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Starbucks to pay $2.79 billion over bagged coffee dispute

An arbitrator ruled the coffee maker breached its distribution contract with Mondelez International Inc.

Gaining control of your company’s entire production process can often be a huge boost to business. But is it worth a breach of contract, resulting in a $2.79 billion dollar settlement?

For Starbucks, it may just be.

An arbitrator ordered Starbucks to pay the exorbitant sum to Mondelez International Inc. on Nov. 13, settling a dispute over the company’s bagged coffee business. Through the terms of the settlement, Starbucks owes Mondelez $2.23 billion in damages and $557 million in interest and attorneys’ fees. The coffee maker said in a statement that it has adequate cash and borrowing capacity to cover the payment.

The original suit arose in 2010 after Starbucks wished to end its partnership with Mondelez, then Kraft Foods International, which had been the company’s bagged coffee distributor. Kraft, however, rejected Starbucks’ $750 million offer to terminate their agreement. Starbucks then attempted to wrest control of distribution anyway.

According to Kraft’s filing in 2010, revenue from the Starbucks bagged coffee segment of the company grew from $50 million at the start of their arrangement to $500 million in 2010. Since then, the segment has grown even larger, outgrowing other segments of the Starbucks brand thanks to developments such a K-Cups.

David Tarantino, an analyst at Robert W. Baird & Co. in Milwaukee, said in a research note obtained by Bloomberg that the new Starbucks revenue “would not have been possible without ending the Kraft arrangement.” He also claimed that the segment should continue to grow for “above-average pace for an extended period.”

Thanks to this strong growth, analysts believe, the payout for Mondelez in the case turned out to be higher than expected. Still, Starbucks is happy to have the litigation behind it. Starbucks CEO Howard Schultz said on a webcast after the case that the company was “building a multibillion-dollar global consumer packaged business. We now have the flexibility and the freedom to control our own destiny.”

 

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