Starbucks: Kraft not up to snuff in distribution deal

By Associated Press
Posted Dec. 28, 2010 at 8:05 a.m.

Starbucks Corp., which is in a legal dispute with Kraft Foods Inc. over a distribution deal, says the foodmaker has not performed up to its expectations — with Kraft admitting missteps in internal communications.

Kraft, which says the coffee chain violated terms of a distribution deal, announced late last week that a New York court may consider its request for a preliminary injunction against Seattle-based Starbucks. Both companies have until Jan. 21 to present their positions.

In a filing late Monday with the U.S. District Court for the Southern District of New York, Starbucks denied Kraft had performed “exceptionally well” under the agreement.

Starbucks said it repeatedly told Kraft that it wasn’t performing adequately. The coffee chain said Kraft admitted to deficiencies as well.

Citing a January e-mail from Anthony Vernon, president of Kraft Foods North America, Starbucks said Vernon admitted to Starbucks CEO Howard Schultz that the relationship between the two companies was “very broken” and that Kraft “neglected (the) relationship badly in North America.”

Vernon goes on to say that he wants to fix the problems that exist, but Starbucks says in the legal filing that “Kraft has continued to fail to live up to its obligations” under the deal.

A Kraft representative could not be immediately reached for comment.

Kraft and Starbucks began arbitration proceedings late last month as Kraft tried to prevent Starbucks from ending an agreement to distribute and promote its packaged coffee in stores.

Starbucks said in early November that it wanted to end the agreement, which began in 1998. Sales at grocery stores and other retailers, which are tied directly to the Starbucks, Kraft agreement, are increasingly important to Starbucks, primarily because of its Via brand. The coffee company has said that it plans to have more products available in stores after introducing them in its cafes.

Starbucks previously said that Kraft has not done what was required by the contract, failing to work closely with the company on marketing decisions and customer contacts. Starbucks said its decision to sever relations with the foodmaker, whose brands include Nabisco, Oscar Mayer and Trident, is consistent with the contract’s terms.

Starbucks has said it wants to take back the business March 1. But Kraft has said that if Starbucks goes ahead with those plans, it needs more transition time and that the company should be compensated for the fair market value of the business, plus a premium of up to 35 percent.

Kraft, which is based in Northfield, previously said it has increased revenue from Starbucks’ packaged coffee business to $500 million from $50 million during the partnership.

The contract automatically renews for successive 10-year terms and has no end date.

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