Even well-structured agreements can sometimes break down, as illustrated by the high-profile dispute between food industry leaders Starbucks and Kraft (whose grocery business later became part of Kraft-Heinz and Mondelez International). A multi-year conflict over the distribution of Starbucks packaged coffee in grocery stores was ultimately resolved when an arbitrator ruled that Starbucks had breached its contract with Kraft. As reported by Stephanie Strom in The New York Times, the decision required Starbucks to pay $2.75 billion in damages.
Before diving into lessons for negotiators, here’s the quick takeaway for readers searching for practical guidance:
Key negotiation lesson: Long-term business agreements should include clear renegotiation and exit provisions so companies can adapt when markets, technologies, or consumer behavior change.
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How the Starbucks–Kraft Dispute Began
The conflict dates back to a 1998 agreement under which Kraft began distributing Starbucks packaged coffee to grocery stores across the United States. The partnership helped Starbucks build a powerful retail grocery presence while Kraft leveraged its established distribution network.
By 2010, sales of Starbucks packaged coffee in grocery stores had climbed to roughly $500 million annually. At the same time, consumer demand for single-serve coffee was exploding.
Seeking more flexibility, Starbucks offered Kraft $750 million to end their distribution agreement early.
Why? The single-serve pod market was rapidly shifting. Starbucks’ agreement limited it to selling pods compatible with Kraft’s Tassimo machines, while competitor Green Mountain Coffee Roasters’ Keurig system and K-Cup packs were quickly gaining dominance in homes and offices.
Starbucks faced the risk of losing ground in a fast-moving market.
Termination, Arbitration, and a Multibillion-Dollar Award
Kraft objected to ending the deal, arguing that Starbucks could not simply terminate the agreement without consequence. Starbucks nonetheless moved forward, ending the partnership and beginning sales of K-Cup packs compatible with Keurig machines.
The dispute moved to arbitration after settlement efforts failed.
Meanwhile, corporate restructuring added complexity. Kraft split in 2012, and the arbitration award ultimately went to Mondelez International, which inherited the grocery business involved in the dispute.
The arbitrator ruled that Starbucks had improperly terminated the contract, resulting in the $2.75 billion damages award.
Starbucks publicly disagreed with the decision, stating that Kraft had failed to meet its responsibilities to the Starbucks brand under the agreement. However, arbitration rulings are generally binding, leaving little room for appeal.
Market Outcomes After the Split
Despite the arbitration loss, Starbucks did succeed commercially in the grocery channel after regaining distribution control.
According to reporting at the time:
- Starbucks’ share of the single-serve pod market grew significantly after launching K-Cup products.
- Freed from sharing profits with Kraft, Starbucks saw strong gains in grocery product revenues, including packaged coffee and bottled beverages.
- Fiscal 2013 grocery revenues reached approximately $1.4 billion, representing major growth over previous years.
The dispute shows how companies sometimes accept large legal or contractual costs in pursuit of long-term strategic gains.
Negotiation Lessons: Building Adaptable Business Agreements
This business dispute highlights a core challenge in negotiation: markets evolve faster than contracts.
What looked like a mutually beneficial agreement in 1998 became restrictive by 2010 due to changes in technology and consumer habits.
Smart negotiators anticipate uncertainty and include tools to manage it.
Best Practices for Long-Term Business Contracts
When negotiating long-term distribution or partnership deals, consider including:
- Scheduled renegotiation windows to revisit terms as markets shift
- Clear early termination provisions and defined compensation formulas
- Technology and market change clauses that allow flexibility when industries evolve
- Performance benchmarks tied to brand protection or growth expectations
- Dispute resolution mechanisms, including mediation steps before arbitration
Such mechanisms can help partners adapt rather than collide when business conditions change.
The Negotiation Takeaway
The Starbucks–Kraft dispute demonstrates that even successful partnerships can unravel when agreements lack flexibility for changing conditions.
Negotiators cannot predict every future development. But they can design contracts that allow for adjustment without triggering expensive disputes.
Preparation today can prevent tomorrow’s litigation.
What did you learn from this negotiation between two large corporations? Share your thoughts in the comments below.
Claim your FREE copy: Business Negotiation Strategies: How to Negotiate Better Business Deals
Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.
Originally published on December 10, 2013.
The numbers in the arbitrator’s dispute were huge, but probably not out-of-line with the profits being made by Starbucks outside of the Kraft contract. It sounds like Starbucks is lucky to have gotten off with damages, rather than an injunction. That’s what long term contracts are for — to distribute unknown risks over a fixed time period.A mandatory renegotiation of the fee within the contract would seem to make sense with respect to major increases in commodity prices, but why should Starbucks not have to bear the risk of foreseeable market changes without having an automatic second bite of the apple ? Of course, a mediated solution would probably have produced a faster and more business-oriented solution, but once the arbitration road was chosen, the roulette wheel started to spin.