Starbucks Owes Kraft $2.23B Over Packaged Coffee Dispute

SEATTLEStarbucks Coffee Company concluded its arbitration with Kraft over its packaged coffee business, and now must pay $2.23 billion in damages to Kraft along with $527 million for interest and legal fees.

An arbitrator ruled on Nov. 12, that the company must pay the fines as a result of ending its packaged coffee supply agreement with Kraft at least three years early.  

Kraft began selling bags of Starbucks coffee in grocery stores in September 1998, but Starbucks prematurely ended the contract in March 2011, giving the business to privately held Acosta, Inc., as reported by the Chicago Tribune. The initial term of the deal was to end in March 2014, after which it was to be renewed automatically for successive 10-year terms.

"We believe Kraft did not deliver on its responsibilities to our brand under the agreement, the performance of the business suffered as a result, and that we had a right to terminate the agreement without payment to Kraft," said Troy Alstead, chief financial officer and group president, Global Business Services, Starbucks, in a press release.

After taking back its packaged coffee and Starbucks premium single-serve offerings business from Kraft, Starbucks reports the segment grew by $3.2 billion in revenue and 47% in profitability.

"Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders," Alstead said in the release. "The results over the past two and a half years clearly demonstrate that Starbucks at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft in 2011."

Alstead said the payment to Kraft will be booked as a charge to the company's fiscal 2013 operating expenses. Mondelez International, Inc., Kraft's global snack company spinoff, will receive all proceeds resulting from the ruling, as reported by the Chicago Tribune.