Starbucks v Kraft
A double shot of discord
The kings of coffee brawl with the monarchs of macaroni
STARBUCKS once seemed so unstoppable that the Onion, a satirical paper, joked about a new Starbucks opening in the restroom of an existing Starbucks.
Yet by January 2008, when Howard Schultz, the coffee chain's most effective boss, returned as chief executive,
it was rapidly declining.
Mr Schultz closed stores, shed staff, slimmed the supply chain and arrested Starbucks's slide.
In fiscal 2010 the firm's operating margins rebounded to 13.8%, the highest in its 40-year history.
One of the problems Mr Schultz found, after a review of the business, was in the way Starbucks-brand coffee was sold in supermarkets.
The so-called consumer-packaged goods business is handled by Kraft, America's biggest food company, which is best known for having mastered the art of mixing macaroni with cheese.
Following an agreement in 1998, Kraft sells, markets and distributes bags of Starbucks coffee.
Mr Schultz told Kraft he was dissatisfied.
Kraft acknowledged the complaint, but, according to Starbucks, failed to act because it was focused on the takeover of Cadbury, a maker of superior British sweets such as Creme Eggs.
By the spring of last year, both sides realised that their partnership was broken.
Starbucks says it offered Kraft $500m to give back the CPG business.
As part of the proposed deal, it still wanted to supply capsules for Tassimo, Kraft's single-portion coffee machines.
Kraft initially agreed to the buy-out offer, but then changed its mind and demanded another $200m, according to Starbucks.
Kraft disputes this account.
It claims that Starbucks offered $750m to buy out the business in August.
It adds that it rejected the offer.
A fair price would be $1.5 billion, Kraft says.
In October Starbucks told Kraft that it was in material breach of their agreement.
Unless the matter was resolved within 30 days, Starbucks said, all their agreements would end by March 1st and Kraft would get nothing.
The alleged breaches include Kraft's failure to involve Starbucks in sales planning, to provide detailed budgets and to obtain approval for advertising.
Starbucks says Kraft also violated an exclusivity deal by promoting its own premium coffee.
Kraft says all these alleged breaches are baseless.
It says Starbucks brewed them up to give itself a pretext for grabbing back the best part of its business without paying for it.
On November 29th Kraft initiated an arbitration proceeding to challenge this move.
Ignoring the arbitration, Starbucks said a couple of days later that from March onwards it would distribute its packaged coffee through Acosta, a marketing firm.
On December 6th Kraft sought a preliminary injunction against Starbucks in a District Court of New York, for allegedly violating the terms of their agreement.
The hearing of the injunction is tentatively scheduled for January 27th.
Kraft says that it played a central role in the success of Starbucks's packaged-coffee business, which grew tenfold during the course of their partnership.
Starbucks retorts that it could have grown faster if someone else had handled it.
Even so, it will be tricky to prove material breaches of the agreement, so Starbucks will probably have to pay to end it.
Kraft stands to lose not only a lucrative business but also some “category captaincies”.
Each large American retailer elects a product-category captain who is closely involved in how its sales are managed.
Kraft is category captain in more than 60% of the supermarkets in which it distributes coffee.
Acosta will soon be vying for this profitable honour.
They attempted to overthrow the monarch.
Mary was twitted by a satirical old lady.
The executive manager tossed out my application.
If you pull this lever, the roof will slide back.
We came to the margin of the wood.