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Starbucks Did The Right Thing Breaking Up With Kraft

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November 15, 2013 – Comments (0) | RELATED TICKERS: SBUX , MDLZ , KRFT

We've been kicking around the idea this week whether the Starbucks decision to split from Kraft early was a good one. No, $2.8 billion isn't chump-change. But you also need to look at the bigger picture here. It's about the future for Starbucks; not the past. Here are some points to consider:  

*It's important to note that this relationship goes back to 1998 when channel development was $10-$15 million business for Starbucks. Today it's a $1.5 billion (and growing) business.

*This deal was set to expire in March 2014 at which time they would look at the situation and consider renegotiation.

*Starbucks offered Kraft $750 million in 2010 to end the relationship. Kraft said no, Starbucks decided to leave anyway.

*Since that time in 2010 the channel development has made more than $1 billion in operating profit and growth is still accelerating. In fact channel development operating profit grew 61% in 2012 and 67% in 2013.

*Fast forward to today, the court rules for Starbucks to pay Kraft $2.8 billion

*So the contract would have expired in 2014. The segment from the time Starbucks left in 2010 to the time the contract would have expired would have earned about $1.6 billion based on company and analyst expectations for the upcoming fiscal 2014 year.

*So there's one threshold right there; $1.6 billion is less than $2.8 billion. (#duh) 

*Here’s the interesting thing though: Using some very base assumptions on what we know in regard to the margins channel development will bring in along with some very reasonable sales growth numbers (7% annually through 2020), over the course of the next 7 years (2014 through 2020) channel development will bring in $5.8 billion or more in operating profit.

*It’s also worth noting you can ratchet those sales assumptions back if you like, but it doesn’t change much.

*It could further be argued that Starbucks' success from 2010 to date in channel development is a direct result of its taking back full control in 2010. Kraft was at a point in the relationship where it was dragging down the segment, not propping it up. I don’t think Starbucks would have had near the freedom to pursue grocery, K-cups, other single serves, Verismo, yada yada yada if it was still anchored to Kraft.

So yes, Kraft and Mondelez are winners with this judgment, no question at all. But this move gave Starbucks its freedom much sooner than it would have gotten it otherwise which gave them a significant time period to formulate and begin executing this channel development strategy that is still in the early stages of playing out today.

Kraft/Mondelez needs Starbucks more than Starbucks needs Kraft/Mondelez. We can all debate I'm sure whether Starbucks made the right move bagging this deal. And I'm certain that management didn't see this judgment coming down quite so harshly. But I also don't think this judgment was made willy-nilly and the numbers bear that out. Bottom line for me is that this was absolutely 100% the right move for Starbucks to make and I'm certain management is focused more on the future and not what has already been done. Judging by the way the stock has reacted since then, the market seems to agree.

Foolish best,

Jason 

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