If our community needed any additional reinforcement regarding how important, and perhaps how expensive, open contract management terms and supplier relationships have become, than today’s headlines involving Starbucks and Kraft Foods should be the reminder. (Paid subscription or tiered free viewing) Yesterday an arbiter ordered Starbucks to pay Kraft’s new spinoff, Mondelez International a total of roughly $2.8 billion dollars after the early termination of a Kraft’s supply coffee agreement with Starbucks.
The coffee supply agreement dates back to 1998 when Kraft was contracted to market and distribute Starbucks branded coffee among U.S. grocery and supermarket channels. In a November 2010 Supply Chain Matters commentary, we noted reports that the deal with Kraft was designed as an indefinite arrangement subject to certain conditions and limitations. In order to terminate the supply arrangement, Starbucks accused its partner of failure to actively market the brand and not maintaining appropriate promotional campaigns. Notice was given in November 2010 for termination in March 2011. For its part, Kraft indicated that Starbucks could take over the supply arrangement but needed to compensate the supplier for the market value of the business. At the time, Wall Street analysts’ estimates were that Kraft would seek $1.5 billion in compensation. Starbucks offered $750 million to settle the arrangement. The process was submitted to arbitration in 2011 after both sides could not agree to a compensation number.
While Starbucks now indicates that it strongly disagrees with arbitrator’s ruling, it must now reportedly restate its fiscal fourth quarter financials to show an operating loss. Because Kraft’s coffee business has now split into Mondelez International, that company will receive the recovery from the arbitration award. According to a report published in the Wall Street Journal, Mondelez management indicates that any proceeds will be utilized to buy back shares of that company.
For its part, Starbucks has taken control of its own packaged coffee distribution business and has entered into a distribution agreement with Keurig single-serve brewers. A company spokesperson indicated to the Wall Street Journal that it has sold more than one billion K-cups since the suspension with Kraft. Kraft, in turn, has now entered into an agreement to distribute McCafe branded coffee from McDonalds.
In our November 2010 commentary, we opined that instead of playing “my supply chain trumps yours”, perhaps it was better to move toward a “win-win” negotiation agreement where the lawyers and egos stand in the background. Readers can make their own judgment as to whether this was hindsight or wishful thinking. Three years later, the financial implications have now come to light.
From our lens, a final observation is in order from regarding Mondelez. Instead of allocating this award totally to stock buyback, perhaps some of these monies can be invested in supply chain transformation. After all, that was the original intent.