Starbucks, Kraft emails show coffee spat not new

By Lisa Baertlein

LOS ANGELES (BestGrowthStock) – A feud between Starbucks Corp (SBUX.O: ) and Kraft Foods Inc (KFT.N: ) over supermarket coffee sales has been brewing since at least January — far longer than Kraft has acknowledged — according to email exchanges between their top executives provided by Starbucks.

The rift became public last month, when the Seattle coffee company said it wanted to end its 12-year-old distribution deal with Kraft, which sells bags of Starbucks coffee in supermarkets and other stores. Starbucks wants more control over its grocery business and aims to turn several of its packaged products, including Via instant coffee, into billion-dollar businesses.

Since November, Kraft repeatedly has said it was blindsided by Starbucks’ “overt hostility” and its “sudden” change in opinion about Kraft’s performance selling coffee by the bag.

But emails dated January 17, given to Reuters by Starbucks on Tuesday, show that top executives at both companies privately discussed their troubled partnership nearly a year ago.

“We cannot accept the continued share erosion and lack of progress we are experiencing down the grocery aisle,” Starbucks Chief Executive Howard Schultz wrote in an email to Kraft Chief Executive Irene Rosenfeld.

Starbucks has accused Kraft of breaching their contract by mismanaging its grocery coffee business and failing to take reasonable steps to counter market-share losses. It wants to terminate the supermarket agreement in March 2011, and end a deal covering Starbucks’ supply of coffee discs for Kraft’s Tassimo one-cup brewer.

Kraft denies any breach and says that if Starbucks wanted out, it would have to pay Kraft the fair value of the business plus a premium. The companies are currently involved in arbitration.

“Any long-term relationship has ups and downs,” said Kraft spokeswoman Renee Zahery. She said the “selectively leaked” emails predated several key events, including Starbucks’ $750 million offer to buy the business from Kraft; positive public statements from Starbucks executives about the relationship; and rising 2010 revenues.

“These emails came in the context of a mutual desire to address business challenges facing both companies,” Zahery said. “These emails do not support the allegation of material breach.”

Given the high hurdle of proving a “material breach,” analysts expect the coffee chain to have to pay Kraft, possibly more than $1 billion. The two sides are making their case in the press to influence the size of that payment.

While Starbucks’ worldwide cafe business was improving, Schultz said in the email to Rosenfeld, the packaged-coffee business was “in retreat” in Britain and Europe and “continuing to deteriorate” in North America.

“Candidly, we have heard nothing so far to suggest that we have any reason to expect a reversal of these trends anytime soon,” said Schultz.

Starbucks’ revenue from the partnership rose in fiscal 2009 and 2010, according to securities filings, but analysts have said it suffered market share losses for three years in a row.

Starbucks did not provide more recent examples of exchanges between the companies, but spokesman Corey duBrowa said there were additional communications between Kraft and Starbucks concerning their partnership in subsequent months.

“Starbucks has repeatedly pointed out Kraft’s poor performance directly, at high levels between the companies, over a long period of time,” duBrowa said.

‘OVERT HOSTILITY?’

Under Kraft, grocery sales of Starbucks’ bagged coffee grew from $50 million to $500 million a year. North America’s largest packaged-food maker said that the complaints from Starbucks surfaced only recently and that business improved this year.

On December 6, Kraft asked a federal court for a preliminary injunction to stop Starbucks from trying to sell its bagged coffee through a new partner.

Zahery said Kraft would file a motion on Tuesday asking for an expedited hearing on that request.

Kraft General Counsel Marc Firestone said on December 6 that after a long and successful partnership, “it’s difficult to understand Starbucks’ overt hostility and sudden change of view toward Kraft’s performance.”

But according to the emails supplied by Starbucks, Kraft CEO Rosenfeld responded to Schultz on January 17, saying: “We are no happier about the state of our joint business than you are, but, as I know you realize, there are opportunities on both sides to make it better.”

Kraft Foods North America President Tony Vernon told Rosenfeld in a message later that day: “We have neglected this relationship badly in North America … To not give our best effort to rebuild this partnership would be financial, competitive and reputational mistakes for Kraft.”

In his previously mentioned email to Kraft’s CEO, Schultz also expressed concern about the potential success of Kraft’s Tassimo machines, given “the speed at which the single-serve market is moving away from Kraft.”

Green Mountain Coffee Roasters Inc’s (GMCR.O: ) rival Keurig brewing system has a near-monopoly on the relatively small, but fast-growing, single-cup market.

“Coffee is all we do, and we must know that we are on the right path to winning down the aisle and with any single serve partner we choose,” Schultz said.

(Additional reporting by Martinne Geller in New York; Editing by Michele Gershberg and Gerald E. McCormick)

Starbucks, Kraft emails show coffee spat not new