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Foodservice

Kraft Challenges Starbucks' Attempt to End Partnership

Initiates arbitration; Starbucks "strongly disagrees" with Kraft's characterizations of deal

NORTHFIELD, Ill. & SEATTLE -- Kraft Foods Inc. said yesterday that it initiated an arbitration proceeding to challenge Starbucks Coffee Co.'s attempt to end the agreement under which Kraft Foods has successfully built Starbucks retail grocery coffee business.

The strategic partnership between Kraft and Starbucks dates back to 1998, when Starbucks retail grocery coffee business was generating less than $50 million in annual revenues, said Kraft. Since then, Kraft has grown the business to approximately $500 million in annual revenues through its considerable expertise [image-nocss] and resources.

According to Kraft, Kraft and Starbucks entered into a contract that remains in effect indefinitely, subject to certain limitations and protections. Notably, the companies agreed to a straightforward basis under which Starbucks could take over the business in order to pursue a different arrangement. Under the agreement, there needs to be sufficient time for Kraft to execute an orderly transition and Starbucks must compensate Kraft for the fair market value of the business plus, under most circumstances, a premium of up to 35% of that value.

"Starbucks unilaterally and unjustifiably declared in public statements the agreement's termination, needlessly risking confusion among customers about the agreement's status," said Marc Firestone, executive vice president of corporate and legal affairs and general counsel for Kraft. "In effect, Starbucks is trying to walk away from a 12-year strategic partnership, from which it has greatly benefited, without abiding by contractual conditions. Kraft reasonably expected Starbucks to honor the contract. We are confident in our position and look forward to presenting the facts before the arbitrator."

Kraft is continuing to conduct business under the terms of its contractual arrangements with Starbucks.

Starbucks Coffee Co. said that it "strongly disagrees" with Kraft's characterizations that have appeared in the media of the terms of the agreement between the two companies, including assertions that the agreement is perpetual in nature. Starbucks actions to terminate its distribution arrangement with Kraft are consistent with the terms of the agreement between the companies, the initial term of which was set to expire in 2014 unless sooner terminated per the agreement, as well as Starbucks commitment to provide its grocery channel customers with the highest quality of service, it said.

According to Starbucks, the agreement included a number of provisions intended to ensure that Kraft would actively protect and promote the Starbucks Coffee and Seattle's Best Coffee brands, building on Starbucks position as the leading super-premium coffee brand. It also required Kraft to work closely with Starbucks, to maintain Starbucks involvement in significant marketing decisions and customer contacts. This was critical to the success of the relationship, given Starbucks market-leading position in the super-premium coffee business. Kraft did not meet its responsibilities under these aspects of the agreement, Starbucks said, adding that it raised these issues with Kraft, but there was never any improvement in Kraft's performance.

Kraft's "failure to meet its responsibilities" resulted in the erosion of brand equity and experience at grocery that Starbucks customers have come to expect through their experience in Starbucks stores, Starbucks said. In light of Kraft's failure to cure its breaches of the agreement, Starbucks has exercised its right to end the relationship. Starbucks noted that there are binding dispute resolution procedures under the agreement, and any action by either party to contest the dissolution of the agreement must be brought under those provisions. Starbucks expects to assume direct responsibility for its packaged coffee business beginning on March 1, 2011.

In taking this action, Starbucks is mindful of its commitments to the grocery channel customers who carry its packaged coffee products, it said: "Starbucks is disappointed that Kraft is not living up to its obligation to ensure an orderly transition; however, Starbucks is committed to ensuring that its grocery customers experience a seamless transition and that this move benefits both their customers and Starbucks."

Northfield, Ill.-based Kraft Foods' portfolio includes brands such as 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.

Seattle-based Starbucks Corp. is a leading roaster and retailer of specialty coffees. In addition to its Starbucks retail stores, the company produces a variety 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.

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