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Starbucks Settles Coffee Dispute to the Tune of $2.79 Billion

Starbucks Corp. is set to pay Mondelez International Inc. $2.79 billion to settle a “dispute over distribution in the coffee-shop chain’s bagged-coffee unit…” This whopping payment, ordered by an arbitrator, includes $2.23 billion in damages and $557 million in interest and attorneys’ fees. Starbucks stated that it has the cash and borrowing power to cover the payment, and will “book it as a charge to its fiscal 2013 operating expenses.”

The dispute began in 2010, when Mondelez was known as Kraft Foods Inc. Starbucks offered the food retailer $750 million to end their distribution agreement. Kraft rejected the offer. Starbucks was trying to sever the agreement to jump into the K-Cups foray. “[T]hat would not have been possible without ending the Kraft arrangement,” said David Tarantino, an analyst at Robert W. Baird & Co.

In fiscal year 2012, Starbucks saw revenue for packaged coffee and tea rise 50 percent, “compared to 14 percent sales increase for the entire company.” This success was largely attributed to the sales of Starbucks and Tazo brand single-serve K-Cup packs.

Naturally, the two sides disagreed about whether the arbitrator’s decision was correct. Starbucks thought the decision was harsh and said, “Kraft didn’t deliver on its responsibility to the brand.” Mondelez said, “[I]t would use the proceeds from the award to buy back stock.”

Mondelez was looking to recover compensation for the “fair market value” of the business plus a “premium of as much as 35 percent of that value.” It estimates that since the two companies started collaborating, “Starbuck’s retail-grocery coffee business grew to $500 million in annual revenue from $50 million . . . .”

Starbucks claims that “sales growth at grocery stores ‘quickly fell’ after 2000 and its market share dropped to about 25 percent of grocery store premium coffee sales at the beginning of 2010 from almost 33 percent in 2005.”

Analysts believe that the split was necessary now that Starbucks is being viewed as “a global consumer products company rather than simply a coffee retailer.” Despite this, one certainty is that Starbucks is on the hook for $557 million in interest and attorneys’ fees.

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