Starbucks Teams With Kraft For National Network

In a java jolt that will be felt in the retail business for years to come, Kraft Foods has agreed to market and distribute Starbucks Coffee beans to more than 25,000 grocery stores in the United States.

Starbucks Chairman Howard Schultz called the agreement with Kraft, which was announced today, one of the major milestones in his company's history.

Schultz said the deal is only the first phase in a long-term partnership with Kraft, based in Northfield, Ill., that will help to build Starbucks into a global brand.

Kraft eventually may place on supermarket shelves the upscale foods Seattle-based Starbucks is developing for its retail stores and new Cafe Starbucks restaurants. And Starbucks' food products and coffee beans will have entree to grocery stores around the world through Kraft's distribution system, Schultz said.

With $16.7 billion in annual sales, Kraft is the largest packaged-foods company in North America and second-largest in the world, behind Nestle.

The immediate impact of the agreement with Kraft will be the distribution of Starbucks coffee beans in all 50 states over the next few months, said Schultz. Starbucks began testing the sale of its beans in Portland and Chicago supermarkets two years ago and expanded its distribution to 12 western states and 3,500 stores earlier this year.

But Starbucks was relying on about 50 independent brokers for signing up stores, compared to Kraft's 4,000-person sales staff, Schultz said. "We are going to dramatically accelerate" the national rollout of Starbucks coffee beans in supermarkets, he said.

Terms of the agreement were not disclosed. Schultz said there was no exchange of stock, and both companies remain separate. Kraft is a subsidiary of Philip Morris.

Schultz declined comment on the potential boost to Starbucks sales from the wider distribution of its beans. Analysts are estimating Starbucks' sales for the 1998 fiscal year that ended yesterday at $1.3 billion, up 34 percent from $967 million the previous year.

Before today's announcement, analysts were projecting sales of nearly $1.7 billion next year.

Starbucks officials previously told Wall Street analysts they were expecting sales to rise 30 percent next year and earnings per share to be up around 35 percent. Profit for fiscal 1998 is expected to be 89 or 90 cents a share. That includes the one-time expense of acquiring the Seattle Coffee chain of retail stores in the United Kingdom earlier this year. Profit for 1999 currently is projected at $1.20 to $1.25 a share.

Starbucks stock closed up $5.188, or 14.5 percent, to $41 in New York trading today.

Grocery sales don't register

Schultz said that although Starbucks is the leading roaster and retailer of specialty coffee in North America and the No. 1 gourmet coffee in supermarkets where it is now sold, its grocery sales are so small that it is "off the radar screen" when it comes to competing for a share of the $5 billion to $6 billion a year coffee-bean business in U.S. grocery stores.

Maxwell House, which is owned by Kraft and has a 31 percent market share, is neck and neck with Folger's for the top spot in grocery sales, Schultz said. Starbucks does not separate its grocery store sales from its total revenue.

Though Starbucks beans will be distributed by Kraft, "I can say unequivocally there will be no confusion whatsoever" between Starbucks and Maxwell House coffees, Schultz maintained.

Starbucks will continue to buy, roast and package its Arabica beans. The suggested retail price for a 12-ounce bag of Starbucks beans will remain at $7.45, Schultz said.

Ann Fudge, president of Kraft Foods' Maxwell House and Post Division, said Kraft will be able to expand its distribution portfolio with a "well-known super-premium brand" while helping Starbucks build its grocery business. About 85 percent of Starbucks sales now come from its 1,800 retail stores in North America, Asia and Europe.

Schultz said Starbucks and Kraft could someday co-develop products for distribution in grocery stores. He noted that Cafe Starbucks, which opened Sept. 11 in Seattle's Madison Park as Starbucks' first full-service restaurant, is a test kitchen for developing products for grocery distribution.

In separate joint ventures, Pepsi-Cola will continue to distribute Starbucks' bottled Frappuccino, and Dreyer's Ice Cream will continue to distribute Starbucks coffee ice cream, said Schultz.

Lee Moriwaki's phone message number is 206-464-2320. His e-mail address is: