“We are pleased the arbitration has ended,” he said. “However, we strongly disagree with the arbitrator’s conclusion and that Kraft is entitled to $2.23bn in damages plus $527m in prejudgment interest and attorneys’ fees. We believe Kraft did not deliver on its responsibilities to our brand under the agreement, the performance of the business suffered as a result, and that we had a right to terminate the agreement without payment to Kraft. While we disagree Kraft is entitled to damages, the amount awarded reflects the value of our at-home coffee business and the continued global growth opportunity that lies ahead for Starbucks. We have adequate liquidity both in the form of cash on hand and available borrowing capacity to fund the payment, which will be booked as a charge to our fiscal 2013 operating expenses.
“I would add that taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders. 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 in 2011. We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly under the direct model.
“Ending our agreement with Kraft also gave us the flexibility to aggressively expand our growth in the premium single-serve segment with Starbucks Coffee K-Cup Packs and Verismo. With single-serve as the fastest growing category within at-home coffee, this represents a strategic opportunity for Starbucks that will continue to contribute meaningful growth for many years.
“Together, packaged coffee and Starbucks premium single-serve offerings are the cornerstone of the Channel Development segment of Starbucks business, which cumulatively grew by $3.2bn in revenue since taking the business back from Kraft and 47% in profitability in the past two years. Channel Development, which is still early in its growth curve, is already the company’s second largest operating segment with substantial potential for long-term global growth. With continued focus, innovation and execution, we will build on Channel Development’s strong momentum and expand our global footprint beyond our 29 current markets and more than 100,000 points of distribution in the years to come.”
Updated financial statements will be provided in upcoming filings with the US Securities and Exchange Commission. The details of the arbitrator’s decision are confidential and Starbucks respects the privacy of the arbitration process so the company will not be sharing additional details from the ruling or the proceedings.
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