Starbucks has lost an arbitration case against Kraft foods and were ordered to pay a staggering $2.7 billion, which included over $525 million in lawyer fees for Kraft.
This decision was very costly against the number one coffeehouse chain in the world. And it was a big gain for Starbucks’ competition.
When Starbucks filed their lawsuit in 2010, they claimed that Kraft wasn’t marketing their product effectively in their stores and wanted out of their contract. Kraft argued that Starbucks did not give them new products to market at all, even as they were introduced in their cafes.
This was a tough pill for Starbucks to swallow. According to their financial documents, Starbucks ended their fiscal year with $2.6 billion on operating cash. They may be able to cover that through liquidating, but it is hard not to notice.
Kraft has now entered an agreement with Starbucks’ rival, McDonalds, to distribute McCafe products in its stores. McDonald’s has been slowly chipping away at the coffee market that Starbucks had such a grip on a decade ago. Because the price of their coffee and espresso are lower than Starbucks, McDonald’s has been able to grab a piece of the market.
Not only is that good for McDonald’s, but it is also good for other restaurants that are now serving coffee and breakfast items, such as Burger King and Wendy’s. This means that the competition has widened against Starbucks, and they have a chance.
Sales for fast-food chains have been slow over the past few years, as people have been turning to healthier alternatives. When McDonald’s added espresso items and more breakfast foods to its menu, sales went up 6.7 percent in 2012. The demand for a fast breakfast was high, and McDonald’s capitalized. They offered breakfast and coffee for a lower price than Starbucks. Other restaurants have now followed, and now it is hard to find a restaurant chain that doesn’t sell breakfast or coffee.
This only means things can get worse for Starbucks. They had an agreement in place since 1998 with Kraft to have their products distributed in grocery stores. With that deal now gone, it will become harder for Starbucks to compete. Although it has opened about over 500 new stores worldwide last year, they haven’t opened as many per year as they did during 2004-2007, when they opened over 8,000 stores. Yet between 2008 to 2011, they have only opened a little over 1,000 stores, which could seem like they are slowing down due to becoming oversaturated.
Profits have increased about 25 percent since Starbucks has introduced more food items, but they seem to be behind in the game. McDonald’s and Burger King have had a variety of foods on their menus, and by adding coffee and breakfast items, they have done a very good job in getting customers back in. And now with McDonald’s having their coffee on store shelves soon, they could topple the big coffee chain with the mermaid logo.
It might be a bit too late for Starbucks to dominate once again.
By: Renayle Fink