The contract dispute between Starbucks (Nasdaq: SBUX ) and Kraft (NYSE: KFT ) over the distribution of Starbucks packaged coffee to grocery and other retail stores has quickly turned into an expensive he said, she said battle that highlights the risk of not tightly managing and controlling a premium brand.
Starbucks asserts that Kraft mismanaged the marketing and distribution of its packaged coffee products, damaging its brand and therefore giving it the right to end the relationship. Not surprisingly, Kraft sees things a bit differently, arguing that Starbucks can’t end the partnership without paying a fair price for the Starbucks packaged coffee business that it built. Market analysts estimate Starbucks might have to pay Kraft more than $1.5 billion to end the deal.
When Starbucks struck the distribution deal with Kraft 12 years ago, it gained access to a big distribution channel, but it lost hands-on control of its brand in grocery and other retail stores.
During this period, competition intensified. Green Mountain Coffee Roasters (Nasdaq: GMCR ) came out of nowhere to become a billion-dollar business, powered by the success of the Keurig and its K-Cups. A look at the coffee aisle in my local grocery store shows a crowded space, where Starbucks is hardly the star. The premium brand shares less than premier shelf space with packaged coffees from Peet’s (Nasdaq: PEET ) , J.M. Smucker’s (NYSE: SJM ) Folgers and Millstone brands, Kraft’s Maxwell House, and of course those pesky K-Cups. Starbucks should have owned this aisle, and the company’s decision to outsource management of its packaged coffee business is likely a reason that it doesn’t. And it appears that Starbucks management knows it.
In the company’s most recent earnings conference call, and at an investors’ conference last week, CEO Howard Schultz and members of the executive team made clear the importance of packaged goods and the grocery store channel to Starbucks’ growth strategy. The company needs to reclaim control of the brand in this sales channel, which would likely result in an expensive lesson in what can happen when you don’t maintain direct control. Owners of other premium brands should be watching and heed the lesson on Starbucks’ dime rather than their own.
For more Foolishness: