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Starbucks Goes Down Hard to Mondelez in Grocery War

NEW YORK (TheStreet) -- Even for Starbucks (SBUX - Get Report) $2.76 billion is a chunk of change.

That's how much an arbitrator has said the company must pay for canceling a contract with Kraft Foods (KRFT) for packaged coffee sold in grocery stores.

Starbucks will pay that money to Mondelez International (MDLZ - Get Report), which kept Kraft's global snacking and food brands but in 2012 spun off the North American grocery manufacturing business into the new Kraft Foods.

The price may be bigger than a venti Caramel Macchiato, but Starbucks may still consider it a bargain. Let's go through the whole tale and see if you don't agree. 

Over the last four years Starbucks has made a major move into the grocery aisle, offering instant coffee, single-serving K-Cups, and energy drinks. The company's executives have said they want packaged goods to make up half of Starbuck's sales, which were nearly $15 billion last year.

Getting control of that channel, and of its brand, is a key to Starbucks' growth strategy. Wall Street is a big believer in that strategy and recently was valuing Starbucks with a price-to-earnings ratio of more than 35.

Starbucks first lined up Kraft to supply its products to stores in 1998, when it was a very different company, having just crossed the $1 billion-a-year sales mark. 

At that time, Kraft was division of Philip Morris, the cigarette maker now known as Altria (MO), but it was the largest retail packaged food company in North America and had a number of its own coffee brands, including Yuban, Maxwell House and Gevalia.

Starbucks first talked publicly about canceling the deal in early 2010, a year after launching the VIA line of instant coffee, which drew strong reviews and $100 million in sales.

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