Starbucks, last Thursday, stated that it wished to uncoil an agreement under which Kraft has dispersed Starbucks bagged coffee and Seattle’s Best coffee brand in supermarkets and among other food retailers since 1998.
As per Kraft’s financial officer, Tim McLevish, the business has risen to $500 million in annual sales from $50 million 12 years back.
At a press release late Thursday night, Starbucks public statement about its aim to terminate the deal initiated a tit-for-tat altercation. Both companies blamed each other of inappropriately exemplifying the terms of the deal.
Kraft stated that it needs Starbucks to compensate Kraft with the fair-market price of the business as well as a premium in some cases. Both companies said that they have decided to sort out things privately.
This deal is a prime element in the plan put up by Chief Executive Howard Schultz to handle potential growth for the country’s biggest coffee-shop chain, with a brand found in more than a single cup holder. It would denote a most important change for Starbucks customer packed business, if the deal is closed.
Last year, Starbucks made an astounding entrance into the market of single-cup coffee and accumulated $135 million in the first-year sales with its instant coffee, Via. (Wish we could see those kinds of sales for our wheelchair accessories.)
On Friday, in a research report, John Ivankoe, a JP Morgan analyst said that Starbucks could enter into new partnerships selling single-cup coffee packets used for one-cup brewing machines. About 80% of Starbucks customer’s do not have a single cup brewer at home, he said.
The Green Mountain Coffee Roasters, a fast-growing Vermont-based company may come into the picture here also. They are extremely popular in the single-cup brewing equipment market and also sell Keurig machines and the K-Cups coffee packets used in them.
With its Tassimo brewing machines, Kraft is a rival and it is Starbucks which supplies coffee to Tassimo. So the future of Kraft’s long-established Maxwell House brand remains indecisive.
In a research note, RBC Capital Markets analyst Ed Aaron said that they can’t help thinking if this change would prompt Kraft to ultimately divest Maxwell House. A terminated distribution deal with Starbucks might reduce up to 4 cents a share from Kraft’s earnings, he said after a back-of-the-envelope calculation.
Judy Hong, an analyst at Goldman Sachs said that if Kraft loses the distribution deal, the food maker’s dominant role in the coffee aisles of U.S. grocery stores could be in jeopardy.
As Starbucks reported fourth-quarter financial results late Thursday, its shares increased by 4% to $31 in afternoon trading. Green Mountain grew to around 3% to $34.83 while Dow Jones Industrial Average section Kraft dropped almost 3% to $30.87.
What’s all this mean for the food and beverage industry or the coffee you love in your drink holder? We’ll have to wait it out and see.
