Starbucks Corporation (SBUX) announced that it will have to pay $2.76 billion to Kraft Foods Inc. against settlement of the year-long distribution agreement dispute.
The indemnity will go to Mondelez International Inc. (MDLZ) which emerged when Kraft Foods was split into two separate companies – Mondelez and Kraft Foods Group, Inc (KRFT) – in October last year. While Mondelez took old Kraft’s food and snacks business, Kraft Foods Group got the North American grocery business of the old Kraft.
Per the distribution agreement, old Kraft looked after the distribution and marketing of certain Starbucks and Seattle's Best Coffee branded packaged coffees in grocery channels. In fiscal 2011, Starbucks took back its packaged coffee business from old Kraft on the grounds of breaching the contract and not marketing its products properly.
However, Kraft denied Starbucks’ accusations and commenced a federal court action against the latter in Dec 2010. Kraft had demanded damages worth $2.9 billion.
Starbucks has been ordered by an arbitrator to pay Mondelez $2.23 billion in damages plus $527 million in pre-judgment interest and attorneys’ fees to settle the dispute. Starbucks has announced that it has ample cash and borrowing capacity to make the payment.
Starbucks’ packaged coffee business is part of its Channel Development business also known as the CPG business. The CPG business reflects everything outside the Starbucks stores like packaged coffee, foodservice operations, K-Cups, Starbucks VIA Ready Brew and Tazo tea. In North America, the company has 100,000 points of distribution in the CPG channels. Starbucks has plans to introduce its CPG business in China in the long term.
The business is growing rapidly with revenues in the segment increasing 50% in fiscal 2012. Although revenues were below management's expectations in fiscal 2013, the CPG business is expected to return to double-digit growth in fiscal 2014. The company expects this business, which strengthens Starbucks’ presence in the at-home coffee and away-from-home coffee segments, to continue to grow over the long term.
Starbucks carries a Zacks Rank #3 (Hold). Another stock in the retail/restaurant sector worth mentioning is Buffalo Wild Wings Inc. (BWLD) carrying a Zacks Rank #1 (Strong Buy).