Kraft loses bid to keep distributing Starbucks

By Reuters
Posted Jan. 28 at 5:18 p.m.

A federal judge rejected Kraft Foods’ bid to force Starbucks Corp to keep using Kraft to distribute packaged coffee to supermarkets in North America and Europe, a decision that allows Starbucks to move ahead with a new partner.

In a ruling from the bench, U.S. District Judge Cathy Seibel in White Plains, New York, on Friday also noted that Starbucks could end up owing Kraft “a boatload of money” if an arbitrator decided the coffee chain breached a 1998 agreement with Kraft.

Kraft, North America’s largest packaged food maker, contended that it would suffer “irreparable harm” if Starbucks, the world’s largest coffee chain, went through with its plan to move distribution to privately held Acosta Inc on March 1.

“Kraft has not established it will suffer irreparable harm,” the judge said after hearing arguments from both sides.

Kraft said in a statement that it planned to appeal the decision.

Starbucks wants to end its partnership with Kraft and has accused it of multiple material breaches of contract, including mismanaging the brand. Kraft denies any breach and says that if Starbucks wants out, it must pay Kraft fair value for the business, which brings in $500 million a year in revenue.

“Without proof of material breach, Starbucks’ only legitimate termination mechanism is to pay Kraft fair market value for the business, plus a premium,” Kraft’s statement said. “We believe more strongly than ever that such a payment is the appropriate outcome in this dispute.”

Some legal experts had said Kraft would have difficulty winning an injunction because they are normally only given in more dire circumstances.

Kraft lawyer William Quinn, told the court that the company would face “incalculable” damage and be left at a “possibly permanent competitive disadvantage” if it were forced to scramble to replace the lost sales and store shelf space provided through the Starbucks partnership.

But Seibel was left unsatisfied that Kraft did not do more to find a new supplier. She likened the absence of a “Plan B” to a person who does not try hard enough to find a new place to live after being told to vacate his apartment.

Sharon Zackfia, an analyst covering Starbucks for William Blair & Co, said, “I bet they have to pay something.”

She said it was difficult to value the Kraft coffee distribution business.

“A lot is based on the strength of the Starbucks brand, which Starbucks owns,” Zackfia said.

The judge said that for her to intervene, it was not enough that Kraft’s business be disrupted. She said customers would continue to buy Kraft products even if they bought Starbucks’ products elsewhere.

Starbucks spokesman Alan Hilowitz welcomed the decision.

“We are hopeful this will bring an end to Kraft’s efforts to further confuse our mutual customers and look forward to the transition of the business to Starbucks on March 1 and to the pending arbitration process,” Hilowitz said in a statement.

Kraft requested the injunction after Starbucks said it wanted to end the partnership.

Under the agreement, Kraft distributes Starbucks coffee to an estimated 40,000 grocery stores and other retailers in all 50 U.S. states and Canada, as well as in Britain and Europe.

Kraft shares closed at $30.53 per share, down 0.3 percent. Starbucks closed at $31.73, down 3.9 percent.

The case is Kraft Foods Global Inc v Starbucks Corp, U.S. District Court, Southern District of New York, No. 10-09085.

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  1. Former Employee Jan. 28 at 2:37 pm

    Hahaha, Kraft sucks!

  2. StarBucks bl@ws Jan. 28 at 4:27 pm

    Look for Kraft to partner-up with another coffee company
    and put Starbucks on the bottom shelf next to the cat food!

  3. NiteCat Jan. 29 at 2:49 pm

    Kraft directs a lot of prime real estate in most grocery stores along with Target & Walmart. Unless Acost has the equivalent amount of premium presence this may not be a good move for Starbucks. Plus Starbucks is diluting its own presence in these stores with their own merchandising in their Starbucks cafes.

  4. jack (me) Jan. 30 at 9:48 a.m.

    All the “Kraft says” quotes prove is that Reuters’s legally illiterate reporter was snowballed by the b.s. of some lawyer.

    Maybe the Reuters reporter should first read some of sister company ThomsonReuters West’s books to find out that once there is an agreement to arbitrate, that has to be exhausted first. Case closed.

  5. Craig Feb. 1 at 6:51 pm

    Actually, Starbucks also owns the Seattle’s Best Brand which is part of this deal too. Retailers aren’t going to drop two brands from their shelves that sell because Kraft isn’t driving the truck to the distribution centers.
    Starbucks only needs Acosta (Acosta distributes Duncan Heinz, Silk, Birds Eye Vege, Pfizer products, Sargento, Shcick, Minute Maid, Ken’s dressing, and lots of others. Very comparable to Kraft) because they do not have their own internal distribution. Not even for products delivered to their stores. (It’s all third party.) Kraft basically was the truck driver and got money for pushing the product through distribution channels. (Almost like using UPS or FED Ex.) The only extra thing Kraft did was negotiate shelf space and promotions on behalf of Starbucks like they do with their own brands.

    Starbucks is the brand, not Kraft, and a brand that sells. No retailer is going to stop selling the Starbucks Brand. The selection of coffee in stores is generally poor. And Starbucks offers a wide variety of blends and single origin coffees that other companies do not. Starbucks will probably keep more of the profit by not using a company like Kraft. The only real dilemma I see for Starbucks if if they’re going to have to pay Kraft in the end. I don’t think Starbuck’s would terminate a contract that didn’t have an escape clause built into it. In fact, I bet there is one. What other reason would Kraft have to cry their business will be damaged?