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Starbucks' ground coffee product, Seattle's Best Coffee, is seen on display at the company's corporate headquarters in Seattle. (ANTHONY BOLANTE/REUTERS/ANTHONY BOLANTE/REUTERS)
Starbucks' ground coffee product, Seattle's Best Coffee, is seen on display at the company's corporate headquarters in Seattle. (ANTHONY BOLANTE/REUTERS/ANTHONY BOLANTE/REUTERS)

Kraft, Starbucks coffee conflict heats up Add to ...

Starbucks Corp and Kraft Foods Inc. began airing a messy divorce in public Monday, fighting over the dissolution of their partnership selling bags of Starbucks coffee at supermarkets.

News of the breakup first surfaced on Nov. 4, when Starbucks Chief Executive Howard Schultz said on a quarterly conference call that Starbucks wanted to end its 12-year deal with Kraft, which markets and distributes Starbucks and Seattle's Best coffees to supermarkets and stores like Target Corp Kraft, which also sells Starbucks discs for its Tassimo one-cup coffee brewer and Tazo teas, said Monday that it initiated arbitration to challenge Starbucks' attempt to end the agreement.

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It contends that if Starbucks wants to back out, it must pay Kraft the fair market value of the business plus a premium of as much as 35 per cent. Under the deal with Kraft, Starbucks bagged coffee sales grew to $500-million (U.S.) a year from $50-million.

Starbucks shares were down 2.8 per cent in morning trade, while Kraft shares were down 1.4 per cent.

Starbucks could end up paying more than $1-billion if it is forced to compensate Kraft for the business, according to Baird analyst David Tarantino.

"We suspect Starbucks will experience some difficulty in proving its case, given that sales have grown more than tenfold during the 12-year partnership," Mr. Tarantino said in a research note.

Starbucks may be willing to risk the potential cost of a dissolution as it seeks significant growth beyond its cafe chain by looking to the market for consumer packaged goods. The company is also pushing sales of its Via instant coffee in what it hopes will become a billion-dollar business.

"What they want is to manage their brand. They're trying to regain control of that," said Oppenheimer analyst Matthew DiFrisco.

The company told Reuters it plans to work with the sales and marketing division of privately held Acosta Inc, which handles its Via business, to distribute Starbucks coffee to stores after ending its ties to Kraft on March 1, 2011.

Starbucks has accused Kraft of failing to meet certain provisions of their arrangement, including keeping Starbucks involved in major marketing initiatives, and said those failures caused "the erosion of brand equity."

"Kraft did not meet its responsibilities," Starbucks said in a statement Monday. "Starbucks raised these issues with Kraft, but there was never any improvement in Kraft's performance."

Kraft in turn accused Starbucks of trying to walk away from their partnership without honouring its conditions.

"In effect, Starbucks is trying to walk away from a 12-year strategic partnership, from which it has greatly benefited, without abiding by contractual conditions," Marc Firestone, Kraft's general counsel, said in a statement.

Details of the escalating battle between the two companies emerged on Sunday, after Reuters obtained letters from a Starbucks attorney to Kraft, accusing the packaged food giant of multiple "material breaches."

Kraft said it recognized Starbucks' right to take over the business but said the deal calls for Kraft to get sufficient time to prepare for any transition. It said Starbucks' public comments about the deal's termination needlessly risked confusion among customers.

Starbucks disputed Kraft's assertion that the deal was in effect indefinitely. The world's largest coffee chain said the arrangement was set to expire in 2014 unless one of the parties decided to end it early.

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