Starbucks and Kraft spar over supply chain agreement

Starbucks, the world's largest coffee chain, suffered revenue declines during the recession, but it is back to its profitable ways, posting positive earnings results in the fourth quarter of 2010. However, an old supply chain agreement with Kraft Foods Inc. could hurt the company's ability to cash in on the burgeoning market of home brewing.

The 13-year-old supply chain deal between Starbucks and Kraft stipulates that the coffee giant cannot put its coffee in the Keurig Home Brewer, one of the most popular brew-at-home coffee appliances. Currently, Kraft's brewing system owns a paltry 2.6 percent market share, but the Keurig dominates the U.S. market for machines that make single cups of coffee in under a minute with a 71 percent market share.

As consumers move toward the home brewing machines, they are cutting into sales of ground coffee offered by Starbucks at grocery stores. In November, Howard Schultz, the chief executive of Starbucks, tried to end the deal with Kraft; nonetheless, Kraft says Starbucks cannot terminate the deal unless it compensates Kraft for the "fair market value" of the coffee business.

The original deal between the two companies was made back in 1998, when the single cup brewer was a new technology and markedly less popular. Now, the machines are a staple in both businesses and homes and Starbucks hopes that it can break its supply chain deal with Kraft and enter into the home brew market.