When Starbucks entered into a partnership with Kraft Foods, the suppliers made it possible for consumers to buy bagged coffee at Starbucks retail stores or at supermarkets. From 1998 to 2010, this partnership increased brand awareness for Starbucks and made a lot of money for Kraft.
But after a decade of profitable partnering, Starbucks wants to halt its grocery distribution and sell bagged coffee only through its retail stores. Kraft, understandably, is disputing this termination, asking Starbucks to pay a massive penalty to end the agreement. Specifically, to dissolve a partnership that earned $500 million in annual revenues and was valued at $1.5 billion, Starbucks will have to pay 35 percent of the value of the business to cancel it.
Starbucks has responded with the complaint that Kraft has not worked sufficiently closely with Starbucks to maintain the brand and thus that it has damaged the brand’s equity. Kraft counters that Starbucks only wants exclusive distribution in its own stores to gain back control and that it has done nothing to hurt its partner.
The counterargument gains some support from the success of Starbucks’ instant coffee product, VIA—well on its way to being a billion dollar brand after just a year on the market. Starbucks can increase its brand equity by limiting distribution of its bagged coffee and making customers visit a Starbucks store, where the environment and atmosphere will always be according to the Starbucks design.
In the battle of two titans of commerce, regular consumers can only hope they will not get trampled underfoot.
1. Will Starbucks coffee drinkers make a separate stop for bagged coffee, or will they just choose a different brand on the supermarket shelf?
Paul Ziobro, “Kraft Seeks Arbitration in Dispute with Starbucks,” The Wall Street Journal, November 29, 2010.