The key trends:

In 1998, Starbucks and Kraft struck a deal [...]]]> Brand licensing is what built a $50 million a year business to a $500 million a year business for Kraft and Starbucks. But problems with the business deal between the two companies threaten to cost billions and destroy a notable brand success. Talk about clouds in the coffee.

In 1998, Starbucks and Kraft struck a deal to expand the brand from the coffee shops into grocery store aisles. Pete Canalichio, a brand licensing expert at Licensing Brands, Inc., a leading consulting firm in the field, explained that the deal initially made sense. “You want a best-in-class relationship, and and that is certainly true of Kraft.”  The deal put the nearly unparalleled power of Kraft’s sales force behind the brand, giving it reach into hundreds of thousands of grocery retailers. The Starbucks name gave Kraft a premium brand with an operating margin of over 20%. Each company could focus on its own area of expertise and benefit from the complimentary strengths of the other.

• Companies that license their brand risk losing control of it. Think of the proliferation of the Pierre Cardin brand and the cheapening of its image. Starbucks CEO Howard Schultz told analysts on November 4 that they wanted to end the Kraft relationship to regain control of the brand.
• Companies that license their brand need to spell out the specifics of “work product”—who owns what in the process of marketing a licensed brand. Kraft contends that they should be compensated at the fair market value of the business they built plus a premium of 35%. Starbucks hopes to walk away with the grocery store business clean.
• Quality control is another issue that frequently creates conflict. Starbucks is contending that Kraft has eroded “brand equity” because it didn’t involve Starbucks enough in marketing decisions and didn’t spend enough on advertising.
• How and when a license comes to an end is another common area of conflict. No deal is forever, however Kraft says the licensing deal with Starbucks has no definite end date. Starbucks says the deal expires in 2014, but that either party could end it early.

Licensing is a rapidly growing way to unlock maximum value from their brands, but when it goes wrong, everyone loses. Reuters quotes informed analysts pegging the compensation that Starbucks will end up paying Kraft at between $1 billion to $1.5 billion. While the matter is in arbitration, one can hardly imagine Kraft investing maximum effort in selling bags of coffee at the store level. When the relationship finally is severed, Starbucks plans to work with the small, unknown company Acosta to handle retail store selling. The brand will no doubt lose ground in the intensely competitive coffee aisle.

Pete from Licensing Brands adds, “The lesson here is to put structure in place. We advise people to treat the license arrangement with the same degree of scrutinty as you would an internal initiative. Set requirements, specific standards, and detailed procedures. It ultimately is your fault if you are caught off guard. You should have set the deal up right in the first place. In this case, everyone loses, even the consumer.”

UPDATE: The Street has an article suggesting other options for Kraft.  In fact, whether Kraft wins in arbitration or not, they do hold all the cards. Starbucks will have to find a less capable partner to sell their brand. They will surely lose shelf space, market share and profits. Kraft, however, can license another premium coffee brand–perhaps a better one than Starbucks–and replace the revenue from the Starbucks license. There are lots of coffee brands, but Kraft knows few rivals in their ability to get products on hundreds of thousands of retail shelves.