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Kraft Foods is arguing in court papers that market share doesn’t matter as it seeks to prevent Starbucks from unilaterally walking away from the two companies’ grocery distribution contract.

According to a Reuters story, Starbucks is arguing that negligence by Kraft reduced its market share in the premium grocery coffee segment from one-third in 2005 to one--quarter in 2010, a drop that cost the partnership $100 million in sales.

"Declining market share is clear evidence of Kraft's failure to perform its basic obligations under the agreement," Starbucks spokesman Alan Hilowitz said on Friday.

Reuters writes that “in its last court filing before that hearing, Kraft on Friday said market share is not a measure of performance in the contract governing Kraft's handling of Starbucks' bagged coffee sales in supermarkets and other stores in the United States, Canada, Britain and other countries. ‘We dispute its relevance. It's hypothetical. That has no bearing on the question of whether they have the right to terminate and walk away for nothing on their own time table,’ Marc Firestone, Kraft's general counsel, told Reuters.”

"It's disappointing but not surprising that Kraft would congratulate itself for ever-diminishing returns," Hilowitz responded.

Starbucks reportedly already has offered $750 million to Kraft as a consolation prize, but Kraft is holding out for what some analysts say could be a $1.5 billion payday; for the moment, Kraft is hoping that the courts prevent Starbucks from ending the partnership while an arbitrator examines the two arguments.
KC's View:
I have to admit that I didn’t really have a strong opinion on this case up until this point - I just figured it was another example of two really rich parties fighting it out over money and that in the end Starbucks would get its way and gain greater control over its brand - it is all just a matter of how big a check CEO Howard Schultz has to write. (The more interesting question to me, from a purely philosophical point of view, is whether greater control of an expanding brand franchise equates to greater brand equity ... or whether Starbucks’ desire to be seen as a CPG company eventually will hurt its core business model. I don’t care what other products the company sells ... but if the tables and floor are dirty at my local Starbucks, that is a much bigger problem long run.)

But now I’m not so sure I’m still on the fence, if the “market share doesn’t mean that much” argument is being accurately reported by the press. Of course market share matters. It may not be the most important factor in evaluating the success of a brand, but it is hardly irrelevant.

Whatever happens in this case, I hope for both companies’ sakes that it gets resolved quickly. That way, Kraft can get even more focused on the upscale coffee brands that it inevitably is going to bring to market to compete with Starbucks. And Starbucks can get busy cleaning the floors and tables.