Kraft-Starbucks Arbitration Hearing to Start Wednesday
07/11/2012| 10:22am US/Eastern
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By Paul Ziobro
Kraft Foods Inc. (>> Kraft Foods Inc) and Starbucks Corp. (>> Starbucks Corporation) are set to begin arbitration hearings Wednesday to determine if and how much Starbucks owes Kraft over the coffee-company's decision to start distributing its packaged coffee on its own.
The two consumer-product giants will be heard in private by arbitration firm JAMS in Chicago. The hearing is scheduled to run through July 31. Starbucks has said it expects the decision to be handed down in August.
The binding arbitration hearing will settle whether Starbucks owes Kraft a termination fee for ending 13-year-old licensing deal in March 2011. Under that arrangement, Kraft sold Starbucks bagged coffee in supermarkets and other retailers.
Starbucks argues it does not owe the break-up fee because it says Kraft mismanaged parts of the distribution agreement, like failing adequately stock shelves with its coffee and mismanaging promotions.
Kraft disagrees, saying the problems were minor and did not rise to the level that allows Starbucks to end the deal without having to pay a termination fee.
Kraft has claimed damages of up to $2.9 billion, plus attorney fees, but analysts expect Starbucks to be hit with a much lower penalty. Stifel Nicolaus, for instance, estimates that Kraft may get $1.8 billion. Other analysts have estimated Starbucks would pay at least $1 billion.
Starbucks says Kraft's damage claim is highly inflated, and is claiming damages of $62.9 million from loss sales due to Kraft's mismanagement of the business.
"We're going to vigorously defend our position," Starbucks spokesman Jim Olson said Wednesday. "We believe we have valid claims of material breach by Kraft."
A Kraft spokeswoman declined to comment on the arbitration until the ruling is handed down.
The decision would finally close the book on a drawn-out break-up between Kraft and Starbucks. The relationship started to publicly unravel in late 2010, when Starbucks told Kraft that it planned to end the licensing deal so Starbucks could run its bagged-coffee business on its own. Kraft generated about $500 million in annual sales from the deal.
Kraft tried to block the move in court, but Starbucks ultimately won the right to take the business in-house.
Write to Paul Ziobro at paul.ziobro@dowjones.com
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