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Issue Date: Vol. 50, No. 11, November 2010, Posted On: 11/9/2010

Kraft's Q3 Revenue Climbs, Profit Dips; Starbucks Ends Distribution Deal

Emily Jed
Kraft, Kraft Foods, Cadbury, Starbucks, Green Mountain Coffee Roasters, Keurig, OCS, office coffee, vending machine business, vending foods,

NORTHFIELD, IL -- Kraft Foods Inc. reported strong third-quarter performance across all geographies, despite an 8% dip in profit. The world's second-largest food company said higher spending on advertising its brands and costs related to the acquisition and integration of British confectioner Cadbury offset a 26% jump in revenue.

Kraft reported net income of $754 million for the three months ended Sept. 30, or 43¢ per share, compared with $824 million, or 55¢ per share, for the same quarter a year ago.

The maker of Maxwell House coffee and Oreo cookies said net revenues for the third quarter rose 26% to $111.86 billion from $9.40 billion a year ago, boosted by its $28 billion acquisition of Cadbury earlier this year. Kraft said in September that the acquisition would produce $1 billion in additional revenue by 2013.

Kraft chief executive Irene Rosenfeld said the Cadbury integration has proceeded "smoothly and quickly," adding that the company is already benefiting from "significant cost synergies."

In North America, revenue was up 9.3%, including 7.8% from the Cadbury acquisition, totaling $5.8 billion. Higher prices due to higher input costs accounted for 3.1% of the change.

Revenue in Kraft's European division increased 29% and emerging market operations generated $3.3 billion, a 69.8% increase.

The company confirmed its 2010 guidance for combined organic net revenue growth of 3%- to 4% and earnings of at least $2 a share. The company also reiterated its 2011 targets for combined organic net revenue growth of at least 5% and mid-teens earnings per-share growth.

Separately, Starbucks Corp. announced that it has informed Kraft of its intention to end their distribution agreement, which has been in place since 1998. Kraft said that if Starbucks terminates its right to distribute Starbucks packaged coffee at retail, the Seattle coffee giant is bound to pay Kraft the fair market value of the business, and in some instances, a premium. The companies said they plan to resolve matter in private.

Industry analysts are speculating that an end to the Kraft-Starbucks relationship could also mean an end to Starbucks coffee in T-Disks for use in Kraft's Tassimo single-cup brewer. This could pave the way for Starbucks and Green Mountain Coffee Roasters, a rival of Kraft's coffee business, to forge a single-cup alliance for GMCR's Keurig brewing system.

Observers are also speculating that loss of the Starbucks distribution deal could motivate Kraft to eventually divest its long-established Maxwell House coffee brand.

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