By Paul Ziobro
Kraft Foods Inc. (KFT) and Starbucks Corp. (SBUX) are set to
begin arbitration hearings Wednesday to determine if and how much
Starbucks owes Kraft over the coffee-company's decision to start
distributing its packaged coffee on its own.
The two consumer-product giants will be heard in private by
arbitration firm JAMS in Chicago. The hearing is scheduled to run
through July 31. Starbucks has said it expects the decision to be
handed down in August.
The binding arbitration hearing will settle whether Starbucks
owes Kraft a termination fee for ending 13-year-old licensing deal
in March 2011. Under that arrangement, Kraft sold Starbucks bagged
coffee in supermarkets and other retailers.
Starbucks argues it does not owe the break-up fee because it
says Kraft mismanaged parts of the distribution agreement, like
failing adequately stock shelves with its coffee and mismanaging
promotions.
Kraft disagrees, saying the problems were minor and did not rise
to the level that allows Starbucks to end the deal without having
to pay a termination fee.
Kraft has claimed damages of up to $2.9 billion, plus attorney
fees, but analysts expect Starbucks to be hit with a much lower
penalty. Stifel Nicolaus, for instance, estimates that Kraft may
get $1.8 billion. Other analysts have estimated Starbucks would pay
at least $1 billion.
Starbucks says Kraft's damage claim is highly inflated, and is
claiming damages of $62.9 million from loss sales due to Kraft's
mismanagement of the business.
"We're going to vigorously defend our position," Starbucks
spokesman Jim Olson said Wednesday. "We believe we have valid
claims of material breach by Kraft."
A Kraft spokeswoman declined to comment on the arbitration until
the ruling is handed down.
The decision would finally close the book on a drawn-out
break-up between Kraft and Starbucks. The relationship started to
publicly unravel in late 2010, when Starbucks told Kraft that it
planned to end the licensing deal so Starbucks could run its
bagged-coffee business on its own. Kraft generated about $500
million in annual sales from the deal.
Kraft tried to block the move in court, but Starbucks ultimately
won the right to take the business in-house.
Write to Paul Ziobro at paul.ziobro@dowjones.com