Starbucks: Kraft not meeting expectations

[December 29, 2010]  NEW YORK (AP) -- A Kraft Foods executive acknowledged to Starbucks' CEO nearly a year ago that Kraft had "neglected" their relationship, but the food maker still wants a court to force the coffee chain to pay for ending the distribution pact.

Responding to that request, Starbucks said in a filing late Monday with the U.S. District Court for the Southern District of New York that it repeatedly told Kraft it wasn't performing adequately and gave it a chance to shape up.

Anthony Vernon, president of Kraft Foods North America, told Starbucks CEO Howard Schultz in a Jan. 17 e-mail that the companies' relationship was "very broken," Starbucks' said.

Vernon goes on to say Kraft "neglected (the) relationship badly in North America," and he wants to "fix the sins of the past."

"These e-mails do not demonstrate a material breach" of the distribution agreement, Kraft spokeswoman Renee Zahery said in an interview.

Zahery said at the time of the e-mails both companies expressed a mutual desire to address the business issues they were facing, which included the unstable economy and competitive challenges.

The dispute between Kraft and Starbucks went to arbitration last month after Starbucks said it no longer wanted Kraft to distribute and promote its packaged coffee in stores and had chosen an alternate distributor. The arbitration proceedings are continuing.

Starbucks said it is operating within the contract's terms in moving to sever relations with the food maker -- whose brands include Nabisco, Oscar Mayer and Trident.

Kraft has said it needs more time beyond the March 1 termination date that Starbucks set, and it wants compensation for losing the distribution business plus a premium of up to 35 percent. Starbucks pegged the food maker's demand at $700 million.

Zahery said Starbucks told Kraft in August that it wanted to end their partnership because it wanted to concentrate more on the packaged coffee business, not because it was dissatisfied with Kraft's performance.

Sales at grocery stores and other retailers are increasingly important to Starbucks. It has said it plans to offer more products in stores -- after first introducing them in its cafes, as it did with its Via brand of instant coffee.

Starbucks has said Kraft didn't fulfill its obligations under the contract and failed to collaborate on marketing decisions and customer contacts.

Kraft, which is based in Northfield, Ill., has said it increased revenue from Starbucks' packaged coffee business to $500 million from $50 million during the partnership, which began in 1998. Zahery added that the business' 2010 results were strong and show that Kraft has driven both revenue growth and market share gain.

The companies have until Jan. 21 to file papers supporting their positions.

Shares of Starbucks fell 32 cents to $32.15 in afternoon trading on Tuesday, while Kraft's stock gained 5 cents to $31.66.

[Associated Press]

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