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Starbucks: Kraft screwed up our partnership

Starbucks has accused Kraft of bungling sales of its packaged coffee in grocery stores and wants to end their 12-year partnership due to "material breaches" of their contract.
/ Source: Reuters

Kraft Foods Inc said Monday it is seeking arbitration in its fight with Starbucks Corp, which is trying to end a deal under which Kraft sells packaged Starbucks coffee to grocery stores.

Starbucks 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 on Monday. "Starbucks raised these issues with Kraft, but there was never any improvement in Kraft's performance."

Kraft, which has overseen the growth of the packaged coffee business from $50 million to $500 million in annual sales, in turn accused Starbucks of trying to walk away from their partnership without honoring 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 first emerged on Sunday. .

Starbucks' shares slipped 10 cents in premarket trading to $31.04 on Monday, while Kraft slid 5 cents to $30.25.

Starbucks, which is also pushing for sales growth of its Via instant coffee, has made no secret of a desire to exert more control over its consumer packaged-goods business.

On Monday, the company said it has exercised its right to end the relationship due to Kraft's failure to fix the alleged breaches of their partnership. It expects to assume direct responsibility for the packaged-coffee business on March 1, 2011.

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.

Kraft said Starbucks must compensate it with the fair market value of the business, plus a premium as high as 35 percent.

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.