Starbucks Ordered to Pay $2.76bn to Kraft Foods for Improper Contract Termination

US coffee giant Starbucks has been asked to pay a significant amount in damages and other costs to Kraft Foods in a dispute over an agreement the companies had for distributing Starbucks packaged coffee in grocery stores.

An independent US arbitrator has ordered Starbucks to pay $2.76bn (£1.74bn, €2.05bn), including $2.23bn in damages and $527m in interest and legal fees.

Kraft first began marketing Starbucks roast and ground coffee in 1998 and succeeded in building a business worth about $500m by 2010.

The deal providing Kraft with exclusive rights for the sales of Starbucks coffee in retail and grocery outlets was due to run until March 2014, but the coffee major announced its intention to terminate the contract in November 2010, saying that Kraft had broken the terms.

Subsequently, Kraft initiated arbitration proceedings to challenge the improper termination of the companies' contract.

The payments from the case will go to Mondelez International, from which Kraft Foods was spun off in 2012.

"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," Gerd Pleuhs, executive vice president at Mondelez, said in a statement.

The company would use the net proceeds from the arbitration award to repurchase its class A common stock.

Starbucks' Response

The adverse ruling is yet another blow for Starbucks, whose public image was tainted in the UK over tax dodging. It does not have a provision to appeal against the arbitrator's decision.

"We are pleased the arbitration has ended; however, we strongly disagree with the arbitrator's conclusion and that Kraft is entitled to $2.23 billion in damages plus $527 million in prejudgment interest and attorneys' fees," Starbucks CFO Troy Alstead said in a statement.

"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."

Alstead noted that Starbucks has adequate liquidity to pay the amount, which will be recorded as a charge to 2013 operating expenses.

At the same time, the company added that the amount awarded reflects the value of its packaged coffee business and the continued growth prospects of it.

"I would add that taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders. 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 added.