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Starbucks to Pay Kraft $2.8 Billion Over Packaged Coffee Dispute

November 13, 2013
URL: http://www.entrepreneur.com/article/229929

Starbucks is paying the big bucks to Kraft Foods to settle a dispute over packaged coffee.

Starbucks will pay Kraft almost $2.8 billion, following an arbitrator’s conclusion that Kraft is entitled to $2.23 billion in damages plus $557 million in prejudgment interest and attorneys’ fees.

As a result, the coffee giant revised its fourth-quarter earnings to a $1.23 billion loss from an initially reported $481.1 million profit.

The company also revised its 2013 earnings to $8.3 million, or one cent a share, from a previously reported $1.72 billion, or $2.26 a share. Despite this, the coffee-chain has restated its commitment to providing returns in the range of $2.55 to $2.65 per share for 2014.

Kraft's sister company Mondelez is entitled to proceeds from the payout.

Related: Starbucks CEO Howard Schultz Steps Down From Square's Board of Directors

The dispute between Starbucks and Kraft dates back to November 2010, when Starbucks announced its intention to terminate the agreement that allowed Kraft to sell bags of Starbucks coffee in grocery stores. Kraft had been marketing Starbucks products since 1998 and says it had built a "highly profitable" consumer packaged goods business that had grown from a base of $50 million to $500 million. Meanwhile, Starbucks argues that Kraft failed to deliver on its responsibilities, damaging the coffee chain's performance and limiting its growth in the single-serve segment.

“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,” Troy Alstead, chief financial officer for Starbucks, said in a statement. “We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly under the direct model.”

While Starbucks opposes the outcome of the arbitration, executives are pleased to have the process concluded. “We now have the flexibility and freedom to control our own destiny,” said CEO Howard Schultz in a conference call earlier today.

According to Alstead, Starbucks has adequate liquidity, through cash on hand and borrowing capacity, to fund the payment. “Absolutely nothing changes in how we invest in the future,” said Culver in the conference call. The company is looking at several ways to recover the $2.8 billion: packaged coffee expansion outside the U.S., the rising profitability of the single-serve segment and the growth of the Teavana brand.

Related: 3 Ways Starbucks Is Innovating and Why You Should Care