to keep these conversations private. There is a specific mechanism within the agreement for the resolution of disputes. As we said in our earnings call, we will ensure that our mutual customers remain well-served."

Sharon Zackfia, a Starbucks analyst at William Blair & Co., told Advertising Age that there are plenty of potential reasons why Starbucks would terminate the relationship with Kraft, but speculated that the company's distribution deal with Acosta Sales & Marketing, a third-party distribution company, for its instant-coffee line Via could be a factor. Starbucks in November 2009 announced it partnered with Acosta to distribute Via to convenience stores, grocery stores and drug stores. Zackfia added that while the upfront cost for Starbucks in the Acosta deal may be higher, the profit potential is higher than the licensing deal with Kraft.Acosta Sales & Marketing, Jacksonville, Fla., is a leading full-service sales and marketing agency in North America, providing outsourced sales, merchandising, marketing and promotional services to manufacturers in the consumer packaged goods (CPG) industry.

With annual revenues of approximately $48 billion, Northfield, Ill.-based Kraft Foods is the world's second largest food company. Its portfolio includes 11 brands with revenues exceeding $1 billion: Oreo, Nabisco and LU biscuits; Milka and Cadbury chocolates; Trident gum; Jacobs and Maxwell House coffees; Philadelphia cream cheeses; Kraft cheeses, dinners and dressings; and Oscar Mayer meats. Approximately 70 brands generate annual revenues of more than $100 million.

Seattle-based Starbucks, with stores around the globe, is a leading roaster and retailer of specialty coffee. In addition to its Starbucks retail stores, the company produces a wide range of branded consumer products globally, including ready-to-drink beverages, packaged coffees and premium ice creams. The company's brand portfolio features Starbucks Coffee, Tazo Tea, Seattle's Best Coffee and Torrefazione Italia Coffee.