• by Thom Forbes  @tforbes, November 13, 2013

An arbitrator yesterday ordered Starbucks to pay nearly $2.8 billion to Mondelez — the snack and confectionary company that was spun off from Kraft Foods last year — for yanking the distribution and marketing of its coffee in grocery stores in March 2011. 

Kraft made a deal for exclusive rights to sell Starbucks at retail in 1998, prompting Chicago Tribune columnist George Lazarus to write that “the pact suggests Starbucks Coffee Co. might eventually be folded into the overall Kraft stable” back at a time when it was only selling about $10 - $15 million annually in supermarkets absent the “distribution and/or promotional clout of Kraft.”

The decision hits up Starbucks for $2.23 billion in damages for ending the arrangement, as well as $527 million for prejudgment interest and attorneys' fees. Starbucks said it was “pleased the arbitration has ended” but maintained that it “strongly disagreed with the conclusion.” 

In the end, though, it looks like it is going to pay up although it would not comment directly on the possibility of an appeal, Julie Jargon reports in the Wall Street Journal, “saying it is still reviewing the decision.”

“Both sides finger-pointed, writesUSA Today’s Bruce Horovitz. “Starbucks said that Kraft mismanaged the brand and had breached the contract. But Kraft denied the Starbucks charges and demanded that Starbucks pay Kraft a fair value for the business. For Kraft, the business brought in annual revenues of about $500 million.”

“Starbucks said it would use some of the $3.2 billion it had on hand and its available borrowing capacity to pay Kraft,” Stephanie Strom reports in the New York Times. “Mondelez plans to use the proceeds to buy back its Class A shares, subject to approval by its board,” she reports.

“Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders,” said Troy Alstead, CFO and group president, Global Business Services in a late afternoon press release. “The results over the past two and a half years clearly demonstrate that Starbucks’ at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft in 2011.”

Alstead also pointed out that Starbucks has the leading market share of premium packaged coffee, and that ending the deal with Kraft “gave us the flexibility to aggressively expand our growth in the premium single-serve segment with Starbucks (Coffee K-cup) Packs and Verismo.”

"We've sold more than one billion K-cups since then, which is something we wouldn't have been able to do if we were still with Kraft," a Starbucks spokesman told the WSJ’s Jargon, pointing out that “sales of packaged coffee have risen 62% in the last two years, compared with 24% growth for the overall packaged-coffee category.”

Starbucks will further discuss the outcome of the arbitration at 6 a.m. PT/9 a.m. ET this morning on a live webcast. 

“We’re pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation,” Mondelez’ EVP legal affairs and general counsel Gerd Pleuhs said in a statement. “We’re glad to put this issue behind us. We can now fully focus on growing our global snacks business.”

“Most certainly Starbucks has handled the channel business better than Kraft, more easily deploying single-serve as well as expanding into different products,” Wedbush Securities analyst Nick Setyan emailed Bloomberg’ Chris Burritt in reacting to the news. He also 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.’” 

Meanwhile, Kraft Foods Group last month announced a deal with McDonald’s “to test sales of McCafe-branded packaged coffees at grocery stores and other retail locations in multiple U.S. markets,” Reuters’ Lisa Baertlein and Phil Wahba reported. “The tests will include packages of whole bean and ground coffee as well as ‘single-cup’ options, which typically include K-cups for Green Mountain Coffee Roasters' popular Keurig brewer.”

The Chicago Tribunereported yesterday that “Kraft Foods Group had revenue in the latest quarter of about $4.7 billion; Starbucks had revenue in the latest quarter of almost $3.8 billion.” In other words, a lot of beans have been roasted since Lazarus first wrote about the 1998 deal between the two companies (and may the gods of journalistic retribution help Kraft if he didn’t get the story first).