Starbucks Corp. (SBUX) said it would pay Mondelez International Inc. (MDLZ) $2.79 billion to settle a dispute over distribution in the coffee-shop chain’s bagged-coffee unit, as grocery-store sales become a growing part of the business.
The payment, ordered by an arbitrator, consists of $2.23 billion in damages and $557 million in interest and attorneys’ fees, Seattle-based Starbucks said today in a filing. The company said it has adequate cash and borrowing capacity to fund the payment and will book it as a charge to its fiscal 2013 operating expenses.
The ruling settles a dispute that began in 2010, when Starbucks offered $750 million to end an agreement through which Mondelez, then known as Kraft Foods Inc., distributed its coffee to food retailers. Kraft rejected the offer. Starbucks sought to wrest control of its packaged coffee business as revenue grew and surpassed gains in other segments.
Recent revenue growth at Starbucks is being driven by new products, such as K-Cups, “that would not have been possible without ending the Kraft arrangement,” David Tarantino, an analyst at Robert W. Baird & Co. in Milwaukee, said in a research note today. The company can continue to grow its packaged-coffee business at an “above-average pace for an extended period,” he said.
In Starbucks’s fiscal 2012, revenue for packaged coffee and teas sold in grocery stores and other retailers jumped 50 percent, compared with a 14 percent sales increase for the entire company. That growth was largely driven by sales of Starbucks and Tazo brand single-serve K-Cup packs, the company said in its annual filing. Starbucks said yesterday that it disagreed with the arbitrator’s conclusion and said Kraft didn’t deliver on its responsibility to the brand.
“They are paying more than I expected,” Nick Setyan, an analyst at Wedbush Securities in Los Angeles, said yesterday in an e-mail. He had expected Starbucks to pay as much as $2 billion and rates the shares outperform, the equivalent of a buy recommendation. “Having said that, it’s great to have it behind us now,” he said.
Mondelez said yesterday in a statement that it would use the proceeds from the award to buy back stock.
While Kraft Foods Group Inc. remained the named party in the dispute after it was spun off from Mondelez in October 2012, Kraft agreed to direct any recovery to Mondelez and said the arbitration’s outcome won’t have a material financial impact on it.
In November 2010, Starbucks Chief Executive Officer Howard Schultz said he planned to terminate the distribution pact with Kraft, which started with an agreement in 1998 that was superseded by a new deal in 2004. The world’s largest coffee chain was seeking to generate more of its revenue from grocery stores with new offerings such as Via, its single-serve coffee product. It’s also expanding its packaged coffee business in more overseas markets.
Starbucks is “building a multibillion-dollar global consumer packaged business,” Schultz said today on a webcast. “We now have the flexibility and the freedom to control our own destiny.”
Kraft sought compensation for the “fair market value” of the business plus possibly a premium of as much as 35 percent of that value. Since they started working together, Starbucks’s retail-grocery coffee business grew to $500 million in annual revenue from $50 million, Kraft said in November 2010.
Starbucks said 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.
“Most certainly Starbucks has handled the channel business better than Kraft, more easily deploying single-serve as well as expanding into different products,” Setyan said. He said he views Starbucks as “a global consumer-products company rather than simply a coffee retailer now. That would be impossible if Kraft still controlled coffee distribution.”
Starbucks added 1 percent to $81.46 at the close in New York. Deerfield, Illinois-based Mondelez rose 2.7 percent to $33.31.
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