Kraft and Starbucks to End 12-Year Partnership

Published by: Frank Galvano on 29th Nov 2010 | View all blogs by Frank Galvano
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Kraft and Starbucks to End 12-Year Partnership

Starbucks Corporation and Kraft Foods Inc. on Monday made public a potentially messy divorce between the two as they continue to fight over the dissolution of their partnership in which Kraft sells bags of Starbucks brand coffee in supermarkets.

Kraft announced on Monday they had begun arbitration proceedings to stop Starbucks from ending the agreement.  The announcement had a negative impact on both companies' stock.  At stake for Kraft is an estimated $500 million annually in sales, with particularly strong profit margins.  Starbucks, analysts say, will likely have to pony up about $1 billion to buy the business back and run it, which economists deem a risky move, considering Starbucks is experienced in running coffee shops, not selling packaged goods.

News of the end of the partnership first surfaced on November 4th, when Starbucks CEO Howard Schultz told analysts that Starbucks wanted to end the 12-year partnership.  Kraft contends that if Starbucks wants out of the deal, it must pay fair market value for the business plus a premium as high as 35 percent, based on how Starbucks carries the business forward.

Shares of Starbucks fell 1.5 percent in early afternoon trading, while Kraft's stock dipped 0.8 percent.  Kraft, who also sells Maxwell House and Yuban brand coffee, does not discuss profits for individual brands, but analysts estimate that Starbucks brings in a profit margin of 20 percent.  Starbucks, if ordered to compensate Kraft, could end up paying between $1 billion and $1.5 billion, according to analysts' estimates.

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