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Howard Schultz of Starbucks to Pay $2.8 Billion to Kraft

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Howard Schultz, Starbucks’s Jewish CEO, claims his corporation is healthy despite its costly arbitration settlement with Kraft Foods earlier this month.
Howard Schultz, Starbucks’s Jewish CEO, claims his corporation is healthy despite its costly arbitration settlement with Kraft Foods earlier this month.
Starbucks must pay approximately $2.8 billion in arbitration fees to Kraft Foods, according to recent reports.

The $2.8 billion is comprised of $2.23 billion in damages and $527 million in prejudgment interest and legal fees, according to The Wall Street Journal. Kraft Foods contested Starbucks’s premature termination of a contract that enabled Kraft to sell bagged Starbucks coffee. The contract took effect in 1998 and was slated to terminate in March 2014, but Starbucks annulled the contract in March 2011 since it thought Kraft had “mismanaged the brand” in breach of the contract. Kraft disputed these claims and initiated arbitration to acquire the value it had lost due to the early end to the contract. According to The Wall Street Journal, Kraft brought in revenues of roughly $500 million annually from its sales of Starbucks products.

Howard Schultz, the Jewish CEO of Starbucks who was born and raised in Brooklyn, told analysts in a conference call last week, however, that the decision to terminate Kraft’s contract was the best move for the long-term welfare of Starbucks, despite the large arbitration settlement.

“It’s difficult when a decision like this goes against you. But it is a one-time charge in a single moment in time, and now it’s behind us,” Schultz explained. Canceling Kraft’s contract was “without question, the right strategic decision for Starbucks, our brand and our shareholders,” he added, the International Business Times reported.

Schultz further highlighted the fact that, without Kraft, Starbucks could “control its own destiny.”

“Having gained full operating control, we now have the flexibility and the freedom to control our own destiny and, most importantly, preserve and enhance the Starbucks Global business and brand around the world,” he said, according to Bloomberg BusinessWeek.

Starbucks chief financial officer, Troy Alstead, similarly expressed disappointment with the arbitration result.

“We strongly disagree with the arbitrator’s conclusion,” he said, the Journal further reported. “We believe Kraft did not deliver on its responsibilities to our brand under the agreement.”

Alstead also stressed that breaking its contract with Kraft Foods was an intelligent move for Starbucks.

“Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders,” he added, according to the Journal. “The results over the past two and a half years clearly demonstrate that Starbucks at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft.”

Kraft expressed satisfaction with the arbitration results in a statement.

“We’re pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation,” said Kraft’s General Counsel Gerd Pleuh, according to Forbes.

Due to it expected payout to Kraft, Starbucks edited its fourth-quarter earnings from $481.1 million profit to a $1.23 billion loss, according to Reuters. Starbucks says it will pay Kraft with the $3.2 billion it currently has available and will borrow more if necessary, The New York Times reported.

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